Germany backs Lower Saxony on the 'VW law'

BY EDWARD TAYLOR

The German government backed the state of Lower Saxony's ability to block significant strategic decisions at Volkswagen AG. The move sets Berlin on a possible collision course with the European Union, which sees the law as protectionist.

Since the 1960s, Europe's largest car maker by sales has been protected from a takeover by a special law that limits the influence oflarge shareholders. Following a ruling by the European Court of Justice in October, the German government was forced to amend the so-called Volkswagen law.

As part of that revision, the Germangovernment kept a provision requiring significant company decisions to be approved by more than 80%of shareholders, rather than the 75% threshold applicable for other German companies. In doing so, the German government effectively handed VW's home state of Lower Saxony, which controls slightly more than 20% of VW's shares, the right to veto significant strategic decisions such as plant closures.

Porsche Automobil Holding SE, which has a stake of about 30.6% in VW and is seeking to raise its stake to a majority, has campaigned for the abolition of the Volkswagen law. Porsche has sought to improve productivity and efficiency at Volkswagen but has met resistance from VW's labor representatives and politicians in Lower Saxony who fear the region could lose jobs if VW shifts production overseas.

The EU's executive arm, which had sent the German government a letter in April warning it to comply with EU law, expressed concernwith the new draft, which was approved by the German cabinet Tuesday.

A spokesman for Charlie McCreevy, the European commissioner in charge of internal markets, acknowledged the European Commission hadn'thad time to study the German government proposals in detail butsaid: 'We insistthatthe courtruling is applied in full and that if this turns out not to be the case, we will push forward with a procedure for nonrespect of a court ruling:'

If the commission presses the matter, the conflict will enter arbitration and the European Court of Justice will decide whether Germany is in breach of European law.

A spokesman for the German Justice Ministry said, "Theway we interpreted the ruling by the European Court of Justice, the voting threshold is legal if it is no longer used in conjunction with the other rules which were struck down." The spokesman added that the German cabinet noted the law could be further amended if there was a threat of legal action from European authorities.

A spokesman for Porsche said the fact that VW retained the 80% voting threshold as part of the revised VW law was "incorrect." "There is no need to protect Volkswagen any more than any other company," he said.

In a revised draft presented Tuesday, the German government abolished a provision that had limited the voting rights of large shareholders to 20% and abolished a rule that entitled both the federal government and Lower Saxony to delegate representatives to VW's supervisory board. Members of the supervisory board, which acts like a board of directors, now need to stand for election.