C-112/05, Volkswagen

I wrote about this case before. The case involved a 1960 German Law on the privatisation of equity in the Volkswagenwerk limited company, according to which the limited liability company, Volkswagenwerk, was to be converted into a public limited company (“Volkswagen”).

Paragraph 2(1) of the VW Law, concerning the exercise of voting rights and the limitations on that right, provided: “The voting rights of a shareholder whose par value shares represent more than one fifth of the share capital shall be limited to the number of votes granted by the par value of shares equivalent to one fifth of the share capital.”

Paragraph 4(1) of the VW Law empowered the Federal Republic of Germany and the Land of Lower Saxony to each appoint two members to the supervisory board on condition that they held shares in the company.

Furthermore, Paragraph 4(3) provided that “Resolutions of the general meeting which, under the Law on public limited companies, require the favourable vote of at least three quarters of the share capital represented at the time of their adoption, shall require the favourable vote of more than four fifths of the share capital represented at the time of that adoption”.

In the present case, the Commission asked the Court for a declaration that Paragraphs 2(1) and 4(1) and (3) infringed Articles 43 and 56 EC.

The Court first of all held that the Commission did not advance any specific line of argument in supported of any restriction on the freedom of establishment. Accordingly, the Court dismissed the action in so far as it was based on a breach of Article 43 EC.

The Court furthermore reiterated that Article 56(1) EC generally prohibited restrictions on movements of capital between Member States. In the absence of a Treaty definition of “movement of capital” within the meaning of Article 56(1) EC, the nomenclature set out in Annex I to Council Directive 88/361 had indicative value. (see
Case C‑446/04 Test Claimants in the FII Group Litigation [2006], and Case C‑157/05 Holböck [2007])

Movements of capital within the meaning of Article 56(1) EC therefore included direct investments, that was to say, as that nomenclature and the related explanatory notes showed, investments of any kind undertook by natural or legal persons and which served to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital was made available in order to carry out an economic activity.

The objective of establishing or maintaining lasting economic links presupposed that the shares held by the shareholder enabled him, either pursuant to the provisions of the national laws relating to companies limited by shares or in some other way, to participate effectively in the management of that company or in its control.

National measures must be regarded as “restrictions” within the meaning of Article 56(1) EC if they were liable to prevent or limit the acquisition of shares in the undertakings concerned or to deterred investors of other Member States from investing in their capital.
(
C‑367/98 Commission v Portugal [2002]).

According to the Court, the combination of Paragraphs 2(1) and 4(3) of the VW Law constituted a restriction on the movement of capital within the meaning of Article 56(1) EC.

By limiting the possibility for other shareholders to participate in the company with a view to establishing or maintaining lasting and direct economic links with it which would made possible effective participation in the management of that company or in its control, this situation was liable to deter direct investors from other Member States.

The restrictions on the free movement of capital which formed the subject-matter of these proceedings related to direct investments in the capital of Volkswagen, rather than portfolio investments made solely with the intention of making a financial investment and which were not relevant to the present action.

Paragraph 4(1) of the VW Law also constituted a restriction on the movement of capital within the meaning of Article 56(1) EC, since it established an instrument which gave the Federal and State authorities the possibility of exercising influence which exceeded their levels of investment.

As a corollary, the influence of the other shareholders might be reduced below a level commensurate with their own levels of investment.

By restricting the possibility for other shareholders to participate in the company with a view to establishing or maintaining lasting and direct economic links with it such as to enable them to participate effectively in the management of that company or in its control, Paragraph 4(1) of the VW Law was liable to deterred direct investors from other Member States from investing in the company’s capital.

The question of whether or not the Federal State and the Land of Lower Saxony made use of their right under Paragraph 4(1) was irrelevant in that context.

According to the Court, Germany had been unable to explain, beyond setting out general considerations as to the need for protection against a large shareholder which might by itself dominate the company, why, in order to meet the objective of protecting Volkswagen’s workers, it was appropriate and necessary for the Federal and State authorities to maintain a strengthened and irremovable position in the capital of that company. Therefore, Germany’s justification based on the protection of workers could not be upheld.


Text of Judgment