International law

1. International Law Course

The case C-112/05 Internal Market and freedom of movement
Special Powers to Public Shareholders
Judgement of 23/10/2007
Alina Kovalenko

2. List of Contents

• General description of the case,
• Legal question,
• The final judgment of the Court of Justice;

3. The introduction to the case

• The Volkswagen Law is a set of German Federal Laws enacted in 1960, regulating
the privatization of Volswagenwerk GmbH into Volkswagen AG(Wikipedia, 2015).
• The State of Lower Saxony owned 20% of a voting share and fixed blocking
minority at 20% to the major decisions and prevention of the other shareholders’
overruling the procedure (regardless of the extent of ownership),
• The State of Lower Saxony and The Federal State were also allowed to appoint two
members to the board of Volkswagen AG;

4. Case C-112/05 Legal question

Violation of:
• Free Movement of capital, Article 56 EC;

5. Central issue: Free Movement of Capital, Article 56 EC

• According to the argument brought by the Commission, certain rules of VW Law
derogated from the general German Company Law and were liable to deter direct
investment and for that reason constituted restrictions on the free movement of
capital within the meaning of Article 56 EC;
• The meaning of the movement of Capital was recognized by the Court as the
following: Movements of capital within the meaning of Article 56(1) EC
therefore include direct investments, i.e. investments of any kind undertaken by
persons and which serve to establish or maintain lasting and direct links between the
persons providing the capital and the undertakings to which that capital is made
available in order to carry out an economic activity.(Constitutional Law of the
European Union, James D. Dinnage)

6. The VW Law(Measures in the contrariety)

• Paragraph 2(1) of the VW states that “The
• Paragraph 4(1) states “The Federal Republic of
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 1/5 of the share capital”;
• Paragraph 3 states “Resolutions of the general
meeting which, under the Law on public limited
companies, require the favorable vote of at least three
quarters of the share capital represented at the time of
their adoption, shall require the favorable vote of
more than four fifths of the share capita represented
at the time of that adoption”;
Germany and the Land of Lower Saxony may
each appoint two members to the supervisory
board on condition that they hold shares in the
company”;
Summarize by the Court: Compulsory
representation of public authorities on the
VW board, granted a 20% blocking minority
particularly in favor of the Land of Lower
Saxony and installed a 20% voting cap
resulting into powers of blocking significant
transactions- including intra-EU cross-border
investment;

7. Major obstacles to the free movement of capital

(1) ‘prohibitions on investors from another
EU country acquiring more than a
limited amount of voting shares in
domestic companies’;
(2) ‘measures applied without distinction to
all investors, in particular general
authorization procedures whereby, for
example, any investor( EU and national
alike) wanting to acquire a stake in a
domestic company above a certain
threshold [...] must be authorized’;
(3) ‘the rights given to national authorities, in
derogation of company law, to veto certain
major decisions to be taken by the company,
as well as the imposition of a requirement for
the nomination of some directors as a means
of exercising the right of veto, etc.’;
COMMUNICATION OF THE COMMISSION ON CERTAIN LEGAL ASPECTS CONCERNING INTRA-EU INVESTMENT. 1997

8. Golden shares under the company Law

• “…Although the business of the company is privatized, a golden share
[government share] retains the government’s right to intervene in the share
structure and management of the company. This includes special provisions
designed to enable the executive to prevent takeovers or other changes of
control.” (Company Law and Economic Protectionism: New
Challenges to European Integration, Ulf Bernitz)
• Example of the case: Special rights provided to the State of Lower Saxony
prevailing and the Federal State of Germany under the VW Law (National
Law)

9. Decision of the European Court of Justice

• The Court has concluded that VW(National) Law and its rules concerning
the limitation of the voting rights of every shareholder to 20% of the share
capital and the fixing of the blocking minority at 20% for the most
important decisions of the general meeting were liable to deter direct
investors from other Member States and thus constituted a restriction on the
movement of capital within the meaning of Article 56 EC;

10. With regard to the question of possibility for the Federal State and the Land of Lower Saxony each to appoint two representatives to the supervisory board of Volkswagen

Irrespective of the extent of shareholders’ holding, the ECJ decided that this measure gave two
public actors the possibility of exercising influence which exceeds their levels of investment,
which also added a restriction on the movement of capital.

11. References

• Certain Legal Aspects Concerning Intra-EU Investment’
in 1997, November 2015 (http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:31997Y0719%2803%2
9)
• Free movement of capital: Commission refers Germany
back to Court for failure to comply with the Volkswagen
law judgement, October 2015
http://europa.eu/rapid/press-release_IP-111444_en.htm,
• Free movement of capital: Court of Justice of the
European Union rules on restrictions on the free
movement of capital in the Volkswagen Law, November
2015http://www.lexology.com/library/detail.aspx?g=4f0
c5b7e-2ea9-461e-a27b-7f8b59b1dc73
• Commission v Germany (The justification)
https://catalyst.uw.edu/gopost/conversation/wawa/839
716
• State Aid and the European Economic Constitution,
Francesco de Cecco;
• Report from the Commission to the EU Parliament and
the council, November 2015
http://ec.europa.eu/transparency/regdoc/rep/1/2014/
EN/1-2014-327-EN-F1-1.Pdf
• Communication of the Commission on Certain Legal
Aspects concerning intra-EU Investments, November
2015 http://eur-lex.europa.eu/legalcontent/EN/ALL/?uri=CELEX:31997Y0719%2803%2
9
• Judgement of the Court(Grand Chamber) of 23 October
2007 http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:62005CJ0112