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Volkswagen's 'golden share' is being challenged in court by the EU.

Danny Moloshok/Reuters/Danny Moloshok/Reuters

A European Union regulator is mounting another legal assault on a contentious German law that has protected Volkswagen AG from takeovers for the past five decades, in a move that will inflame tensions with Berlin.

Michel Barnier, the European Union internal market commissioner, is suing Germany in the European Court of Justice for illegally maintaining a "golden share" that restricts the influence of outside investors on the management of Europe's largest auto maker.

The legal action against Germany infringing the free movement of capital is a highly controversial move that will revive long-simmering tensions over the so-called "VW law," which has been doggedly defended by successive German governments.

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Angela Merkel, the German chancellor, has already raised strong objections over the Commission's handling of the case, underlining Berlin's determination to do everything possible to protect the state's blocking minority.

The European Commission first started infringement proceedings in 2001 against the "golden share," which was outlined in a 1960 law that privatized VW, and won a court case on the issue in 2007. The rule was instrumental in stopping Porsche's bid to buy VW in 2008, a failure that eventually led a VW takeover of Porsche this year.

In response to the court ruling, Germany made amendments to the VW law that gave the local government of Lower Saxony extra clout on the board and restricted the voting rights of other shareholders to 20 per cent.

But it left untouched the rules that give Lower Saxony a blocking minority on major VW decisions with its 20-per-cent voting stake in the company. VW is an exception from German law, which has a blocking minority threshold of 25 per cent.

Mr. Barnier sees the action against the law protecting VW as logical, given the European Commission's strong stance against "golden shares" and other special rights that protect companies from foreign takeovers – a position reiterated in recent negotiations with Portugal.

But it will enrage politicians in Germany, who see no need to meddle with the constitution of a successful, competitive company. Germany argues the ECJ ruling found the blocking minority only breached laws on the free movement of capital when seen in conjunction with the 20-per-cent voting cap, which has been scrapped.

This summer Germany walked away from talks with the Commission over compliance, leaving Mr. Barnier having to decide on whether to pursue the matter through the courts.

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The EU is calling for Berlin to change the law to align the VW rules on a blocking minority with those applying to all other German companies. Should Germany lose the case, it would have to scrap the law and pay a multimillion-euro fine for late compliance.

Copyright The Financial Times Ltd. All rights reserved.

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