European Commission postpones decision on Porsche-VW issue

Implications: Porsche recently purchased shares outright corresponding to a 4.92 % share of VW’s common stock. The European Commission announced the postponement, of its decision in regard to the request submitted by Porsche for approval of its planned shareholding. Meanwhile, in order to ensure that its share of VW remains at the important mark of 20%, Lower Saxony recently purchased 500,000 additional VW shares. In a 2007 decision, the ECJ struck down various provisions of the so-called “VW Law” which contained a minority blocking provision as well as a voting rights cap to protect the interests of the German State of Lower Saxony. In reaction to the ECJ’s decision, the German Ministry of Justice drafted a “new” VW Law which retained the 20 % blocking minority provision of the old law based on Lower Saxony’s interpretation of the ECJ ruling.

Analysis: Porsche wants majority interest in VW
It is no secret that Porsche intends to increase its interest in Volkswagen from currently 31 % to a planned 50 %. However, Porsche seems to have changed its tactics somewhat. While Porsche has so far generally relied on the purchase of stock options, it recently purchased shares outright corresponding to a 4.92 % share of VW’s common stock. The purchases will not, however, become effective until the antitrust authorities give green light for the merger.

European Commission postpones decision on Porsche-VW issue
The European Commission (EC) recently announced the postponement, to 23 July 2008, of its decision in regard to the request submitted by Porsche for approval of its planned shareholding increase after Porsche withdrew its original request and submitted a new one. Despite the EC’s announcement, Porsche continues to believe that the EC’s decision is a mere formality and that it will receive approval in the end. Porsche has already received approval from the US antitrust authorities and is also awaiting approval from the authorities of 15 other, non-European countries.

Lower Saxony purchases half a million extra shares
Meanwhile, in order to ensure that its share of VW remains at the important mark of 20%, the German State of Lower Saxony recently purchased 500,000 additional VW shares. This move was necessary, according to Lower Saxony’s Finance Minister, in order to prevent a dilution of its interest which could have arisen if and when the 3 million share options granted to employees are exercised. While the Finance Minister did not publish the purchase price of the additional shares, considering the current VW stock price it must have amounted to around EUR 9 million (approximately USD 13.2 million).

EU Launches Legal Action against Germany over “New” VW Law
In a 2007 decision, the European Court of Justice (ECJ) struck down various provisions of the so-called “VW Law” which contained a minority blocking provision as well as a voting rights cap to protect the interests of the German State of Lower Saxony. In reaction to the ECJ’s decision, the German Ministry of Justice drafted a “new” VW Law which retained the 20 % blocking minority provision of the old law based on Lower Saxony’s interpretation of the ambiguous ECJ ruling. As a result, the new VW law continues to shield VW, Europe's largest car maker, from takeovers by granting 20 % minority blocking rights to its shareholders although German law generally only allows a blocking minority of 25%. In effect, the new VW Law gives the German State of Lower Saxony, with its 20% interest, the ability to block actions desired by Porsche, the other main shareholder, which holds an interest of 31%. On 5 June 2008, the EC increased pressure on Germany over this so-called ”new VW Law” with an EC spokesman declaring that “special rights granted to the German authorities are not acceptable or compatible with basic (EU) treaty provisions such as the freedom of capital flows". The EC gave the German government a two-month deadline in which to react to concerns about the law and said failure to provide answers would result in the case being transferred back to the ECJ. Although Germany partly implemented the ECJ decision into the new VW Law, the EC believes that Germany’s interpretation of the ECJ ruling does not go far enough to ensure European rights and warned that new legal action could follow.    

Commentary
The currently running antitrust suits are just another major step in Porsche’s apparently unavoidable VW takeover. However the crucial point will not be when and how Porsche reaches the 50 % mark, but if, when and how the Federal State of Lower Saxony and the German Federal Government will lose their influence as a major shareholder of Volkswagen. While it seems more and more likely that the EC will force Germany to abolish the new VW Law, this will not clear the way for Porsche’s merger plans. The prime minister of Lower Saxony, Christian Wulff has already pulled out another joker: a 50-year-old letter of comfort signed by the German Federal Government, granting a “minimum state influence” at Volkswagen which could potentially force the Federal Government to purchase a 5 % stake in Volkswagen if and when the 20 % blocking minority provisions is abolished. In this case, a special VW Law would no longer be needed since the 25% blocking minority is common in German stock corporation law and also in line with European provisions. Therefore, while Porsche is well prepared for the merger it is not yet master of the situation. As long as Germany and Lower Saxony maintain their positions, Porsche will remain stuck in the back seat regardless of its actual ownership interest. Lower Saxony is not just a shareholder with a blocking minority, but also a shareholder who is not necessarily acting in the company’s best interests. The main goals of Lower Saxony are the protection of jobs at Volkswagen and consequently its suppliers and the protection and preference of VW factories in Lower Saxony (even over other factories in Germany). Monetary fines, procedural costs and purchase prices for supplemental shares can be brought up without considering its efficiency. There are also voices among German politicians calling for a sale of Lower Saxony’s shares in Volkswagen which would generate gains of around EUR 15 billion (approx. USD 22 billion) and would allow Lower Saxony to reduce its annual debt burden of EUR 700 million (approx. USD 1 billion). However, these voices are not yet drowning out the contrary voices. There is no doubt that Porsche will and should merger with Volkswagen one day. But so far, there is no master plan as to how this should be achieved.