Showdown at VW

Implications: Volkswagen’s two major shareholders – Porsche and the State of Lower Saxony - are on course for a showdown at the company’s upcoming annual general meeting (AGM) to be held on 24 April 2008. Porsche’s fight with Lower Saxony stems from the so-called “VW law,” parts of which were struck down last year by the European Court of Justice (ECJ).

Analysis: Both Porsche and Lower Saxony agreed on Friday that provisions in the law capping voting rights at 20 % and giving the state the automatic right to two supervisory board seats – both of which were also written into VW’s articles of associations – should be scrapped. However, the shareholders have disagreed as to whether the current 20 % blocking minority provision should be retained or increased to the general limit of 25 % set by German law.

Porsche calls for changes in VW Articles

Under the VW law, therefore, while Porsche holds a 31 % interest in VW, which it is planning to increase to at least 50 % in the near future, it has little control over VW since its voting rights are limited to 20 % and the State of Lower Saxony with its 20% interest can block any of Porsche’s proposals which it deems unattractive. Therefore, Porsche’s calls for amendments to the VW articles of association which would increase its shareholder rights will likely have little chance of success at the upcoming AGM.

Election of Lower Saxony representatives

As noted above, another provision of the draft amended VW law would suspend a current provision which grants two automatic supervisory board seats to the German State of Lower Saxony. The current state members of the board, Minister President Christian Wulff and his Minister of Economy Walter Hirche, will stand for re-election at the AGM and while their re-election is said to be certain, the legal basis for the election is not. VW wants to have them elected in an ordinary manner in order to prevent any later legal dispute which could arise if the automatic right to two board seats is abolished in the new VW Law.

The new draft “VW –Law”

It is unclear whether Porsche would file a legal challenge to try to change the articles of association if it fails to push through its proposals at the AGM and it is also unclear whether such a claim would be successful. This arises from the ambiguity of the ECJ decision which stated that it was the combination of the 20 % voting cap and the 20 % blocking minority provisions which was considered contrary to EU law. Legal experts say it is unclear whether the removal of the voting cap alone would allow the retention of the blocking minority provision. However, this is exactly what the German Ministry of Justice, which is currently preparing a draft of the amended VW Law, intends to do. Lower Saxony and VW workers are hoping the a new VW law will be enacted which would retain the blocking minority and certain other of the law’s provisions which the ECJ did not clearly reject. This would give employees an effective veto over factory closures in Germany and particularly in Lower Saxony. Furthermore, the draft of the new VW Law, which would basically maintain the rights of Lower Saxony, might not even get beyond the draft status. Currently the draft is being discussed between the relevant ministries, and the German Federal Economics Minister Michael Glos, has announced his intent to reject the draft bill, without, however, having yet provided any reasons for his position.

Is Porsche preparing a take-over?

Porsche recently denied media reports regarding a possible takeover of VW, with Porsche raising its VW stake to 75 %, declaring that this is merely “analyst and investor fantasies”. Although the Supervisory Board has recently allowed Porsche to increase its share to 50 percent, this would not give Porsche any additional rights given the current legal situation.

New ECJ proceedings

A spokesman for the European Commission stated at a regular briefing that “It is up to the German authorities ... to do whatever they find necessary to change the German system to comply with the [ECJ’s] ruling.” A recent article in the German news weekly “Focus” claiming that the EC Commissioner for Competition, Neelie Kroes, is preparing another lawsuit against Germany with respect to the VW Law, elicited no comments from Ms. Kroes’ spokesperson.

Conclusion

The year 2008 will bring remarkable changes to VW, regardless of the outcome of the current shareholder discussions and disputes. The next steps will be decided at the AGM on 24 April 2008.