Germany enacted legislation in 1960 (partly) privatizing Volkswagen. The legislation capped the voting rights at 20% even if a shareholder exceeded that holding, fixed a blocking minority at 20% and gave the German Federal State and the Land of Lower Saxony each the right to appoint two representatives to the supervisory board.
The Commission considered that those provisions of the 1960 law restricted the free movement of capital in a manner contrary to Article 56 EC as well as the freedom of establishment guaranteed by Article 43 EC.
The Court of Justice held that the restrictions placed on shareholder rights in Volkswagen were contrary to Article 56 EC on the free movement of capital. It held that while the EC Treaty did not define ‘movement of capital’ within the meaning of Article 56(1) EC, it has previously recognized the nomenclature set out in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty [article repealed by the Treaty of Amsterdam] as having indicative value. 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 (see, Case C‑446/04 Test Claimants in the FII Group Litigation, paragraphs 179 to 181, and Case C‑157/05 Holböck, paragraphs 33 and 34).
The Court held that the capping of voting rights at 20% and the fixing of the blocking minority at 20% taken together enable the German Federal State and the Land of Lower Saxony to exert considerable influence of Volkswagen beyond that which they could exert under general company law. That considerable influence is liable to deter investors from other member States.
The Court also found that the right granted to the German Federal State and the Land of Lower Saxony to appoint two representatives to the supervisory board enables them to exert considerably more influence than their actual level of shareholding would allow normally which thus reduces the influence of other shareholders. That too is liable to deter foreign investors.
The Court of Justice stated that restrictions on the free movement of capital could be justified under Article 58 EC. But it held in this case that the German government had advanced no viable justification for the restrictions.
Rather oddly the German government claimed that the privatization legislation of 1960 was not a state measure and thus not caught by Article 56 EC. It claimed that the 1960 law reproduced an agreement which should be classified as a private law contract. The Court would have none of that and held that the fact that the agreement has become the subject of a Law suffices for it to be considered as a national measure for the purposes of the free movement of capital. It concluded rather tartly that the exercise of legislative power by the national authorities duly authorized to that end is a manifestation par excellence of State power.
The Court dismissed the action as regards Article 43 EC because the Commission put forward no arguments to substantiate that claim.