Saturday, October 04, 2008

Porsche, Volkswagen, Germany and the European Union squabble over the Veto Powers of the German State of Lower Saxony over VW Management

Porsche has recently increased its stake in Volkswagen (VW) to 35.14%, giving it a controlling interest in VW. Furthermore, it is rumored that Porsche may try to increase its controlling interest in VW to 50% or more in the coming months, although, of course, no one knows for sure. Porsche is keeping open its theoretical possibility of obtaining 75% of the shares of VW.

However, in spite of the controlling shares owned by Porsche, according to controversial provisions in the Volkswagen Articles of Association (German: Satzung), the German State of Lower Saxony (Niedersachsen) effectively retains a veto power over important decisions at Volkswagen through its 20.1% stake. Moreover, the Federal Republic of Germany as well as Lower Saxony retain the special right of each delegating 2 members to the 20-member Volkswagen Supervisory Board, as long as they own shares in VW.

The mentioned provisions in the Articles of Association were designed to protect the interests of ca. 150,000 employees at Volkswagen in Lower Saxony. Those actual provisions of the Volkswagen Articles of Association read in English translation [not our translation] as follows:

"
§ 12

Right of Delegation

The Federal Republic of Germany and the State of Lower Saxony are each entitled to delegate two members to the Supervisory Board as long as they hold shares in the company.

...

§ 24

Voting Right - Restrictions on Voting

(1) Every ordinary shares shall carry one vote at the General Meeting. The preferred stockholders have no voting rights. If, however, the preferred stockholders are entitled to a voting right under any mandatory provisions of the law, every preferred shares shall carry one vote. If a stockholder holds more than one fifth of the shares in the company, his voting rights shall be restricted to the number of votes granted by one fifth of the shares. Shares held by a

stockholder shall also include such shares as are held by a third party for the account of the stockholder. If a stockholder is a company, the shares belonging to said company shall also include such shares as are held by a company controlling it, by any of its subsidiary companies or by any fellow group company or such as are held by a third party for the account of such companies. [emphasis added by LawPundit]

(2) Shares in the company may not be transferred in order to avoid the voting right restriction set out in subsection 1 above. In accordance with § 2 of the law relating to the transfer of share rights in Volkswagenwerk GmbH into private hands, any shares which have been transferred in such manner as to be at variance with this prohibition cannot be reassigned."


The European Union (EU) through the European Commission (EC) has maintained its stance that these protective provisions violate European Union rules permitting free investment throughout the EU, and the EC has put pressure on VW accordingly. As written at the International Herald Tribune:

"European Union regulators have challenged the so-called VW law and the European Court of Justice ruled in October that it restricted the free flow of capital."

As a consequence, VW is no longer relying on the existing provisions, which capped any shareholders voting rights at 20%, and is now trying to change the Articles of Association to provide that an 80% vote is required for significant company decisions (this figure is currently 75%), thus effectively retaining the old rule in its converse, and with the same effect, since Lower Saxony's 20.1% share makes it impossible for anyone to obtain 80% of the shares, thus maintaining its veto power.

The Volkswagen Supervisory Board has thus submitted such changes in their Articles of Association to the court of record, the registry (viz. register) court (Registergericht) in Braunschweig, Germany. As written at the International Tax Review:

"[C]onfirmation by a government agency is typically a condition precedent to the formation of a corporation (in Germany, this takes the form of entry in the commercial register after review of the articles of incorporation by the commercial register court - partnerships, by contrast, are effective as between the partners upon entry into the partnership agreement)."

Recent news reports indicate, however, that the court of record in Braunschweig is not going to accept the changes to the Volkswagen Articles of Association as submitted by the Supervisory Board, since these Articles are regarded by that court to be matters which can only be changed by a resolution of a General Meeting of Stockholders, which votes as follows:

"§ 26
Resolutions
(1) The General Meeting shall adopt its resolutions by simple majority of the votes
cast.
(2) Resolutions of the General Meeting in respect of which the German Corporation
Act stipulates a majority comprising at least three quarters of the capital stock
represented at the time the resolution is voted on shall require a majority of more
than four fifths of the capital stock of the company represented at such time."[emphasis added by LawPundit]

The matter is apparently to be adjudicated at a local court in Hannover on November 6, 2008, but we think that the outcome is quite clear, in spite of the opportunistic political posturing by politicians for the VW provisions in the Articles of Association and in spite of emotional reports in German media which fail to see that the issue is a legal issue, and not a political one.

The fact is that neither the EU nor the courts can permit these kinds of blatantly twisted legal exceptions in the Articles of Association at Volkswagen. Otherwise, any and all companies would be entitled to put similar protective provisions in their Articles of Association, if they wanted them, which would then potentially engender complete chaos as regards the principle of free investment within the European Union.

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