Germany: ECJ Delivers New Judgments Concerning "Golden Shares"

By Philip Martinius and Matthias von Oppen

The European Commission has once more been successful before the European Court of Justice ("ECJ") in its continued battle against "golden share" provisions of EC (European Community) Member States. On May 13, 2003, the ECJ issued two judgments¹ regarding certain control rights of public authorities in privatized undertakings in Spain and the UK. Reaffirming its decisions of July 4, 2002,² the Court declared both the Spanish and the UK rules unlawful.

The ECJ once more held that national laws conferring on a state special rights in the form of golden shares or comparable means contravene the fundamental principle of freedom of movement of capital between EC Member States and between Member States and third countries, Art 56 EC Treaty. Thus, golden shares or equivalent provisions in national law are only permissible if (i) justified by reasons referred to in Art 58 EC Treaty or by overriding requirements of the general interest and (ii) the national provisions satisfy the principles of proportionality and legal certainty.

The new court rulings will encourage the European Commission to continue challenging golden share schemes in other Member States such as, for example, Germany's laws regarding Volkswagen AG.

Spanish legislation provides for a system of prior administrative approval of major decisions relating to the winding-up, demerger, merger, sale of core assets or change of corporate object of certain privatized undertakings in the energy (Repsol and Endesa), telecoms (Telefónica), banking (Argentaria) and tobacco (Tabacalera) sectors. Equally, the transfer of a number of shares in those undertakings exceeding certain thresholds require prior administrative authorization. The ECJ held that these rules entail restrictions for investors who intend to acquire participations in these undertakings. As such investments are considered as movements of capital under the EC Treaty, the Spanish rules contravene the fundamental principle of the free movement of capital according to Article 56 EC Treaty.

The free movement of capital may be restricted by national rules that are justified by overriding requirements of the general interest. Such rules must be suitable for securing the objective which they pursue and they must be proportionate, i.e., not go beyond what is necessary to attain their purpose. This even applies if the national rules do not differentiate between nationals and non-nationals. Regarding the undertakings in the banking and tobacco sectors, the ECJ denied the existence of overriding requirements of the general interest as these undertakings do not provide public services. As regards the undertakings in the energy and telecoms sectors, the ECJ acknowledged that there are requirements of public security which in principle may justify restrictions on the movement of capital. For example safeguarding supplies of energy in the event of crisis could be a legitimate justification. The Court found, however, that the Spanish rules go beyond what is necessary to achieve that purpose as the exercise of the State's right to prior approval of the acquisition of shares is not subject to any conditions. Moreover, the investors are given no indication of the specific, objective circumstances in which prior approval will be granted or withheld. Such lack of precision is regarded by the Court as contrary to the principle of legal certainty and thus unlawful.

The United Kingdom Government owns a special share in BAA plc, the privatized former British Airports Authority, which owns certain international airports in the UK. This share gives its owner a special approval right regarding certain measures (e.g., winding-up, disposal of an airport). BAA's Articles of Association prevent the acquisition of the special share by any non-governmental entity as well as the acquisition of more than 15% of the voting shares in the company by any person.

Again the provisions affect the position of an investor acquiring a participation in BAA plc and thus restrict the movement of capital. The UK Government pleaded that in this case solely the application of private company-law mechanisms was concerned. The Court did not accept this argument. It held that the restrictions did not arise as the result of the normal operation of company law. The Court pointed out that BAA's Articles of Associations were to be approved by the Government with the Member State acting as a public authority in this instance. The ECJ held that therefore the rules at issue constitute a restriction on the movement of capital according to Art. 56 EC Treaty. The court did not go into any details with respect to a possible justification based on overriding requirements relating to the general interest.

It should be noted that - quite unusually - both decisions are contrary to the opinion of the Advocate General, which was delivered jointly for both cases on February 6, 2003. However, the Court's decisions appear to be relatively unimpressed by the criticism of the Advocate General. It is therefore unlikely that the ECJ will reverse its position in future cases.

With these judgments the ECJ has increased pressure on the national governments in the EU Member States. In order to comply with the rules laid down in the judgments, the governments will have to review their respective golden share schemes. As the judgment of June 2002 in the case Commission v. Belgium shows, golden share schemes can be lawful if they are sufficiently precise, foreseeable and limited to the extent necessary. The necessary adjustments may lead to new opportunities for international or domestic investors.

It is expected that the Commission will soon ask Germany to justify its Volkswagen law with regard to the ECJ's continued jurisdiction on golden shares. The Volkswagen law had been enacted as a federal law in 1960. It provides a 20 % voting cap, in combination with a 20 % blocking minority. Any shareholder holding more than 20 % of voting shares may only cast a maximum of 20 % of the votes in a shareholders' meeting. Additionally, a majority of more than 80 % of shareholder votes is required for important decisions in the company. The Land of Lower Saxony holds currently roughly 20 % of the shares in Volkswagen and is also the biggest shareholder. In practice, the Land is therefore granted a special right of veto concerning strategic decisions of the shareholders' meeting.

Copies of the judgments may be obtained from the ECJ's website at www.curia.eu.int.