UK: The Legality of Golden Shares in the European Union

Last Updated: 30 August 2002
Article by Jeff Soal


The European Court of Justice has held1 that national laws conferring on a state special rights in the form of golden shares do contravene the fundamental principle of freedom of movement of capital between Member States and between Member States and third countries. However, such golden shares are permissible if they can be justified on specified grounds (in particular public policy or public security) or by overriding requirements of the general interest which are non-discriminatory and satisfy the principles of proportionality and legal certainty.

In comparing the decisions in relation to three cases, which were brought simultaneously before the ECJ, some useful guidance can be obtained as to when golden shares may be permissible.


Portuguese, French and Belgian legislation permitted the holding by their respective governments of golden shares in certain privatised companies which conferred on them certain rights. In summary these rights were:

  1. in respect of Portugal, a prohibition on the acquisition by foreign nationals/entities of more than a specified number or value of shares in undertakings operating in the banking, insurance, energy and transport sectors;
  2. in respect of France and Portugal, a requirement that prior notification and authorisation was to be given where a limit on the number of shares or voting rights held was exceeded; and
  3. a right to oppose, retrospectively, decisions concerning the transfer of shares or the granting of security over certain assets (France and Belgium) or the taking of certain actions by the board of directors (Belgium).


The ECJ held that:

  1. the Portuguese rule was clearly unlawful and its justifications (see below) not valid.
  2. the French requirement of prior authorisation and right to oppose share transfers were both unlawful and not justified; and
  3. the Belgian legislation, although prima facia unlawful, was justifiable on the grounds stated (see below).

It is important therefore to consider the justifications put forward by each country but in order to do so it is necessary to set out below a more detailed summary of the relevant legislation in each jurisdiction.


The restrictions in Portugal were twofold. Firstly, the Portuguese legislation provided that its privatisation legislation may limit the overall amount of shares which may be acquired or subscribed for by foreign entities or entities the majority of the share capital of which is held by foreign entities and may also lay down rules fixing the maximum value of their respective participations in the capital of any company and the corresponding methods of control, non-compliance with which, in the circumstances to be prescribed, will be penalised by the forced sale of any shares exceeding those limits, loss of voting rights conferred by those shares or the validity of those acquisitions or subscriptions.2

In fifteen different decree-laws under this Article maximum foreign participations of between five and forty per cent. were specified in undertakings operating in the banking, insurance, energy and transport sectors.

The second offending piece of legislation provided that: "The acquisition inter vivos, with or without consideration, by a single natural or legal person, of shares representing more than 10% of the voting capital, and the acquisition of shares which, when added to those already held, exceeds that limit in companies which are to be re-privatised, shall require the prior authorisation of the Minister for Financial Affairs".3


The French legislation concerned a golden share held by the government in Société Nationale Elf-Aquitaine and provided:

(a) that any direct or indirect shareholding by a natural or legal person, acting alone or in conjunction with others, which exceeds the ceiling of one tenth, one fifth or one third of the capital of, or voting rights in, the company must first be approved by the Minister for Economic Affairs; and

(b) the right to oppose any decision to transfer or use as security the assets [listed in the annex to the Decree] – the assets in question being the majority of the capital of four subsidiaries of the company.4


The Belgian legislation concerned golden shares in two companies, Société Nationale de Transport par Canalisations (SNTC) and Distrigaz, both of which carried similar rights as follows:

(a) advance notice of any transfer, use as security or change in the [use of the company's strategic assets] must be given to the Minister responsible, who shall be entitled to oppose such operations if he considers that they adversely affect the national interest in the energy field; and

(b) the Minister may appoint two representatives of the government to the board of directors who may propose to the Minister the annulment of any decision of the board which they regard as contrary to the guidelines for the country's energy policy.5

The Legal Position

Article 73b(1) (now Article 56 EC) of the Treaty states that: "all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited".

There is, however, a derogation to the above principle in Article 73d(1)(b) of the Treaty in that Member States may "take all requisite measures to prevent infringements in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security".

The Commission adopted in 1997 a Communication6 on certain legal aspects concerning intra-EU investment in which it expands upon the above derogation and states at Point 9 that: " ... the discriminatory measures (i.e. those applied exclusively to investors from another EU Member State) would be considered a incompatible with [the free movement of capital and freedom of establishment] rules unless covered by one of the exceptions in the Treaty. As regards non-discriminatory measures (i.e. those applied to nationals and other EU investors alike) they are permitted in so far as they are based on a set of objective and stable criteria which have been made public and can be justified on imperative requirements in the general interest. In all cases the principle of proportionality has to be respected."

What is clear from the judgments in each of the three cases is that the measures adopted by the respective states were held to be prima facia in breach of the principle of free movement of capital. Where the judgments are of value is in their consideration of the justifications put forward by the states and it is these which are analysed below.

Before moving on to the justifications, however, it is worth touching briefly on the relevance of whether or not the national legislation was discriminatory. Both the French and Portuguese7 governments argued that their rules applied without regard to the nationality of shareholders and as such were not discriminatory. This argument was rejected, the ECJ holding that the prohibition (on restrictions of movement of capital) went beyond mere elimination of unequal treatment, on grounds of nationality, as between operators on the financial markets. The ECJ further held that even although the rules may not have given rise to unequal treatment, they were liable to impede the acquisitions of shares in the undertakings concerned, rendering the free movement of capital illusory. Although breaches of this principle have historically been along nationalistic lines, the ECJ has now established that discrimination is not a prerequisite. In effect, the purpose of the principle of free movement of capital is not to ensure non-discriminatory treatment but to ensure free access to the capital markets.


The ECJ confirmed that, depending on the circumstances, certain concerns may justify the retention by Member States of a degree of influence within undertakings that were initially public and subsequently privatised, where those undertakings are active in fields involving the provision of services in the public interest or strategic services. Restrictions on the free movement of capital may only be justified by reasons referred to in Article 73d(1) of the Treaty or by overriding requirements of the general interest and which are applicable to all persons and undertakings pursuing an activity in the territory of the host Member State. The national legislation must also accord with the principle of proportionality, that is to be suitable for securing the objective and not go beyond what is necessary to attain it; be based on objective, non-discriminatory criteria which are known in advance and all persons affected by the restrictive measure must have a legal remedy available to them. Such general principles are useful but let us examine how these principles were applied in practice in each of the three cases.


The Portuguese government argued that the measures it had adopted were justified by overriding requirements of the general interest in that they were intended to enable it, when re-privatising an undertaking in stages, to ensure that the economic policy objectives pursued by the re-privatisation were not frustrated. In particular the objectives of choosing a strategic partner where the activities of the undertaking are to assume an international dimension, or strengthening the competitive structure of the market concerned or modernising and increasing the efficiency of means of production. The Portuguese government also argued that proportionality was satisfied in as much as an assessment of operations which alter the structure of share ownership constitutes an appropriate means of achieving the objective pursued.

The ECJ bluntly rejected these arguments and reiterated that it was settled case law8 that economic grounds can never serve as justification for obstacles prohibited by the Treaty. As such economic policy objectives cannot constitute a valid justification for the restrictions.

The Portuguese arguments having failed at the first hurdle, the ECJ did not go on to consider the proportionality and openness of the measures but it did do so in the cases of France and Belgium.


The French government argued that the restrictions were justified by the public security exception in Article 73d(1)(b) of the Treaty and by overriding requirements of the general interest. In particular they were required to guarantee the availability of petroleum products in the event of a crisis, first, by the right to requisition the crude oil reserves of Elf located abroad and, secondly, by ensuring that the central decision–making body of the company remain in France.

The ECJ accepted that the objective of safeguarding supplies of petroleum products in the event of a crisis falls within the ambit of a legitimate public interest.9 However, the ECJ also held that the requirements of public security as a derogation must be interpreted strictly so that its scope cannot be determined unilaterally by each Member State without any control by the Community institutions and where France failed was in the tests of openness, certainty and proportionality.

The ECJ noted that the restrictions imposed by the French government and the powers of the Minister for Economic Affairs were not qualified by any condition, save the protection of the national interest. Investors were given no indication as to the specific, objective circumstances in which the power of prior authorisation and opposition ex-post facto would be exercised and such lack of certainty did not enable individuals to assess the extent of their rights and obligations under the Treaty. In this regard the restrictions were contrary to the principle of legal certainty. The ECJ held that it therefore followed that the restrictions went beyond what was necessary to in order to obtain the objective. It is not entirely clear, at least to the author, how the second finding follows the first but some clues can be gained from examining the pleadings.

The Commission argued that the objective of securing continuity of petroleum supplies could be more effectively attained by sectoral measures coming into force in the event of a crisis and qualified by well-defined technical criteria relating not to the share capital of the companies but to the use of stocks. Moreover, such an objective was already adequately safeguarded by measures provided under EU and international law. The French government argued that in the absence of significant oil reserves no such sectoral measure could be taken in respect of crude oil suppliers and that the EU and international measures were insufficient – as such the Commission had failed to discharge its obligation to show that the measures failed the test of proportionality.

It is regrettable that, in its ruling (at least in the French case) the ECJ did not address this issue directly but rather made the leap of logic described above. To the author it does not follow that a lack of legal certainty means that the measures were not proportionate. Nevertheless the judgment provides useful guidance on the importance placed on openness or legal certainty not only in the nature of the restrictive measures but also in their application.


Like France, the Belgian government successfully pleaded safeguarding of the country's energy supplies as an overriding requirement of the general interest such as to justify a derogation from the principle of free movement of capital. However, unlike France, Belgium also successfully showed that its measures satisfied the tests of proportionality and legal certainty. This was in large measure down to the strictly controlled and limited manner in which the Minister's powers were capable of exercise.

The ECJ accepted the Belgian plea that the measures provided were proportionate in that they were predicated on the principle of respect for the decision–making autonomy of the undertaking concerned. It was held that the prior-notification procedure constitutes, in the absence of any suspensory effect, a means of keeping the authorities informed. In both cases (the prior-notification and the annulment procedure), the Minister's powers are not of a general nature but instead relate solely to specific matters (the national interest in the energy sector), are limited in time (in the first case, the Minister may exercise his right of opposition within 21 days of receiving notice of the operation in question and, in the second case, the government representatives on the board of directors can only apply to the Minister within 4 working days of a decision and the Minister has 8 working days to annul the decision) and are limited to certain decisions concerning the strategic assets of the companies in question. Furthermore, any such intervention must be supported by a formal statement of reasons and may be subject to an effective review by the courts.

The ECJ held that the above safeguards were sufficient to satisfy the principle of legal certainty and also held that the Commission had not shown that less restrictive measures could have been taken to attain the objective pursued. In this latter respect the Commission had argued for planning designed to encourage natural gas undertakings to conclude long-term supply contracts, to diversify their sources of supply or to operate a system of licenses but the ECJ held that such measures would not be sufficient to permit a rapid reaction in a crisis situation. Moreover, the introduction of such rules would be even more restrictive than a right of operation limited to specific situations and within defined boundaries.


Golden shares do on their face constitute a breach of the principle of freedom of movement of capital. However, certain derogations from that principle are permitted provided that the objectives intended to be achieved by the measures adopted/rights enshrined fall within the scope of Article 73d(1)(b) of the Treaty (essentially public policy or public security but not economic policy objectives) and such measures are based on objective, non-discriminatory criteria which are known in advance (i.e. satisfy the principle of legal certainty), are subject to legal review in their application and satisfy the principle of proportionality.

Member States which wish to use golden share schemes would be well advised to follow the lead of the limited Belgian scheme, utilising strictly defined powers related to specified circumstances and capable of exercise within short, specified time periods.

Nothing stated in this documents should be treated as an authoritative statement of the law on any particular aspect or in any specific case. Action should not be taken on the basis of this document alone. For > specific advice on any particular aspect you should consult the usual partner with whom you deal.

1 Cases: C-367/98 Commission v Portugal;
C-483/99 Commission v France;
C-503/99 Commission v Belgium.
Judgments of 4th June 2002.

2 Article 13(3) of Law No. 11/90.

3 Article 1 of Decree-Law No. 380/93.

4 Articles 2(1) and 2(3) of Decree No. 93-1298 of 13 December 1993.

5 Royal Decree of 10 June 1974 and 16 June 1994.

6 OJ 1997 C 220 p.15.

7 Portugal argued that although its rule limiting the amount of shares held by foreign entities was on the face of it discriminatory, in practice (due to the doctrine of direct effect) it could never be applied as between nationals of Member States and therefore was not discriminatory – this argument was rejected on the basis that administrative practices (which are changeable at will) do not constitute proper performance of an obligation under the Treaty as it creates uncertainty as regards the extent of the rights guaranteed by the Treaty.

8 Case C-205/95 Commission v France [1997] ECR I-6959 para. 62.

9 Case 72/83 Campus Oil and Others [1984] ECR 2727 para. 34.

Copyright © 2002 Washington Legal Foundation

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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