Commission of the European Communities v Federal Republic of Germany.
Date: 2007-10-23
1. By its application, the Commission of the European Communities asks the Court for a declaration that Paragraphs 2(1) and 4(1) and (3) of the Law of 21 July 1960 on the privatisation of equity in the Volkswagenwerk limited company (Gesetz über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand, BGBl. 1960 I, p. 585, and BGBl. 1960 III, p. 641-1-1), in the version applicable to the present proceedings (‘the VW Law’), infringe Articles 43 EC and 56 EC.
Legal context
The Law on public limited companies
13. According to settled case-law, national provisions which apply to holdings by nationals of the Member State concerned in the capital of a company established in another Member State, giving them definite influence on the company’s decisions and allowing them to determine its activities, come within the substantive scope of the provisions of the EC Treaty on freedom of establishment (see, inter alia, Case C‑251/98 Baars  [2000] ECR I-2787, paragraph 22; Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas  [2006] ECR I‑7995, paragraph 31; and Case C‑524/04 Test Claimants in the Thin Cap Group Litigation  [2007] ECR I‑0000, paragraph 27).
17. According to consistent case-law, Article 56(1) EC generally prohibits restrictions on movements of capital between Member States (see, inter alia, Joined Cases C‑282/04 and C‑283/04 Commission  v Netherlands  [2006] ECR I‑9141, paragraph 18 and the case-law cited).
18. In the absence of a Treaty definition of ‘movement of capital’ within the meaning of Article 56(1) EC, the Court has previously recognised 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in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty [article repealed by the Treaty of Amsterdam] (OJ 1988 L 178, p. 5) as having indicative value. Movements of capital within the meaning of Article 56(1) EC therefore include direct investments, that is to say, as that nomenclature and the related explanatory notes show, investments of any kind undertaken by natural or legal 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, to that effect, Case C‑446/04 Test Claimants in the FII Group Litigation  [2006] ECR I‑11753, paragraphs 179 to 181, and Case C‑157/05 Holböck  [2007] ECR I‑0000, paragraphs 33 and 34). As regards shareholdings in new or existing undertakings, as those explanatory notes confirm, the objective of establishing or maintaining lasting economic links presupposes that the shares held by the shareholder enable him, either pursuant to the provisions of the national laws relating to companies limited by shares or in some other way, to participate effectively in the management of that company or in its control (see Test Claimants in the FII Group Litigation , paragraph 182, and Holböck , paragraph 35; see also C‑367/98 Commission  v Portugal  [2002] ECR I‑4731, paragraph 38; Case C‑483/99 Commission  v France  [2002] ECR I‑4781, paragraph 37; Case C‑503/99 Commission v Belgium  [2002] ECR I‑4809, paragraph 38; Case C‑463/00 Commission v Spain  [2003] ECR I‑4581, paragraph 53; Case C‑98/01 Commission  v United Kingdom  [2003] ECR I‑4641, paragraph 40; Case C‑174/04 Commission  v Italy [2005] ECR I‑4933, paragraph 28; and Commission  v Netherlands , paragraph 19).
19. Concerning this form of investment, the Court has stated that national measures must be regarded as ‘restrictions’ within the meaning of Article 56(1) EC if they are liable to prevent or limit the acquisition of shares in the undertakings concerned or to deter investors of other Member States from investing in their capital (see Commission  v Portugal , paragraph 45; Commission  v France , paragraph 41; Commission  v Spain , paragraph 61; Commission  v United Kingdom , paragraph 47; Commission  v Italy , paragraphs 30 and 31; and Commission  v Netherlands , paragraph 20).
30. Having regard to the parties’ arguments in relation to the first two complaints, and the cumulative effects of the two provisions of the VW Law which those complaints call in question, it is appropriate for the Court to examine the latter together.
The first and second complaints, based on the fact that the voting rights are capped at 20% and the blocking minority is fixed at 20%
– Arguments of the parties
47. Admittedly, as the Federal Republic of Germany has stated, this power applies without distinction. In the same way as the cap on voting rights, it may operate both to the benefit and to the detriment of any shareholder in the company.
48. However, it is apparent from the file that, when the VW Law was adopted in 1960, the Federal State and the Land of Lower Saxony were the two main shareholders in Volkswagen, a recently privatised company, and each held 20% of its capital.
50. Paragraph 4(3) of the VW Law thus creates an instrument enabling the Federal and State authorities to procure for themselves a blocking minority allowing them to oppose important resolutions, on the basis of a lower level of investment than would be required under general company law.
51. By capping voting rights at the same level of 20%, Paragraph 2(1) of the VW Law supplements a legal framework which enables the Federal and State authorities to exercise considerable influence on the basis of such a reduced investment.
52. By limiting the possibility for other shareholders to participate in the company with a view to establishing or maintaining lasting and direct economic links with it which would make possible effective participation in the management of that company or in its control, this situation is liable to deter direct investors from other Member States.
54. As the Commission has argued, the restrictions on the free movement of capital which form the subject-matter of these proceedings relate to direct investments in the capital of Volkswagen, rather than portfolio investments made solely with the intention of making a financial investment (see Commission  v Netherlands , paragraph 19) and which are not relevant to the present action. As regards direct investors, it must be pointed out that, by creating an instrument liable to limit the ability of such investors to participate in a company with a view to establishing or maintaining lasting and direct economic links with it which would make possible effective participation in the management of that company or in its control, Paragraphs 2(1) and 4(3) of the VW Law diminish the interest in acquiring a stake in the capital of Volkswagen.
55. This finding is not affected by the presence, among Volkswagen’s shareholders, of a number of direct investors, which, according to the Federal Republic of Germany, is similar to such a presence among the shareholders of other large undertakings. This circumstance is not such as to cast doubt on the fact that, because of the disputed provisions of the VW Law, direct investors from other Member States, whether actual or potential, may have been deterred from acquiring a stake in the capital of that company in order to participate in it with a view to establishing or maintaining lasting and direct economic links with it which would make possible effective participation in the management of that company or in its control, even though they were entitled to benefit from the principle of the free movement of capital and the protection which that principle affords them.
59. Under Paragraph 4(1) of the VW Law, the Federal State and the Land of Lower Saxony are each entitled, on condition that they are shareholders in the company, to appoint two representatives as members of the supervisory board of Volkswagen, that is, a total of four persons.
60. Such an entitlement constitutes a derogation from general company law, which restricts the rights of representation conferred on certain shareholders to one third of the number of the shareholders’ representatives on the supervisory board. As the Commission has argued without being contradicted on this point, in the case of Volkswagen, the supervisory board of which comprises 20 members, 10 of whom are appointed by the shareholders, the number of representatives who may be appointed by the Federal State and the Land of Lower Saxony may not exceed a maximum of three according to general company law.
61. This right of appointment is therefore a specific right, which derogates from general company law and is laid down by a national legislative measure for the sole benefit of the Federal and State authorities.
62. The right of appointment conferred on the Federal State and the Land of Lower Saxony thus enables them to participate in a more significant manner in the activity of the supervisory board than their status as shareholders would normally allow.
64. Paragraph 4(1) of the VW Law thus establishes an instrument which gives the Federal and State authorities the possibility of exercising influence which exceeds their levels of investment. As a corollary, the influence of the other shareholders may be reduced below a level commensurate with their own levels of investment.
65. The fact that the supervisory board, as the Federal Republic of Germany submits, is not a decision-making body, but a simple monitoring body, is not such as to undermine the position and influence of the Federal and State authorities concerned. While German company law assigns to the supervisory board the task of monitoring the company’s management and of providing reports on that management to the shareholders, it confers significant powers on that body, such as the appointment and dismissal of the members of the executive board, for the purpose of performing that task. Furthermore, as the Commission has pointed out, approval by the supervisory board is necessary for a number of transactions, including, in addition to the setting-up and transfer of production facilities, the establishment of branches, the sale and purchase of land, investments and the acquisition of other undertakings.
66. By restricting the possibility for other shareholders to participate in the company with a view to establishing or maintaining lasting and direct economic links with it such as to enable them to participate effectively in the management of that company or in its control, Paragraph 4(1) of the VW Law is liable to deter direct investors from other Member States from investing in the company’s capital.
72. The free movement of capital may be restricted by national measures justified on the grounds set out in Article 58 EC or by overriding reasons in the general interest to the extent that there are no Community harmonising measures providing for measures necessary to ensure the protection of those interests (see Commission  v Portugal , paragraph 49; Commission  v France , paragraph 45; Commission v Belgium , paragraph 45; Commission  v Spain , paragraph 68; Commission  v Italy , paragraph 35; and Commission  v Netherlands , paragraph 32).
73. In the absence of such Community harmonisation, it is in principle for the Member States to decide on the degree of protection which they wish to afford to such legitimate interests and on the way in which that protection is to be achieved. They may do so, however, only within the limits set by the Treaty and must, in particular, observe the principle of proportionality, which requires that the measures adopted be appropriate to secure the attainment of the objective which they pursue and not go beyond what is necessary in order to attain it (see Commission  v Portugal , paragraph 49; Commission  v France , paragraph 45; Commission v Belgium , paragraph 45; Commission  v Spain , paragraph 68; Commission  v Italy , paragraph 35; and Commission  v Netherlands , paragraph 33).
81. In the light of all the foregoing, the complaints relied on by the Commission alleging breach of Article 56(1) EC must be upheld.