Gold Bars

For the past decade, the European Commission (EC) has been on a mission to wipe out golden shares across the EU. Golden shares are special rights member states retain over certain recently privatized companies. These rights typically give the government the power to veto or prevent changes in the ownership structure of the company.

The EC's last major hurdle to achieving this goal is Germany's VW Law, a golden share that effectively blocks takeovers of Volkswagen. It carries special significance because it's one of the oldest golden shares in existence.

The EC believes that if it can take down the VW Law, then it will send a strong message to other member states that waging a battle to protect golden shares is futile. The hope is that these nations will instead voluntarily relinquish their special rights.

The EC rolled out its strategy in 2004 when it argued its case against Germany before the European Court of Justice. In February, the advocate general, the high court's top adviser, sided with the Commission, a move that experts say spells certain death to the VW Law.

If this happens and other member states scale back their golden shares, some of Europe's biggest and most important companies will be open to foreign investment.

"Because of the speed at which the EC is pursing this, member states will have to come to grips with this change and let go of their special rights," says Nina Niejahr, an attorney with Baker & McKenzie in Brussels. "They may be reluctant to do so because some Europeans still fear foreign investment. But this is a feature of globalization that will catch up with European companies."

Privatization Push

The golden share craze swept Europe about 20 years ago, during a time when member states were privatizing certain key industries, such as oil, defense and telecommunications. Although privatization was the goal, most nations were hesitant to completely relinquish control over these sectors.

"Politically, member states were nervous about what would happen if they gave these companies over to private control," says Stephen Kinsella, a partner at Sidley Austin. "They couldn't predict what new owners would do. So they opted to give themselves these special rights."

But there was a problem with this idea. Golden shares are a direct violation of the EC Treaty, which states that EU members cannot impose restrictions on the free movement of capital between member states. At first, the Commission turned a blind eye to the violation, reasoning that any small step toward privatization was a positive thing. But soon it became apparent that member states were using golden shares to impede foreign investment.

"These golden shares have inevitably acted as a disincentive to others buying shares in a company because they know their shares won't carry the degree of control it should," Kinsella says. "It also naturally acts as a deterrent for a company in one country to invest in another member state."

That problem was crystalized in the late 1990s when France threatened to use its golden share to block a takeover of oil company Soci?? 1/2 t?? 1/2 Nationale Elf-Aquitaine by Belgian competitor TotalFina.

The EC stepped in and filed suit against France, alleging its golden shares restricted cross-border investment. Prior to a 2002 ECJ ruling in the Commission's favor, France voluntarily loosened its grip on Elf-Aquitaine and allowed it to become TotalFinaElf. France has since repealed its golden shares.

At the same time, the EC successfully eliminated other golden shares, including British control of several airports and Spain's control of its banking and tobacco industries. In response, many member states voluntarily scaled back or eliminated their own special rights.

Volkswagen Veto

But according to a 2005 Commission report, member states still retain golden shares in more than 100 companies throughout Europe, many in newly inducted member states. That's why breaking down the VW Law is crucial for the success of the EC's mission.

"With Volkswagen, the EC wants to set a precedent," Kinsella says. "They've taken on what is probably the largest member state and single economy in Europe. Other member states will say, 'If the Commission can defeat Germany, they'll certainly be able to defeat us.'"

The biggest hurdle for the Commission will be punching a hole in Germany's legal defense. Germany's representatives argued before the ECJ that completely relinquishing government control over Volkswagen would be detrimental to the public interest, in

part because the automobile manufacturer employs such a large number of German citizens.

The court will scrutinize this argument using a proportionality test, weighing the nation's public interest argument against the degree to which the special rights restrict cross-border investment. If the court deems the golden shares overly restrictive, which it has done in all but one case regarding golden shares, then Germany will have to relinquish its control over VW.

Because experts expect Germany to lose, other member states will likely scale back or eliminate their golden shares as opposed to waging a losing court battle.

"For the remaining countries that have retained special rights, a win for the EC against Germany would mean increased scrutiny," Niejahr says. "There would be very little hope that state influence could be maintained."

Foreign Invasion

If golden shares disappear, a large number of European companies will not only be more open to investors, but also will be more appealing investment targets. This will likely increase the number of inter-EU mergers, giving rise to more Europe-wide companies.

"In the EU, this will make it easier for businesses to build up to a global level," Kinsella says. "Companies will be able to use the benefits of the economies of scale, manufacturing in the country that's most attractive to manufacture in and investing where it is most attractive to invest."

For foreign investors, such as U.S. multinationals, the elimination of golden shares also could give rise to more EU investment opportunities.

But some experts speculate it might not be so easy. Even if EU members decide to abolish their special rights, they still may find ways to protect businesses deemed important to the state from outside investors.

"Obviously the removal of golden shares means that takeover bids may be more likely in the future," says Mark Powell, partner at White & Case in Brussels. "But because they'll retain a very close nexus to the state, these countries could still make life difficult for foreign investors through such measures as legislation."

Technology Editor

Keith Ecker

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