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By handing down three decisions on voting-right limitations for privatized companies, the European Court of Justice (ECJ) has made a sophisticated judgment of special voting rights in the proceedings brought by the EU Commission.

The ECJ makes a distinction between strategic public utility companies and other privatized companies for which the state reserves the right to ward off foreign investors which want to acquire shares in privatized companies, by voting-right limitations, golden shares or in other ways. It states that restrictions on the free movement of capital are prohibited under the Treaties of Rome. Moreover, the Directive of 1998 on the realization of free movement of capital defines the investments in company shares that correspond to the principles of free movement of capital.

The only condition for the restriction of the free movement of capital is compelling reasons of public interest. With this decision, the Court enforces the EC Treaties and shows the member states the limits of voting-right schemes in privatized companies. The judgment also removes the blockade of the 13th Directive on takeovers of companies, which failed last year with a tie in the European Parliament, due in part to the change of attitude of the German government. Germany for a long time had pursued a policy of liberalization with respect to companies and repeatedly activated the takeover directive, which had been brought to a standstill again and again. Also due to a domestic statutory change, the voting-right limitation of stock corporations was abolished (however, not the Volkswagen Privatization Act, which limits the percentage of votes of the remaining shareholders to 20% and grants the State of Lower Saxony a dominating position with about 20% of votes).

After the successful takeover of Mannesmann by Vodafone – which many had considered impossible – the need for statutory regulation for takeovers to replace the voluntary takeover code, became obvious. At the same time, an intense discussion on corporate governance principles developed in Germany, and this tends at present towards support for the German Law on the Purchase of Securities and Takeovers, which came into effect in 2002. In this context, the German government took two unexpected measures. With the rejection of the takeover directive it made clear that the absence of a level playing field in the EU puts certain countries at a disadvantage due to golden shares, voting-right limitations and other state influences in the acquisition of shares. Moreover, the defence options for a company's management were extended by the takeover law, in contrast to earlier drafts, and this was intended to impede unfriendly takeovers. Thus, the principle that only a company's shareholders can decide on a takeover bid was driven back, with the result that Germany ended up somewhat isolated in the discussion on the rights of investors.

To remove these difficulties, the EU Commission set up a High Level Working Group (the Winter Commission), which has published its proposals on equal starting conditions for takeover bids, on adequate prices in cases of mandatory offers and on squeeze-out and sell-out of minority shareholders.

The decision of the ECJ serves the interests of all concerned parties with a further development of the Directive on takeover bids. The German government has been confirmed in its view concerning the absence of a level playing field. All EU member states will have to take the ECJ standards as an orientation for their policies of voting right limitations and golden shares. The EU Commission can bring the 13th Directive on takeover bids into the committees again together with the findings of the Winter Commission and hopefully conclude the matter successfully, and this may also result in an amendment to the German takeover law.

Josef Tobien

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