German legislation that effectively protects Volkswagen from a takeover contravenes EU rules, the European Court of Justice was told yesterday in a case that could have wider implications for the use of golden shares to shield companies from foreign predators.

Dámaso Ruiz-Jarabo Colomer, an advocate-general who advises the Luxembourg-based judges at Europe’s highest court, said that the protective provisions in the 47-year-old Volkswagen Law violate one of the EU’s basic principles — the free movement of capital — and were not “based on overriding reasons relating to the public interest”.

His opinion was welcomed by the European Commission, which began court action in March 2005 and consistently campaigned against national measures that create obstacles to market entrants.

However, German politicians and trade unionists rallied behind the legislation, maintaining that it helped to ensure stability at Europe’s largest car manufacturer.

Jörgen Peters, head of Germany’s largest industrial union, said: “The VW law has proved its value because it has contributed to the wellbeing of the company and its employees.”

More often than not, the European judges follow the advice they are given by their top legal counsellor. If they do so on this occasion when they deliver their judgment this summer, it will be an embarrassing setback for Germany at the very time that it is holding the EU presidency.

Under the law, the German federal Government and the region of Lower Saxony each have the right to appoint two members to the company’s ten-member supervisory board, irrespective of the size of their shareholding.

According to Mr Ruiz-Jarabo Colomer, this acts as a disincentive to anyone wishing to acquire a significant share.

The law also limits voting rights to 20 per cent of the share capital — the exact percentage the federal and state governments each held at the time the legislation was adopted — even if an individual shareholding exceeds that.

Lower Saxony, where Volkswagen’s Wolfsburg headquarters are based, holds an 18.2 per cent stake, while Porsche, which has recently been increasing its holding to prevent hostile foreign takeovers, now has 27.4 per cent.

Christian Wulff, the State Governor, said that even if the law was struck down, there was unlikely to be any effect as Lower Saxony and Porsche could block any takeover attempts.

The European Court ruling this year could be a test case on the measures governments may take to protect companies they consider vital to their economies. The Commission is confident that the Court will share its view that these have no place in the EU.

A Commission spokesman said: “If you look at the recent case law of the Court of Justice, you see that it seems the Court shares this line. It is refining and restricting the use of golden shares on every occasion.”

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