Germany May Skate on Assistance to Volkswagen

(CN) - The European Commission should fail in its latest bid to fine Germany for helping Volkswagen, an adviser to the Europe's highest court said Wednesday.

Germany first felt the bite of the EU's executive body in 2007 when the Luxembourg-based Court of Justice found illegal infringement on the free movement of capital in three provisions of the Volkswagen law, a 1960 regulation on the privatization of equity in the automaker.

The court took issue with a provision granting the German government and the state of Lower Saxony the right to appoint two representatives to the Volkswagen board.

A separate provision was also found to illegally cap the voting rights of individual shareholders at 20 percent - though it also gave those shareholders a blocking minority within Volkswagen's general assembly.

At the time, the high court found that these provisions limited minority shareholders from participating fully in the running of the company and were likely to deter investors from other European countries from investing in Volkswagen. Germany responded by entirely repealing the first provision and the voting rights cap, but it left the blocking minority in place.

Complaining that Germany had failed to fully comply with the court's decision, the commission brought new charges in 2012. It said Germany illegally impedes the free movement of capital by preserving the portion of the provision that grants 20 percent shareholders a blocking minority.

Regulators also asked the court to levy massive fines on Germany for every day that the country has failed to comply with the 2007 ruling. They suggested Germany pay a $365,000 penalty for each day it takes to amend the Volkswagen law and a $40,000 lump-sum payment multiplied by the number of days between the 2007 ruling and the day Germany finally complies - $82 million so far.

Advocate General Nils Wahl told Europe's high court, however, that he believes Germany has sufficiently amended the Volkswagen law. In a Wednesday opinion, he asked the court to dismiss the commission's action and chided it for leaving "room for argument" in its earlier decision.

"That the parties draw contrasting conclusions from the 2007 judgment is regrettable," Wahl wrote. "Although disagreement about the meaning and scope of judgments is an inevitable aspect of law, it seems to me that in the context of infringement proceedings the court may help to avoid such uncertainty by ensuring that its reasoning is transparent and by carefully formulating the operative part of its judgments. Indeed, while it is for the commission to assess at the post-litigation stage whether compliance by the member state can be considered sufficient, the carrying out of this assessment effectively presupposes a clear statement from the court with regard to the existence of a failure to fulfill obligations."

Wahl said the 2007 ruling aimed to remove the cumulative effects of the offending provisions of the Volkswagen law. Rather than taking the commission's approach of reading each portion of that judgment on its own, Wahl emphasized a comprehensive approach to implementing the ruling.

"I must emphasize that the court stated, on the one hand, that 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 ... which are not relevant to the present action,'" the adviser wrote. "On the other hand, the court concluded as regards direct investments - which in accordance with the first sentence were held to form the subject-matter of the proceedings - that, 'by creating an instrument liable to limit the ability of [direct] 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, [the voting rights provisions] of the VW law diminish the interest in acquiring a stake in the capital of Volkswagen.'"

He continued: "In my opinion, both the use of 'restrictions' in the plural form, and the absence of the words 'in conjunction with' in that paragraph are inconclusive. In that regard, the first sentence simply restricts the assessment of the alleged restrictions to direct investments and excludes the analysis of portfolio investments on the ground that they are irrelevant. The second sentence applies the court's case-law relating to direct investments to the case before it. According to the Court, [the voting rights provisions] of the VW law together diminish investors' interest in acquiring stakes in Volkswagen, because they create a framework - or instrument - which may limit the ability of direct investors to participate in the company with a view to establishing or maintaining lasting links with it. In other words, the interaction of those paragraphs lies at the very heart of this restriction."

But once Germany repealed one portion of the offending provision, it ended the undesirable effect on the free market, according to the opinion.

Should the high court disagree with his assessment, Wahl said it should show restraint in fining Germany. He also criticized the agency for dragging its feet in taking Germany back to court, seemingly in an effort to run up the penalties.

"The fact that in this case a period of three years elapsed between the end of the pre-litigation procedure and the referral of the case to the court does not seem fully consistent with the objective of a speedy and efficient solution to the issue of non-compliance," Wahl wrote. "In this respect, the course of action taken by the commission cannot escape criticism."

Penalties should not exceed $11,000 per day, for a total of just over $24 million, Wahl said. His opinion is not binding on the Court of Justice, which has begun its deliberations in the case.

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