July 21

This Day in History

Automotive

Jul 21, 1960:

Germany passes controversial "Volkswagen Law"

On this day in 1960, the German government passes the "Law Concerning the Transfer of the Share Rights in Volkswagenwerk Limited Liability Company into Private Hands," known informally as the "Volkswagen Law."

Founded in 1937 and originally under the control of Adolf Hitler's National Socialist (Nazi) Party, Volkswagen would eventually grow into Europe's largest car manufacturer and a symbol of Germany's economic recovery after the devastation of World War II. The Volkswagen Law, passed in July 1960, changed the company to a joint stock corporation, with 20 percent held each by Germany and Lower Saxony, the region in which Volkswagen is still headquartered. By limiting the share of any other stockholder to 20 percent, regardless of how many shares owned, the law effectively protected the company from any attempt at a hostile takeover.

By 2007, the controversial legislation had come under full-blown attack from the European Commission as part of a campaign against protectionist measures in several European capitals. The commission objected not only to the 20 percent voting rights cap but to the law's stipulation that measures taken at the annual stockholders' meeting must be passed by more than four-fifths of VW shareholders--a requirement that gave Lower Saxony the ability to block any such measures as it saw fit.

In March of that year, fellow German automaker Porsche announced that it had raised its stake in Volkswagen to 30.9 percent, triggering a takeover bid under a German law requiring a company to bid for the entirety of any other company after acquiring more than 30 percent of its stock. Porsche announced it did not intend to take over VW, but was buying the stock as a way of protecting it from being dismantled by hedge funds. Porsche's history was already entwined with Volkswagen, as the Austrian-born engineer Ferdinand Porsche designed the original "people's car" for Volkswagen in 1938.

On October 23, 2007, the European Court of Justice formally struck down the Volkswagen Law, ruling that its protectionism illegally restricted the free movement of capital in European markets. The decision cleared the way for Porsche to move forward with its takeover, which it did, maintaining that it will still preserve the Volkswagen corporate structure. By early 2009, Porsche owned more than 50 percent of Volkswagen shares.

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