The EU Commission today dealt a blow to Germany by taking Berlin to court over a law that shields icon Volkswagen AG from hostile takeovers, the culmination of a long campaign to break down barriers to foreign investment.
The lawsuit is the parting shot of pro-market Internal Market Commissioner Mr Frits Bolkestein at Germany's protective industrial system which has been defended by Chancellor Gerhard Schroeder.
The European Union executive has repeatedly asked Germany to scrap the law due to provisions that give VW's home state of Lower Saxony effective control on the firm through a minority stake.
The VW law caps voting rights at 20 per cent regardless of the shares owned, requires an 80 per cent majority for key decisions and gives key shareholder Lower Saxony seats on the board, thus deterring bidders.
"The VW law is a legacy of Germany's industrial past that is incompatible with the EU single market," Mr Daniel Gros, director at the Centre of European Policy Studies, said.
The Commission's decision will not change the fate of VW overnight since the European Court of Justice, the EU's highest court, takes on average two years to issue a verdict.
If the court throws out the German law, VW could potentially be the target for a takeover bid. Two years ago US carmaker Ford was said to be interested in the German manufacturer.
Neither Volkswagen nor Berlin had a comment on the Commission's decision.
Mr Schroeder, who was the premier of Lower Saxony and sat on the VW board for 8 years, has fiercely defended the law, saying it was needed to protect jobs at Europe's largest carmaker.