Lower Saxony decries fresh EU challenge of "VW law"

BRUSSELS/HAMBURG Nov 18 (Reuters) - Volkswagen's second-largest shareholder, the German state of Lower Saxony, said the European Commission should not try to quash the special veto rights the state has over the carmaker.

"People in Germany will not understand why they should provide billions in aid to Greece and other EU member states while the commission pillories VW without sufficient justification," the regional state's premier, David McAllister, said in a letter to the commission and seen by Reuters.

The EU Commission will decide on Wednesday whether to return to the European Union's highest court to challenge a German law that boosts Lower Saxony's sway over VW, McAllister said.

He said internal market commissioner Michel Barnier brought the proposal. Two EU officials familiar with the matter told Reuters that while a decision would be made next week, the debate within the commission was ongoing.

In 2007, the European Court of Justice said Germany's so-called "VW law", which effectively gave Lower Saxony special veto rights beyond its 20 percent voting stake in VW, was in breach of the EU's principle of free movement of capital.

Germany reworked the law in 2008 but preserved the regional state's blocking minority status, one that is normally reserved for shareholders with voting rights of at least 25 percent.

While the EU has remained at loggerheads with Germany over whether the changes addressed the court's concerns, the EC's legal campaign against the reworked law has been put on ice.

In his letter, McAllister said that in 2007 the court had only objected to the combination of crimping any VW shareholders voting rights to 20 percent and giving Lower Saxony a blocking minority on top.

While Germany scrapped the limit on any investor's voting power to 20 percent, it preserved Lower Saxony's prerogative, which allows it to fend off unsolicited takeover attempts.

McAllister said the court had not ruled in principle against the state's special blocking powers. "In the current crisis, more than ever, it has become evident how important it is that a company like VW is headquartered in Europe," he said. (Reporting by Jan Schwartz in Hamburg, and Ilona Wissenbach and Julien Toyer in Brussels; Writing by Ludwig Burger)