UPDATE 2-EU's top court rules Germany can keep VW veto law

Tue Oct 22, 2013 9:53am EDT

* EU court says Germany complied with previous ruling

* Law preventing VW takeover watered down after 2007 ruling

* EU top court says amendments were sufficient

* VW's home state says ruling "closes book on 11-year dispute"

* VW law seen as model for consensus-based industrial ties

By Michele Sinner and Andreas Cremer

LUXEMBOURG/FRANKFURT, Oct 22 (Reuters) - Germany won a decisive victory over the European Commission on Tuesday in its bid to preserve state influence at Volkswagen, after Europe's top court rejected an attempt by Brussels to scuttle a law that helps shield the carmaker from takeovers.

The 1960 law, introduced when VW first listed on the stock market, gives the state of Lower Saxony, where VW is headquartered, a veto over key decisions such as factory closures, mergers and acquisitions.

Lower Saxony, which holds a fifth of VW's voting stock, has long opposed scrapping the law, backing workers who argue that it protects jobs as well as labour's role in corporate decision-making, which they say has fostered VW's rise to become the world's third-largest carmaker in 2012.

The Commission says that by effectively preventing foreign buyers from acquiring VW, the law hinders the cross-border integration of industry in the European Union, in breach of EU single market legislation.

Putting an end to the 11-year dispute between Brussels and Germany, the Luxembourg-based EU Court of Justice (ECJ) decided on Tuesday that Germany had fully complied with a 2007 court ruling ordering it to water down the VW law.

A year after the 2007 ruling, Germany scrapped elements of the law but kept untouched the right of any shareholder with a 20 percent stake to veto strategic decisions. That prompted the Commission to pursue Germany again, on the grounds of protectionism.

"The law neither privileges specific shareholders nor discriminates against anyone else's interests," Lower Saxony prime minister Stephan Weil told reporters at VW's base in Wolfsburg. "Today's ruling should close the book on a long dispute."

The VW law has often been cited as an example of Germany's model of consensus-based industrial relations. The company's 20-member supervisory board is evenly split between management and labour representatives, an expression of VW's belief in what it calls "co-determination".

Most of VW's 104 global plants have so-called works councils, consisting of blue- and white-collar employees that discuss personnel issues and working conditions with management.

VW has exported that principle across the globe, though is currently facing difficulties setting up a labour representation body for workers at its U.S. plant in Chattanooga, Tennessee.

"We have never blocked a decision to set up a new factory, and we discuss very thoroughly with our management the effects new factories have on existing plants and jobs," Bernd Osterloh, VW's top labour representative, told reporters.

The ECJ's decision to uphold the VW law will benefit the company's goal to overtake rivals Toyota and General Motors as the world's top carmaker no later than 2018, said Osterloh, who is also deputy chairman.

Lower Saxony's veto has proved hugely important to the independence of Volkswagen, not to deter a potential foreign aggressor, but as an obstacle to sports-car maker Porsche , when it sought to take over its much bigger rival in 2008. Porsche's bid foundered and it was subsequently bought by VW last year.

Nearly 90 percent of VW's voting stock, the ordinary shares, are now in the hands of three strategic shareholders - Porsche, Lower Saxony and the Gulf state of Qatar. Most outside investors hold only a financial interest in VW through its more liquid preference shares.