Court rules on golden shares

In June 2002, the European Court of Justice (ECJ) made a landmark judgement that legal experts say could trigger a fresh wave of cross-border merger activity in the region's telecommunications sector.

The ECJ, after a two-year investigation, narrowed the scope of member states' ability to determine the ownership of privatised former state-owned organisations – known as ‘golden share' schemes – but stopped short of agreeing to European Commission (EC) demands to outlaw such schemes altogether (see box).


The rules and regulations

The European Court of Justice ruling of 4 June 2002 said that golden share schemes "constitute exceptions to the principle of free movement of capital and consequently to the principle of freedom of establishment". But, significantly, the court stopped short of outlawing the controversial schemes altogether.

The court said they are justified in the following cases:

  • If maintaining state control is in the broad public interest.
  • If the means used to achieve those ends are proportionate, agreed in advance and open to review by the courts.
  • If there is a right of appeal.


Lawyers say the decision will now pave the way for a new European Union (EU) takeover law aimed at making it easier for cross-border mergers to take place within the EU and for non-EU companies to buy European businesses. A formal proposal could be ready by the end of 2002.

The ECJ judgement relates to particular energy companies in France, Belgium and Portugal. But it acts as a precedent that is likely to have far-reaching implications for the European telecoms market. The sector is dominated by so-called ‘incumbents' that either used to be part of the public sector or remain civil service departments. Many countries have now privatised these organisations. In those cases, member states have maintained varying degrees of control by keeping a minority stake that carries more than 50% of voting rights.

Golden shares have enabled governments to veto takeovers – as happened two years ago when Madrid blocked a takeover of Telefonica, the local incumbent, by state-backed Dutch carrier KPN. The common justification: that member states should be able to maintain sovereign rights over key infrastructure, such as national communications systems, in case of times of crisis. But, says Vincent Brophy, a European Union lawyer at Linklaters & Alliance in Brussels, this principle has always defied the EC-approved notion of the free movement of capital within the trade block.

It is thought that European governments own golden shares in about 25 companies from all industries. Affected telecoms groups include Telecom Italia, Telefonica and KPN. In addition, the French government, which has yet to privatise the core fixed-line business of France Telecom, said recently that it planned to keep a golden share after the eventual flotation.

A number of EU candidate countries, including Bulgaria and the Czech Republic, have also made similar noises. (The UK government, which sold its golden share in national telecommunications provider BT in 2000, is a notable exception.)

Golden share schemes vary in scope across Europe. In many cases, a government retains the power to halt a foreign takeover of a national ‘champion'. Brophy says that in some cases, government officials even have multiple board seats and exert significant control over the strategic direction and the day-to-day running of a company.

Now all that may change. Brophy says the ECJ ruling narrows the scope of golden share schemes and makes "good common sense". He says that some schemes will have to be revised because they do not follow the rules.

Whether the ECJ ruling will open up the telecoms sector to the degree that liberals hope, however, is a matter of debate. Governments may, lawyers point out, seek to maintain indirect control over the market by beefing up the powers of their national regulatory authorities instead.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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