The context for the articulation of this opinion is the recent overreactions of the French and German governments to the attempts by foreign states to invest in the European Aeronautic Defense and Space Company (EADS, the maker of the Airbus. Last year “Last year, Dubai's sovereign wealth fund bought 3.1% of EADS, while the state-controlled Russian bank VEB bought 5%.” EU Rejects EADS Golden Share Idea, BBC News Online, March 7, 2008 . This worried both the French and German governments. They worried both because these sovereign shareholders might seek to use their shareholder power for political ends. They were also particularly sensitive to the reaction of the Americans, especially since the recent award of a military contract to Airbus in the US had caused some concern there. “If Airbus were to be controlled by companies from less friendly countries, there would probably be even greater opposition to its winning contracts.” EU Rejects EADS Golden Share Idea, BBC News Online, March 7, 2008.
These governments began to think of alternatives means of reducing the threat of foreign state ownership of EADS, or at least of such entities taking a large stake in EADS. To that end the French and German governments began to consider the possibility of creating golden shares in their respective favor. Germany Says EADS Golden Share Talks Continuing, Reuters, March 7, 2008. Golden shares can be defined as a power to veto certain changes in the corporate charter. More specifically it refers either to a particular class of stock or a regulatory system that gives the state a continuing power over certain fundamental corporate decisions especially with respect to formerly state owned enterprises that have been privatized. The Reuters Financial Glossary defines “golden shares as “A share that confers sufficient voting rights in a company to maintain control and protect it from takeover. The golden share prevents potential predators from buying shares and then using them to outvote the company's existing owners.” Reuters Financial Glossary, Golden Share. In the case of EADS, “France and Germany are finalising changes to EADS's corporate-by-laws to prevent foreigners from building large stakes in the company.” Germany Says EADS Golden Share Talks Continuing, Reuters, March 7, 2008.
The reaction of the European Commission came fast.
"The general view on golden shares is clear. The European Commission doesn't think golden shares have a place in the single market," European Commission spokesman Oliver Drewes told a regular news briefing when asked about the situation at EADS. . . . Arguing that free movement of capital is at stake, Brussels has been campaigning against golden shares, which give states special rights in publicly listed companies.
EU Warns Against Golden Shares at EADS, CNBC News, March 7, 2008 (from a Reuters Report). The European Commission’s position on the legitimacy of golden share schemes to protect against sovereign investment in EADS represents both an application and extension of the current jurisprudence of the Court of Justice, now over five years and many cases in development. But is the Commission right?
The recent golden share jurisprudence of the European Court of Justice have excited much commentary with respect to these nexus issues. These cases include:
1.Commission v. Portuguese Republic, Case C-367/98, 4 June 2002 (hereafter “Portuguese Republic 2002”);
2.Commission v. Kingdom of Belgium, Case C-503/99, 4 June 2002 (hereafter “Belgium 2002”);
3.Commission v. French Republic, C-483/99, 4 June 2002 (hereafter “French Republic 2002");
4.Commission v. Kingdom of Spain, Case C-463/00, 13 May 2003 (hereafter “Spain 2003”);
5.Commission v. United Kingdom of Great Britain and Northern Ireland, Case C-98/01, 13 May 2003 (hereafter “UK 2003”);
6. Commission v. Netherlands, Case C-282/04 (hereafter "Netherlands 2004");
7.Commission v. Federal Republic of Germany (Volkswagen), Case C-112/2005, dated 23 October 2007 (hereafter “Germany 2007”);
8.Federconsumatori v. Commune di Milano, Case C-463/04 and C-464/04, 6 Dec. 2007 (hereafter "Milano 2007”).
These cases have substantially supra-nationalized the rules of Member State involvement in formerly state owned enterprises—whether such involvement was in the form of formal privileged stake in the enterprise (French Republic 2002; UK 2003; Milano 2007), or whether that involvement was the product of specifically targeted regulation (Portuguese Republic 2002; Belgium 2002; Spain 2003), or some hybrid arrangement (Germany 2007).
These cases have been examined from many perspectives. There has been writing on the political effect of these cases. (Leland Rhett Miller and Bock, Christian W.D., "Golden Shares and EU Accession: Bulgaria's Balancing Act," Journal of European Affairs, Vol. 1, No. 1, 2003 Available at SSRN. It has been suggested that the cases represent an attack on the German system of corporate governance. (Peer Zumbansen and Daniel Saam, The ECJ, Volkswagen and European Corporate Law: Reshaping the European Varieties of Capitalism, 8(11) GERMAN LAW JOURNAL 1027 (2007)). It can be viewed as a simple elaboration of long standing principles of European Law grounded in basic provisions of the Treaties—principally the non-discrimination and free movement of capital obligations—in the amplification of a harmonized company law. (Martin Rhodes, & Bastiaan van Appeldoorn, Capitalism Unbound? The Transformation of European Corporate Governance, 5 EUR. J. PUB. POL’Y 406 (1998)). From a choice of law perspective it represents a greater effort to move choice of law issues up from the Member State to the European level, and by harmonizing, eliminating the horizontal choice of law issue. Yet, it represents far more than that—it serves as a framework for the rules under which sovereigns may participate in a private capacity in the financial markets and in investing in enterprises, both domestic and foreign.
Advocate General Colomer perhaps best summarized the current state of golden share jurisprudence and its general principles:
(a) The Court examines the various national rules on intervention, essentially, in the light of the principles relating to free movement of capital: failure to observe those principles may, as an ancillary matter, give rise to an infringement of the principle of freedom of establishment.
(b) In so far as such rules are capable of impeding the acquisition of shares in the companies concerned and of deterring investors from other Member States, they amount to restrictions on the free movement of capital.
(c) Article 295 EC has no practical effect in this sphere.
(d) The free movement of capital may lawfully be restricted only by measures which, without being discriminatory on grounds of nationality, are a response to overriding requirements relating to the general interest and are suitable and proportionate to the objective which they pursue. Such measures, which must be adopted ex post facto, must be based on objective criteria which are known in advance to those concerned, to whom a legal remedy must be available. (Germany 2007; Opinion of A.G. Ruiz-Jarabo Colomer, P 30.).
The focus is on national intervention in its own economy. The object is to reduce all possible transaction costs to the free movement of capital that might be based on the “nationality” of that capital. Deterrence is a function not only of rules that discriminate on the basis of nationality, but also of rules that might otherwise deter investment, for example, by privileging state investment. The form of that privileging is immaterial. All state intervention that is accompanies by regulation. Or the threat of regulation, or indirectly supported by special regulation constitutes an impediment to free movement. Derogations in the public interest are narrowly construed. In a general sense, then, a sovereign regulates even when it appears to be participating in the market—where it participates in the market that is the subject of its regulation. It is the regulatory character of the action that is key, along with the power to implement it within its territory. In that context, the private law offers no cover.
In both Germany 2007 and Milano 2007, the Court of Justice held that the member state had violated Article 56, which guarantees the free movement of capital. These cases differed from previous golden share cases in one significant respect. In previous cases, the member states had passed legislation that privatized a particular company or companies and also special interest provisions for the state that were as varied as the states themselves and the industries that were being privatized (Netherlands 2004; UK 2003; Spain 2003; Belgium 2002; Portuguese Republic 2002). In both Germany 2007 and Milano 2007 the contested provisions were not a creature of state legislation, but were enacted through the articles of association of the companies, enabled by member state corporate law provisions. Both Germany and Italy argued that the shares (and rights emanating there from) retained by the State were alienable and that a similar arrangement could be enacted into the company for any other private shareholder (Germany 2007 at P. 32, 36; Milano 2007 at P. 18, 30). Thus, the State was not acting in a public capacity and the Treaty provisions should not be implicated. Advocate General Maduro disagreed (Federconsumatori v. Comune di Milano, Case C-463/04, Opinion of Advocate General Maduro.), as did the Court (Milano 2007, at P. 29, 54). In Volkswagen, while agreeing with the Commission that the particular measures in question were still state action rather than private measures, Advocate General Colomer indicated that the Member States could act as private investors without implicating the Treaty. The Court seemed to agree but only under the most attenuated circumstances.
Maduro’s rationale in Milano 2007 is particularly important for its elaboration of an approach to the choice of public or private law for testing the legitimacy of Member State activity. Maduro broke the analysis down in three parts: (1) whether it made a difference that the rights accorded to the public body were generally available under private law; (2) whether the fundamental freedoms in general, and the free movement of capital, applies to public bodies even when they are not acting in their sovereign capacity; and (3) whether there is sphere of conduct by a public authority acting privately that need not constitute a violation of the authority’s obligations under the free movement of capital (Milano 2007, Maduro Opinion at ¶ 18).
With respect to the first point, Maduro was of the opinion that with respect to the source of a public authority’s rights in an undertaking, “it is immaterial how those powers are granted or what legal form they take.” (Milano 2007, Maduro Opinion at ¶ 19). His rationale was to prevent abuse. “Otherwise, Member States would easily be able to avoid the application of Article 56 EC, by using their position as incumbent shareholders to achieve within the framework of their civil laws what they would otherwise have achieved by using their regulatory power.” (Milano 2007, Maduro Opinion at ¶ 19). Effectively, then, all actions of a public authority have a regulatory effect. There is no private law for public authorities—private activity is regulation by other means. He supports his argument in curious fashion—arguing that the Comune’s bad faith was evidenced by the way in which it sought to turn to private law as a legal basis for its action after the European Court of Justice had held that a direct legislative grant of a similar authority was prohibited by Article 56 EC. (Milano 2007, Maduro Opinion at ¶ 20 (citing Commission v. Italy, Case C-58/99)).
This conceptualization of the state as incapable of acting in a private capacity, because of the inherent regulatory nature of all of its actions, then served as a basis for Maduro’s conclusion on the second point. Specifically, Maduro concluded that a Member State is under a duty, ratione personae, to respect EC Treaty provisions with respect to the fundamental freedoms even when they are not exercising their public authority. (Milano 2007, Maduro Opinion at ¶ 22). “In principle, therefore, a public body such as the Comune di Milano cannot rely on the argument that its actions are essentially private in nature to avoid the application of the Treaty provisions on free movement.” Id.
However, Maduro does suggest a margin of appreciation of sorts in the way that the free movement provisions would be applied to a public authority when it sought to act in the market—that it when its actions are essentially private in nature. (Milano 2007, Maduro Opinion at ¶ 24). There is of course, a tension between Maduro’s attempt to suggest a rationae materiae limiting scope for the application of Article 56 EC and his earlier declaration that public authorities in variably act as a regulatory body when they act, in whatever capacity they act. But the limitation Maduro suggests is narrow indeed. Indeed, Maduro uses the rationae materiae basis for liability to sketch a very broad substance over form standard with respect to which the character of the state action is irrelevant:
Member States are required to take into account the effects of their actions as regards investors established in other states who wish to exercise their right to the free movement of capital. In that context, Article 56 EC prohibits not only discrimination on grounds nationality, but also discrimination which, in respect of the exercise of a transnational activity, imposes additional costs or hinders access to the national market for investors established in other Member States either because it has the effect of protecting the position of certain economic operators already established in the market or because it makes intra-Community trade more difficult than internal trade. (Milano 2007, Maduro Opinion at ¶ 24). In effect, the jurisprudence of quantitative restriction (Art. 28-30 EC), and of impediments to the provision of services (Art. 39-43 EC) applies to the movement of capital within the European Union. This makes sense in the context of the regulatory role of states—where a Member State seeks an advantage or the furthering of a policy through its regulatory powers. But it may make less sense when the Member State competes with private entities in its private capacity, that is, where it participates in the market rather than regulates it. Of course, the rule is different in the United States, where the public law limitations of the dormant Commerce Clause do not bind States acting in the market rather than as market regulators. (Hughes v. Alexandria Scrap Corp., 426 US 794 (1976); South-Central Timber v. Wunnicke, 467 U.S. 82 (1984)).
But Maduro appears to reject this distinction between the public and private activity of states—and their consequences. Even the mere ownership of shares in a company may trigger Article 56, unless “investors in other Member States can be sure that the public body concerned will, with a view to maximizing its return on investment, respect the normal rules of operation of the market.” (Milano 2007, Maduro Opinion at ¶ 25). But given Maduro’s earlier assertion that public bodies regulate merely by acting, it is hard to imagine a situation where this is possible. Well, perhaps one—where the state abandons all control of funds used to invest in shares to another entity over which it has no influence and with respect to which no privileging legislation is passed. Moreover, the limitations to action that are proven to maximize the return on investment “under the normal rules of operation of the market” might misunderstand even the basic nature of share ownership. Investors, of course, always seek to maximize the return on their investment. Corporate investors gauge that by the value of that investment to their shareholders in light of their long and short terms planning. Maximizing value, thus, to some extent, must mean maximizing the utility of the investment to the satisfaction of the owners. Where the state is the owner, maximizing of return must, of necessity, be understood in the context of the desires of the state’s ultimate shareholders—the people. As such, under Maduro’s rationale, the state can never act like a private investor because it must act to satisfy the maximization desires of its people, and that is essentially regulatory rather than “merely” financial “under the normal rules of the market.” Choice of law—public or private—thus depends on the willingness of the state to act against the will of its owners, something that would not be permitted a corporate shareholder.
From these cases, the form of a relevant jurisprudence has emerged. States are free to engage in market activities for their own account with respect to which the private law of such transactions would apply. However, because States never lose their public character, market transactions involving state actors and corporations chartered domestically appear to be presumptively regulatory in nature. Because states can or might regulate their position as shareholders, any state activity involving domestic corporations appears to be treated as direct or indirect regulation, or regulation in effect. As a consequence, such activity, to the extent it might affect the willingness or ease of transactions in those shares by nationals of other Member States, would violate the fundamental right to free movement of capital enshrined in the EC Treaty. What survived was the regulatory framework that appeared to treat all individuals equally and that touched on the regulation of a sector of the economy deemed vital to the governance of the state.
Left unanswered, however, was whether these ideas could apply when the state acted purely as a private party or engaged in private economic (investment) activity in another Member State. To that end, the essay suggested that the opinions of the Advocates General in those golden share cases might prove useful. In particular, Advocate General Colomer’s suggestion of the relevance of article 295 EC and Advocate General Maduro’s sophisticated construction of a theory of the public character of state private transactions suggested a framework for analyzing the choice of law. The implication of these approaches is that the private law of corporate investment must be divided into a private and public component. The ordinary rules of private transactions in shares might not apply when a state purchases stock, and seeks to assert the rights of a shareholder. When a state engages in that activity, it is presumptively engaging in regulatory activity indirectly and public law must apply (in the case of Member States, the overriding law of the EC Treaty). The reason advanced is both deceptively simple and troubling—because a state can never duplicate the internal construction of a private individual, it can never act to maximize its welfare. Instead, as a political body, it must necessarily act to maximize its political capital. As a consequence, it cannot participate in the market in the same way as a private individual.
Applying (and perhaps extending) the logic of Milano 2007 (and the other cases), especially as read broadly by Advocate General Maduro, it is likely that the Commission’s position of the EADS golden share efforts is correct. If challenged, the European Court of Justice will rule in the Commission’s favor. But that is only part of the calculation. Even assuming the Commission id correct, Germany and France might decide to go forward anyway. There are at least two good reasons for this course of action. First, even if their position is ultimately doomed as a matter of evolving EU law, the temporary imposition, and the uncertainty of decision until actually rendered will but EADS time. During that time, foreign sovereigns potentially subject to the golden share restrictions might hesitate to purchase a position in the company. This is a useful short-term objective. For the longer term, even a doomed golden share regime might buy France and Germany time to seek some harmonizing regulation or directive at the EU level. This would be good news indeed. The implications of the European Court’s golden share cases are troubling, especially in the rising context of private financial interventions by sovereigns in global markets. Though valuable in the dismantling of socialist economies in Europe, perhaps, the current jurisprudence is clumsy at best and problematic at worst for meeting this new reality of sovereign investing in the market, especially in the market for shares of non domestic corporations. It is time for the institutions of the EU to step in and construct a set of viable regulations for the administration of sovereign investment in Europeans enterprises.