The European Court of Justice (ECJ) has ruled that restrictions by some European governments on foreign ownership of privatised companies are illegal.

The decision makes it more difficult for governments to block foreign investment in former state-owned firms on national interest grounds, paving the way for more cross-border takeovers and mergers.

The ruling stems from a 1998 legal challenge by the European Commission against the French government's veto power over the sale of major stakes in oil giant ElfAquitaine, now TotalFinaElf.

The Commission also took legal action against the Belgian government's controlling stake - or 'golden share' - in its canal and gas distribution companies, and Portuguese restrictions on foreign ownership of privatised state firms.

Investment barrier

All three governments said the restrictions were designed to ensure that essential industries remained under national control in case of a crisis.

The Commission, however, argued that limits on foreign ownership were incompatible with EU laws guaranteeing the free movement of capital within the trade bloc.

In the event, the ECJ on Tuesday backed Belgium's golden share in its the gas and canals industry.

And it agreed that controls on defence - or other sensitive areas in "exceptional circumstances" - were permissible.

But it said that while France had a "legitimate general interest" in controlling ownership of TotalFinaElf, its restrictions were disproportionate because they restrict the free flow of capital.

As for Portugal, the ECJ outlawed what it termed "discriminatory" restrictions on foreign ownership of privatised state firms altogether.

French finance minister Francis Mer was unperturbed by the decision, saying that TotalFinaElf had "the means to take care of its own future".

VW next in line?

The ruling could, however, trigger a fresh round of legal challenges against government-endorsed restrictions on foreign share ownership.

The BBC's correspondent in Brussels, Patrick Bartlett, says the court's judgement could impact a string of pending cases, among them one involving UK airports operator BAA.

Other companies protected by similiar restrictions on ownership include German car giant Volkswagen, whose home state of Lower Saxony bans foreign owners holding more than 20% of the company.

The decision has also boosted a planned overhaul of EU takeover law aimed at making it easier for firms to launch cross-border mergers and acquisitions.

The reform is an important element of EU plans to create a single European market for investment services by 2005.

The European Commission has said it aims to unveil the reform proposals later this year.