VW is a big employer and a high profile German brand

The European Commission has given Germany two months to act, or face a case in the European Court of Justice.

Under the law drawn up when VW was privatised 40 years ago, the state government of Lower Saxony got a veto to fend off buyers.

The law capped voting rights at 20% per shareholder, and gave Lower Saxony almost 20% of the votes.

VW, whose name literally means "the people's car", is based in Lower Saxony and is one of Germany's most iconic brands.

Blocking share

The so-called "VW law" also stipulates that important decisions on the car maker's future must be passed by 80% of the available votes.

The 20% cap applies regardless of the number of shares owned or the size of the shareholder's investment.

The commission said the offending clauses of the law were "liable to dissuade potential investors from other member states and thus constitute a restriction on cross-border direct investment within the EU".

It is the second time the commission has called on Germany to amend the law governing VW's ownership in order to comply with European law on the free movement of capital.

In January, the commission gave Germany a breathing space in which to make proposals.

The action against Germany was initiated in March 2003 by Frits Bolkestein, the European Commissioner responsible for the EU's single market.

Stepping up pressure

German officials have argued that the law does not breach EU requirements.

VW has declined to comment. Its brands include Audi, Volkswagen, Seat and Skoda, as well as Bentley, Bugatti and Lamborghini.

If Germany were to lose a case in the European Court of Justice, it could face a fine.

German Chancellor Gerhard Schroeder is a former member of VW's board from his days as a politician in Lower Saxony, as the regional government has the right to appoint several representatives to the board.

Hostile takeovers are unusual in Germany; the purchase of another big-name German firm, Mannesmann, by British mobile phone group Vodafone in 2001, sparked controversy.