By Theo Leggett Business reporter, BBC News

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The Volkswagen Law - which the European Union's highest court The European Court of Justice has ruled illegal - was introduced in 1960 when the German car giant Volkswagen Group was first privatised.

It was designed to prevent one of the crown jewels of German industry from becoming the victim of a hostile takeover and potentially falling into foreign hands.

In practice, it prevents any single shareholder from exercising more than 20% of the company's voting rights, no matter how big their actual stake.

It also guarantees seats on the board for the Federal government and the regional authorities of Lower Saxony, where Volkswagen is based.

For years, the European Commission has argued that this arrangement is illegal, because it effectively shields Volkswagen from market forces and contravenes the principles of the European Single Market.

But Germany has refused to back down.

Best friends

Volkswagen is a major employer in the country, especially in Lower Saxony. Analysts agree that if the company were to come under foreign ownership, the political fallout would be substantial.

Porsche chief Wiedeking is getting behind the steering wheel

Yet despite the court's ruling, which will force Germany to rescind the Law, Volkswagen is expected to remain firmly in German hands.

The sportscar maker Porsche already has a 31% stake in the company. It is widely expected to raise that stake to as much as 51%, effectively taking full control.

In recent weeks, Porsche's chief executive, Wendelin Wiedeking, has made it clear he would like to see closer links between the two firms.

"We want to build a close relationship between both companies, based on ownership," he said recently.

"Today's world is very competitive, and it has become difficult for us to find friends. But Porsche must remain Porsche, and VW must remain VW."

The government of Lower Saxony also has a 20% stake in VW, although following the ruling that will no longer give it the right to block key decisions by the board.

Family affair

The key architect of the links between Porsche and VW is widely believed to be Ferdinand Piech.

The chairman and former chief executive of Volkswagen is also the grandson of Ferdinand Porsche. His family still owns and controls the sportscar company.

Those links have prompted some experts to suggest that the deal has more to do with protecting VW from foreign predators than reaping value for Porsche.

But Kristoff Sturmer, an industry analyst with Global Insight, believes that is just part of the story.

"Part of Porsche's strategy was to not let that happen," he says. "They truly identified that risk, way before anyone else did.

"They made sure that once Volkswagen became available for takeover it would be them who would take it over.

"It made good business sense for them."

Power to Brussels

But while the link with Porsche is expected to ensure that VW remains a German company, it could still herald big changes in Wolfsburg.

Volkswagen has frequently been criticised for its inability to react quickly to changes in the market, because of political pressure to safeguard jobs.

Industry observers believe that with Porsche in control, it might be more willing to take on its unions and embark on painful but badly needed reforms.

The ruling also has major implications for the European Commission.

For decades, it has been trying to force European governments to relinquish the influence they retain over flagship industries, for example through so-called Golden Shares.

But it has met intense resistance from European governments, many of whom are reluctant to see symbolic or strategic businesses fall into foreign hands.

Over the past two years there has been something of a resurgence of economic nationalism in the European Union.

Leaders such as French President Nicolas Sarkozy have insisted that some businesses should be allowed to operate outside the EU's single market.