Golden shares

Although governments in the EU have been keen to dispense with the burdens of nationalised industries, most wanted to keep the benefit of some control.

As a result, it became common practice to include in the constitutional documents of each newly privatised company a clause giving the government special powers of control.

These powers were attached to the so-called golden share.

Typically, this share allowed the government to restrict acquisition of a controlling interest in the company and/or give the government the right to insist on certain managerial issues, for example, appointing directors or retaining a power of veto over certain decisions of the company.

The European Commission took exception to these golden shares and notified certain member states that it considered the procedure to be contrary to EU law.

In particular, article 43 (the right of establishment) and article 56 (the right to free movement of capital) of the EC Treaty.

The commission brought a number of cases against various member states.

The action against the UK concerned the control retained by the Secretary of State for Transport following the privatisation of the British Airports Authority (BAA) (Commission v UK (Case C-98/01) (2003) The Times, 15 May).

The commission claimed that there was an infringement of EU law because these special rights were retained.

The European Court of Justice (ECJ) agreed that the standard practice for governments of retaining a golden share is contrary to EU law.

BAA judgment

In the UK case, the golden share was held by the Secretary of State for Transport and under BAA's articles could only be transferred to another secretary of state or government minister.

It gave wide powers to the owner of the share, for example, to restrict the acquisition of voting shares in BAA to 15% and to control any decisions relating to the dissolution of the company.

The commission argued that the special powers were a restriction on the movement of capital between member states and as such prohibited under article 56.

Movement of capital includes participation by way of a shareholding particularly where the rights attached to the share include the right to participate in the management of the company.

(The treaty does not define 'movements of capital' but it is settled case law that the nomenclature set out in annex I to Directive 88/361, with explanatory notes, may be used).

The UK argued that the creation of different types of shares was part of the normal operation of national company law.

In addition, as there was no reference to nationality there was no discrimination against any other member state.

It maintained there could not be a restriction on the free movement of capital and that no justification was required.

The ECJ did not accept the UK's arguments.

It stated that 'the prohibition in article 56 goes beyond the mere elimination of unequal treatment, on grounds of nationality,....' (paragraph 43).

It held that, although there was no distinction between residents and non-residents, the existence of a golden share would deter investors from other member states from acquiring shares in the affected company.

The commission had also sought a declaration that there had been an infringement of article 43, but the ECJ declined to examine this issue as the infringement of article 56 was sufficient for its purpose.

Justification

It is open to a member state to defend an infringement by way of justification.

In fact, the commission's communication on certain legal aspects concerning intra-EU investment (OJ 1997 C220 page 15) specifically envisages the argument of justification.

It states that even where there are non-discriminatory measures introduced 'they are permitted insofar as they are based on a set of objective and stable criteria which have been made public and can be justified on imperative requirements in the general interest.

In all cases, the principle of proportionality has to be respected.'

The UK did not raise the argument of justification in the BAA case, but this may be relevant in other cases.

The ECJ has certainly accepted the defence of justification in Commission v Kingdom of Belgium (Case 503/99) (2002) The Times, 17 June.

Future impact

Although the UK choose not to justify the golden share in BAA, this remains a possibility in respect of other companies in which golden shares are held.

Currently, the UK government holds more than 70 such stakes in companies that were previously in public ownership.

The UK must take action to comply with the ECJ ruling as failure to do so will undoubtedly result in consequences from the commission.

The impact of the ECJ rulings is even more stark when considered in the context of the ten countries scheduled to join the EU on 1 May 2004.

This is also the date for compliance with EU law.

A number of these acceding countries, namely those in central Europe, are at an early stage of the privatisation process.

To date most have followed the existing model of including a golden share to permit the state some control over the enterprise.

They will no longer be able to retain this control unless the defence of justification is appropriate.

Co-written with Lilia Bylos, an associate at City-based law firm Dewey Ballantine

By Coral Hill, College of Law, London