On 8 July 2010, the European Court of Justice (ECJ) declared that the holding of golden shares by the Portuguese state in Portugal Telecom (PT) contravenes the EU rules on free movement of capital and establishment.1 The judgment was handed down a week after the Portuguese government exercised these rights to block Spanish operator Telefónica’s bid for PT’s stake in Vivo, the leading Brazilian mobile operator.
The Portuguese government used its golden shares to veto the offer despite shareholders representing almost three-quarters of the shares voting in favour of the bid. The Portuguese government’s position remained unchanged after the ruling even though Telefónica extended the offer deadline until several days after the judgment. However, the government eventually agreed to the deal on 2 August 2010 after Telefónica increased its offer for the third time to €7.5bn. PT has also agreed in a separate deal to acquire a 22.4% stake in Brazilian telecoms company Oi Telemar, which is partially state-owned. PT’s presence in the Brazilian telecoms market is considered to be of significant strategic and political importance to the Portuguese government as it is a rapidly expanding market and as such is a key part of the growth of Portugal’s largest telecoms company.
Golden shares
Owners of golden shares have special voting rights in a company, allowing them to veto certain strategic shareholder decisions relating to the company’s management and share structure. Golden shares are often owned by governments that are reluctant to hand over complete control of a strategically important public company to the private sector following privatisation, and are frequently designed to prevent foreign takeovers of national champions, such as telecoms companies.
Under Portuguese legislation, the articles of association of public companies undergoing privatisation can provide for golden shares in exceptional cases where required on national interest grounds. These shares must remain the state’s property. The Portuguese state’s 500 golden shares in PT are provided for in PT’s articles of association, which were adopted in 1995 when the Portuguese state still held a majority (54%) of the share capital. The state subsequently sold off all its other public shareholdings but retained the special rights attached to the golden shares in the form of a veto right over important strategic decisions, such as the amendments to the company’s articles of association, decisions involving the acquisition of shareholdings exceeding 10% of PT’s share capital, and decisions defining the general principles of PT’s policy in respect of the disposal of PT shareholdings in companies. These golden shares were used by the Portuguese state for the first time to block Spanish telecom operator Telefónica’s bid for the whole of Brazilian operator Vivo which was at the time jointly controlled by Telefónica and PT via their subsidiary Brasicel, despite approval for the bid by shareholders holding 74% of the company’s voting shares.
ECJ judgment
More than two years after the action was lodged at the ECJ by the European Commission, on 8 July 2010 the ECJ declared that the holding by the Portuguese government of golden shares in PT amounts to a restriction on the free movement of capital and is prohibited by the EU Treaty. It found that a considerable number of important decisions concerning PT require the Portuguese government’s approval, including any decision to amend PT’s articles of association. Furthermore, the government’s influence on PT could only be weakened with the government’s express consent. According to the ECJ, this situation confers on the Portuguese state an influence on the management of PT, which is disproportionate to the size of its shareholding and is therefore capable of deterring operators from other member states from investing in the capital of PT, since they would not be involved in the management of the company in proportion to the value of their shareholdings. Potential investors may also be discouraged because any refusal by the state to approve an important decision may depress the company’s share value.
The ECJ considered that the justifications raised by the Portuguese government were not sufficient to allow the restriction in accordance with the exceptions contained in the Treaty. The ECJ recognised that ensuring the security of the telecoms network in times of crisis, war or terrorism is a valid public security objective that is capable of justifying such a measure. However, the Portuguese government had merely raised this ground without demonstrating how the holding of golden shares would be capable of preventing such an interference with public security. Furthermore, the government had a freedom to exercise the rights that was so discretionary that the restriction was disproportionate as neither the Portuguese legislation nor PT’s articles of association set out any criteria to determine when those special rights may be exercised.
Comment
The ECJ’s ruling serves as a further example of the EU institutions’ traditionally hostile approach to member states’ interference in the management decisions of privatised companies by way of golden shares, in particular where such shares are capable of being used to block foreign takeovers. At a press conference held after the judgment, the Commission’s president José Manuel Barroso welcomed the ECJ’s ruling and added that ‘golden shares are against the internal market’ and the ‘principle’ of free movement of capital. As a general rule, in previous cases the ECJ has confirmed the Commission’s view regarding the illegality of golden shares and has required member states to amend their national provisions accordingly. For example, the ECJ recently declared golden shares held by the Hungarian government in energy operator MOL and by a regional government in Germany in Volkswagen to be illegal. Portugal is also currently involved in two other Commission referrals to the ECJ in relation to the golden shares it holds in energy companies EDP and GALP Energia. The only example to date of the ECJ declaring golden shares to comply with the EU free movement rules (in opposition to the Commission’s view) was a judgment from 2002 concerning Belgium, regarding the security of energy supply.2 This judgment confirmed that the ECJ has a narrow interpretation of the circumstances in which golden shares can be justified (the exercise of golden shares required specific government ex post intervention rather than prior approval, the regime was limited in scope to decisions concerning certain strategic assets and was subject to judicial review).
The EU institutions’ efforts to clamp down on golden shares where they distort the internal market have recently been bolstered by recent amendments to the Treaty aimed at speeding up the procedure by removing the requirement for the Commission to issue a reasoned opinion to the member state before it can lodge an action with the ECJ. However, the ultimate impact that the expedited procedure will have on a government’s use of golden shares remains to be seen. Even if the ECJ agrees with the Commission’s analysis that golden shares are illegal in any given case, the first ECJ judgment is of a declaratory nature only and a member state has several months to ensure compliance before the ECJ can issue a further judgment imposing financial penalties on the member state at the Commission’s request. In the present case, the Portuguese government continued to oppose Telefónica’s extended bid even after the ECJ declared their holding of the shares to be illegal. Ultimately its use of golden shares enabled the government to secure a higher price for its shares and to agree a separate deal with another Brazilian operator to assure Portugal’s strategic position in the Brazilian telecoms market.
By Niamh Grogan, partner, and
Amy Barcroft, associate,SJ Berwin LLP.
E-mail: niamh.grogan@sjberwin.com;amy.barcroft@sjberwin.com.
