The European Union's highest court on Tuesday struck down a German law that shielded Volkswagen from takeover, paving the way for Porsche to take majority control of Europe's biggest carmaker.
The ruling is a major boost for the European Commission in its crackdown on so-called golden shares, or strategic stakes held by governments in listed companies.
The law's demise could also end decades of cozy ties between management and labor at VW in a system called co-determination that gives workers a major say in how the company is run.
By maintaining in force the provisions of the VW law concerning the capping of voting rights at 20 percent and the fixing of the blocking minority at 20 percent ... the Federal Republic of Germany has failed to fulfill its obligations, the court said in a statement.
Porsche welcomed the ruling that lets the maker of 911 sports cars exercise all of its VW voting rights via its nearly 31 percent stake in Volkswagen ordinary shares.
Porsche has said it has secured enough options to let it significantly raise its holding in VW but has declined to say whether this meant it could already gain majority control.
There is no decision on how we will proceed. We will take the decision to the supervisory board and this will be a decision for the supervisory board, Porsche spokesman Frank Gaube said in Luxembourg.
The next meeting of the sports car maker's supervisory board is set for November 12, he said, adding he could not say whether the VW issue would be on the agenda.
One source familiar with the matter said it was unlikely Porsche would increase its stake before the end of this year.
This put an immediate dampener on shares of Volkswagen, which fell 2.2 percent to 176.45 euros by 5:19 a.m. EDT after briefly rising as much as 2.5 percent following the court's decision.
Shares in Porsche were up 5.5 percent.
STATE REMAINS ON BOARD
The 1960 VW law stipulated that Germany and VW's home state of Lower Saxony were each entitled to appoint two members to VW's supervisory board as long as they owned shares.
The German federal government is no longer a VW stockholder, but Lower Saxony is its second-biggest investor and said it intends to keep its VW stake of 20.1 percent.
In addition, the majority needed to adopt resolutions -- such as agreeing to a takeover -- has been over 80 percent under the VW law, rather than the typical 75 percent in Germany, thus giving Lower Saxony a blocking veto.
Porsche said it would be in favor of Lower Saxony's two board representatives remaining in their positions.
Both Berlin and Lower Saxony said they accepted the court's decision, with a spokesman for the German justice ministry adding: We will start the legislative procedure immediately in order to make the changes.
The ruling was eagerly anticipated on two levels -- its implications for future ownership of VW and the huge boost it gives the Commission's crackdown on golden shares.
The EU executive is using the court to stop member states using strategic stakes in companies to thwart takeovers.
-- Additional reporting by Ilona Wissenbach , Sabine Ehrhardt and Carsten Lietz