Associate, Linklaters LLP; DPhil (Oxon)
On 8 November 2012, the Court of Justice of the European Union decided a case concerning the conformity with the rules on freedom of establishment and the free movement of capital of certain Greek measures for the privatisation of public undertakings, requiring authorisation to be obtained from the Greek Government in respect of strategic public undertakings prior to the acquisition of voting rights in them in excess of 20% of their total share capital, and to the adoption of certain decisions concerning them.
This apparently straightforward case presents an interesting twist on the “golden share” cases that have been reaching the Court in the past decade, and precisely because of its simplicity points to a number of tensions in the law.
The decision was adopted as a result of infringement proceedings brought by the European Commission against Greece for its failure to fulfil its obligations under the free movement of capital and the freedom of establishment. The rules sub judice provided that, in respect of strategic public limited undertakings having, or having had, a monopoly, in particular with regard to companies owning, operating or managing national infrastructure networks, the acquisition by a shareholder other than the Greek State, or by companies related to that shareholder, or by shareholders acting jointly and in a concerted manner of voting rights representing more than 20% of the total share capital must be subject to prior authorisation by the Inter-ministerial Privatisation Committee.
Furthermore, prior authorisation was also required for the decisions of those strategic undertakings relating to: (i) their dissolution, their placing in liquidation and the designation of liquidators; (ii) their restructuring; and (iii) the transfer, assignment or alteration of the allocation of strategic elements of assets owned by these strategic undertakings, and of the basic networks and infrastructure necessary for the economic and social life of Greece as well as its security.
Two main questions had to be dealt with in this case. The first one was whether measures taken by a Member State for the purposes of privatising strategic undertakings controlled by the State fell outside of the scope of the fundamental freedoms enshrined in the Treaty by virtue of Article 345 TFEU (ex. 295 EC), which provides that: “The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership”.
The traditional interpretation of this Article has been that while each Member State may organise its system of ownership of undertakings as it thinks fit, this organisation will have to comply with the fundamental freedoms [see Case C-367/98 Commission v Portugal, para. 28]. In the present case, the Court followed this traditional interpretation. In particular, the Court held that if a State decides to transform public undertakings into public limited companies whose shares are quoted on a stock exchange and may, in principle, be purchased freely on the market, Article 345 TFEU cannot be used as a means for national rules to evade the scrutiny they would otherwise be subject to under the fundamental freedoms.
The second question concerned whether these measures infringed the freedom of establishment and the free movement of capital. The Court began by making it clear that, unlike what had been argued by the Commission, only the freedom of establishment was triggered. It then moved on to find that a restriction upon the freedom of establishment existed; and to hold that while the measures had the legitimate objective of ensuring the continuity of certain basic services and the operation of networks considered to be necessary to the economic and social life of Greece (energy and water supply, the provision of telecommunications services, and the management of Greece’s two largest ports), the measures were nonetheless not justified, since they were neither suitable means of attaining this objective nor proportional to it.
This apparently simple case provides very clear examples of some current trends in EU free movement law. Here, I will focus on two issues arising from the Court’s reasoning on whether the Greek rules constituted a restriction upon free movement:
A. The Difference between Free Movement of Capital and the Freedom of Establishment
While the Commission argued that the prior authorisation scheme at issue infringed both the free movement of capital and the freedom of establishment, the Court held instead that, since the scheme covers only the acquisition of holdings in a strategic public limited company which grant voting rights representing 20% or more of the total share capital, with the result that only those shareholders who are able to exert a definite influence over the management and control of such a company are affected, only the freedom of establishment was affected.
This is not completely surprising – it is almost canonical that the distinction between ‘direct investment’ and ‘portfolio investment’ corresponds to the differences between these freedoms, with freedom of establishment / direct investment being characterised by the possibility of participating effectively in the management or control of a company, while the free movement of capital / portfolio investment relates to the acquisition of equity or debt on pure financial investment grounds, that is, without the aim of exerting any influence on management (see, for example, Baars and Überseering). Accordingly, a national of a Member State who has a holding in the capital of a company established in another Member State that gives him definite influence over the company’s decisions is exercising his freedom of establishment; anything less than this triggers the free movement of capital.
Even though the Court has of late tried to be more rigorous in its identification of the “individual” applicable fundamental freedom when various such freedoms may be applicable – particularly under its “mainly applicable freedom” test –, the fact remains that usually choosing one freedom or another does not have any impact on the concept of restriction used or on the content of the subsequent proportionality assessment. The result of this is that it is not uncommon for the Court to apply all relevant freedoms simultaneously, or each freedom individually, to the same factual scenario. There is an exception, however, in what concerns the free movement of capital – when this freedom is at stake, the Court appears to take the different scopes of each freedom very seriously [see Suzanne Kingston, ‘A Light in the Darkness: Recent Developments in the ECJ’s Recent Tax Jurisprudence’ (2007) 44 CML Rev 1321; and, as an example, Test Claimants III, para. 93-102], arguably because of this freedom’s wider scope rationae loci when compared to the other freedoms – i.e., the fact that the free movement of capital applies not only intra-EU but also to third-States, even if these third-States do not grant the EU or its Member-States reciprocal rights.
This trend may help explain why the Court decided to be so clear about the applicable freedom. After all, the main implication of determining that the freedom of establishment, and not the free movement of capital, was applicable in this case was to ensure that similar rules put in place by Member-States and directed exclusively at investors from third-countries would not be restrictive of EU law at all. But this cannot fully explain the Court’s attitude, since Greece relied on the freedom of establishment to argue that the prior authorisation scheme was intended primarily to control speculative hostile acquisitions by sovereign wealth funds established in non-member countries – an argument which would have been unacceptable at the restriction stage if the applicable freedom was the free movement of capital. The Court held that even if this is a legitimate goal, the Greek measures applied to all potential investors, including those established in the EU Member States, and not only to investors established in non-member countries, and thus infringed on the freedom of establishment. In other words, the solution to the case did not hinge on which freedom was deemed to be affected. It seems that the Court’s attention to the applicable freedom is the result of a particular focus on the delineation of the correct scope of the fundamental freedoms, driven perhaps by concerns with improved reasoning and correct conceptual analysis.
The surprising bit, however, results from the similarity of Greek measures with “golden-shares”. “Golden shares” are special shares granting special control powers over a company to their holder – which is usually the State, or an entity related to it –, independently of the size of its shareholding. If the prior authorisation requirement for acquisition of stakes above 20% of total shareholding does not fully fit this bill, the requirement of prior authorisation for the adoption of certain decisions concerning strategic undertakings achieves the exact same effect as a “golden share” would. One would think that, in light of their effect on the control of a company, “golden shares” would restrict upon the freedom of establishment, as the measures in the present case were found to do. One would, however, be mistaken: “golden shares” are as a rule found to infringe upon the free movement of capital, which is seemingly inconsistent with the distinction between direct investment / freedom of establishment and portfolio investments / free movement of capital outlined above and which holds throughout the rest of the law (see AG Jarabo Colomer’s Opinion in Case C-326/07 Commission v Italy, para 44-49; and Case C-212/09 Commission v Portugal, para. 98 and the case law referred therein). This, in turn, gives rise to a very particular concept of restriction, to which I now turn my attention.
B. The Concept of Restriction
In a number of cases in the past decade, the Commission challenged, and the Court struck down, national rules creating and regulating “golden shares” as being contrary to the free movement of capital. The Court’s reasoning as to why national provisions creating golden shares are restrictive is that:
‘to the extent to which they create instruments liable to limit the ability of investors to participate in the share capital [in a company] with a view to establishing or maintaining lasting and direct economic links with it which would make possible effective participation in the management or control of that company, reduce the interest in acquiring a stake in that capital [and are thereby restriction inasmuch as] direct investors from other Member States, whether actual or potential, may have been deterred from acquiring a stake in the capital of that company.’ (C-212/09 Commission v Portugal, para. 28)
This test is, by any standard, very wide – a restriction is found because a national measure may “reduce the interest in acquiring a stake in that capital” and deter investors from acquiring a stake in a company. This seems to be a result of trying to justify why “golden shares” are restrictions in the first place, and restrictions upon the free movement of capital in particular: after all, “golden shares” are not discriminatory, and do not “prevent” or even unduly hinder access to the affected company’s shares, which usually trade in the open market without any evident discount. In light of this, the Commission and the Court were forced to adopt a very wide obstacle test according to which “golden shares” may potentially depress the value of a company and its shares, and thereby “restrict” the free movement of capital. This line of reasoning is arguably why Greece, while sustaining that its prior authorisation scheme was not similar to a “golden share”, nonetheless argued that the relevant provisions did not “limit” the acquisition of shareholdings as such, an argument clearly related to capital and to the obstacle test developed for “golden shares”.
The tensions at the heart of the “golden shares” case law seem also to have influenced the decision in the present case. As we have seen, the Court held that the Greek measures impacted only on the freedom of establishment, which seems to be correct. But perhaps in light of the similarity between the Greek rules and a “golden share”, and in an attempt to square a test developed for the free movement of capital into the freedom of establishment, the Court held that “a restriction exists if a prior authorisation scheme has the effect of preventing or restricting the exercise of voting rights attached to shares held since these constitute one of the principal means for the shareholder to participate actively in the management of an undertaking or in its control”. This seems to be a direct translation for the freedom of establishment of the test used for golden shares in what concerns capital. [see, particularly, Case C‑274/06 Commission v Spain, paras. 21 to 24]
This “translation” seems both unwarranted and unnecessary, since there is clear and longstanding case law according to which a requirement of prior authorisation to the exercise of the freedom of establishment is a restriction upon it. If the Court had been able to ignore the “golden share” case law, the present case could easily have been similarly decided while avoiding the adoption of language which risks widening the scope of the freedom of establishment even more to include any potential (minor?) obstacle to the exercise of voting rights.
The present case, precisely because it is quite straightforward, provides interesting examples of a number of trends and tensions in the case law. The main trend evidenced by this case is a move towards a clear differentiation between the free movement of capital and the other fundamental freedoms, and a concomitant reinforcement in the quality of the reasoning in this area. The main tension brought into relief is the fact that this trend towards improved reasoning in some areas can clash with existing precedent and lead to more muddled reasoning in other areas (such as the concept of restriction) as a result of the Court’s contortions, under pressure from seemingly incoherent previous developments, to both decide the case correctly and give an impression of continuity and coherence in the law. The fact that the Court’s reasoning in such a straightforward case raises these issues is testament to the yet unsolved problems posed by the existing case law on golden shares, and on economic free movement more generally.