Court declares Portuguese State golden share over EDP contrary to EU Law

The Court of Justice of the European Union has delivered its judgement in the case related to golden shares detained by Portuguese State in the company Energias de Portugal (EDP), declaring that  by maintaining in EDP special rights attributed to it by means of golden shares, Portugal has failed to fulfil its obligations in respect of the free movement of capital.

The case over the golden shares Portuguese States has on the company EDP, relates to the Portuguese legislation on privatisation which allows Portuguese State to keep in companies which are to be privatised, to provide golden shares which are intended to remain the State’s property. The reasons given for such preferential right remain on the protection of national interest in some exceptional cases especially in critical sectors such as energy, which will give to the State a de facto right of veto.

The Court has considered in its judgement about the golden shares held by Portuguese State in the company Energia de Portugal (EDP), that the golden shares are an unjustified restriction on free movement of capital

Barriers to free movements of capital implied in “golden shares”

  • Portuguese State’s right of veto over a large number of important resolutions means that the influence of the Portuguese State cannot be reduced except with its consent, which might discourage operators of other Member States from making direct investments since they could not be involved in the management and control of that company in proportion to the value of their shareholdings. Furthermore, that right of veto might have a deterrent effect on portfolio investments, since a possible refusal by the Portuguese State to approve an important decision in the company’s interests might depress the value of the shares and thus reduce the attractiveness of an investment.
  • The 5%-ceiling restriction on the voting rights of any shareholder, with the exception of the State, might hinder both direct and portfolio investments, as voting rights constitute one of the principal ways whereby shareholders can actively participate in the management of an undertaking. Any measure designed to prevent the exercise of those rights or to subject them to qualifications constitutes, therefore, an obstacle to the free movement of capital. Moreover, voting ceilings are an instrument which may diminish the interest in acquiring a stake in the capital of a company since they limit the ability of direct investors to establish or maintain lasting and direct economic links with the company.
  • The right to appoint a director, available solely to the State and to the exclusion of all other shareholders, restricts, in the same way, the ability of shareholders other than the State to participate effectively in the management or control of the company and may render direct investments in its capital less attractive to investors from other Member States.

The Court also holds that the provisions at issue do not define the specific circumstances in which the State’s special powers can be exercised and, therefore, confer on the national authorities a latitude with a very high degree of discretion. The provisions thereby create an uncertainty which entails serious interference with the free movement of capital and cannot, in any event, be proportionate to the objectives pursued.