The German government said on Thursday that a controversial law shielding Volkswagen from hostile takeovers would continue to protect the interests of Lower Saxony, VW’s home region, dealing a heavy blow to Porsche, the carmaker’s biggest shareholder.

The draft so-called VW law will allow shareholders with a 20 per cent stake to block any “significant decisions” at annual meetings, a justice ministry spokesperson said. Lower Saxony holds a 20.1 per cent stake in VW, Europe’s largest carmaker.

Porsche has pressed the government to remove this clause, arguing that the normal blocking minority is 25 per cent under German law and that the clause would limit its strategic options for the company.

Porsche declined to comment on Thursday, but it has in the past said the government proposal in its current form is the “worst position solution”. It holds a 31 per cent share in VW, and would like to increase this holding to 50 per cent.

VW shares fell 1 per cent to €185.35 after dropping as much as 4.5 per cent in the session.

VW declined to comment.

A redraft of the VW law is necessary after a European Court of Justice ruling last October that its provisions restricted the free movement of capital and so breached European Union rules.

The justice ministry said on Thursday that the draft law, to be adopted by cabinet on Tuesday, was compatible with the ECJ ruling.

This was disputed by the European Commission in Brussels, raising expectations that a further stand-off between Berlin and Brussels is likely – to the possible benefit of Porsche.

Commission officials said that internal markets commissioner Charlie McCreevy had been “quite clear” with Germany that the 20 per cent blocking minority would need to be removed from the law for it to comply with the court ruling.

They added that the commissioner reserved the right to open formal proceedings against Germany in the European courts, under provisions that deal with “non-respect” for a court ruling.

The German government statement comes after months of political wrangling in Berlin, with the pro-business economics ministry supporting Porsche’s position. Berlin officials admitted that “there remained a risk” that the new version of the law would be challenged by Brussels.

Under an understanding between the justice and economics ministries, if the law was challenged in Brussels, the government would “swiftly adapt the law” to comply with the ECJ ruling, the officials said.

The justice ministry declined to comment on this aspect.

Wendelin Wiedeking, Porsche’s chief executive, warned in January in a letter to the German government that a VW law that retains a 20 per cent blocking minority would “massively damage Germany as a business location”.

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