Germany's controversial "Volkswagen law", which effectively protects the carmaker from takeover, is illegal under European law and should be scrapped, according to the senior adviser to the European Court of Justice (ECJ).

The advice to the Luxembourg-based judges from Dámaso Ruiz-Jarabo Colomer, the Advocate General at the court, will be welcome news to the European Commission, which began its court action against the 47-year-old law in March 2005.

But it could increase tensions between Brussels and Berlin, which has repeatedly defended the legislation, at the very time that Germany holds the rotating EU presidency.

The Advocate General, whose advice is usually, but not always, followed by the judges, agreed with the Commission that the law was a restriction on the free movement of capital — a basic EU principle.

Under the law, both the German federal Government and the Land of Lower Saxony have the right to appoint two members to the company's ten-strong supervisory board, irrespective of the size of their shareholding.

The restriction is a disincentive to anyone wishing to acquire a significant holding in the company, the Advocate General concluded.

Mr Ruiz-Jarabo Colomer also criticized the provision in the legislation that voting rights are limited to 20 per cent of the share capital — the percentage the federal and regional governments held when the legislation was passed — even if a shareholder exceeds that percentage.

Finally, he attacked the need for resolutions at the general shareholders' meeting to secure more than 80 per cent of the vote to be adopted. That, he said, gave the Government and Lower Saxony a blocking minority.

The judges are expected to deliver their verdict by the summer.

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