The European Court of Justice Declares That the Portuguese Government’s Golden Shares in Portugal Telecom Constitutes An Unjustifiable Restriction On the Free Movement of Capital

3 August 2010

Portuguese legislation on privatizations allows by-laws for publicly-funded companies which are to be privatized for reasons of national interest to include privileged shares (so-called golden shares). The Portuguese government owns the golden shares entitling them to veto any modifications to the by-laws as well as decisions relating to other specific areas. Spain’s Telefónica’s bid for shares in one of the companies affected by the aforementioned legislation was recently in the news when the Portuguese state responded by exercising its veto rights, citing security of telecommunication network availability in the event of crisis, war or terrorist acts.

The non-compliance proceedings filed by the European Commission led to the ruling which determined that firstly, the golden shares held by the Portuguese state unduly influences the management of the company and could discourage direct investment from other member states.

The ruling goes on to confirm that, despite the fact that the national measures that restrict the free movement of capital can be justified for the motives listed in the EC Treaty, they must be appropriate to guarantee achievement of the objective and they must be proportional. In their ruling, the Court deemed that the arguments put forth by Portugal, without justification of same, constitute a disproportionate measure as the limits specified in Portuguese legislation are not subject to specific or objective conditions or circumstances.

In view of the foregoing, the Court ruled that there was a serious breach of the free movement of capital.

For further information please contact Ángel Aldasoro: aaldasoro@mmmm.es