The European Union's highest court struck down a German law shielding Volkswagen from hostile takeovers, clearing a path for Porsche to increase its influence -- and possibly even take control -- at Europe's biggest automaker.
The decision Tuesday is expected to have ramifications across Europe, where many governments have tried to protect companies they see as vital to their economies from takeovers, particularly foreign ones.
German politicians and labor unions had argued that the 47-year-old law was needed to protect local jobs, but the European Court of Justice said the measure was illegal and limited "the free movement of capital" that is a tenet of the EU.
The ruling is a triumph for the European Commission, which has fought several battles against European governments and their "golden shares" in critical companies.
The court ruled that the "VW law" discouraged foreign investors from taking a stake in Volkswagen, because German authorities are able "to exercise considerable influence" over the company. The state of Lower Saxony is VW's second-biggest shareholder.
"This situation is liable to deter direct investors from other member states," the court said in a statement.
The law caps a shareholder's voting rights at 20 percent, whatever the size of its holding.
But it will take a while before the changes come into force, Philippe Houchois, autos analyst at JP Morgan, told "Worldwide Exchange."
"The law has been overturned but we have to go through a number of administrative processes for that change to be effective," Houchois said.
European Union regulators took Germany to court in 2005 over the law, saying the right to do business anywhere in the 27-nation bloc is hindered if governments interfere with companies.
The EU has since lined up or threatened cases against Spain over allegations it is protecting energy companies like Endesa, Italy for blocking a takeover attempt of highways company Autostrade, and Poland for hindering Italy's UniCredit from consolidating its grip over a local bank.
Volkswagen said in a statement it would examine the ruling and its "potential consequences."
Germany's federal Justice Ministry said it would move immediately to comply with the ruling.
The country's biggest industrial union, IG Metall, criticized the ruling. Union leader Juergen Peters said it was a sign of European institutions' distance from ordinary people if "free movement of capital and thus the interests of investors are given a higher value than the interests of employees."
Green Light for Porsche
For Porsche, which has spent about 5 billion euros ($7.08 billion) building up a 31 percent stake in Volkswagen since 2005, the ruling gives it the go-ahead to increase its holding.
Porsche Chief Executive Wendelin Wiedeking said the company was "naturally very interested in being able to fully exert our voting rights" in Volkswagen. However, he did not refer to the possibility of a takeover -- which many analysts expect.
Lower Saxony is Volkswagen's second-largest investor and Porsche may find it difficult to restructure the company to cut costs, therefore it is likely to seriously mull the option of a takeover, analysts said.
"It is somewhat of an unstable situation," said JP Morgan's Houchois, because Porsche may have to fight with the unions to restructure Volkswagen if it wants to turn it into a global carmaker, emulating Toyota.
At some point, he added, Porsche will have to address the issue of the German cost base and this could weaken its alliance with Lower Saxony.
"It's a question of how comfortable they are with their level of control and if they want to raise it," Houchois said.
Stuttgart-based Porsche -- which reportedly has secured a $14.2 billion line of credit to buy Volkswagen shares -- said it did not plan to immediately raise its stake but that the issue would be addressed when its supervisory board meets next month.
Because the combined holdings of Porsche and Lower Saxony exceed 50 percent of Volkswagen, the door already is closed for any would-be foreign suitors.
Volkswagen's board chairman and former CEO, Ferdinand Piech, is a member of the family that controls Porsche.
"Today's decision marks an historic moment where VW moves from the status of a state-controlled company to that of a family-run company," Morgan Stanley analyst Adam Jonas wrote in a research note.
He added that Volkswagen would benefit from more control by Porsche and its executives given that they are some of the "most skilled capitalists in the global auto sector, with an obsession for efficiency, product quality and brand management -- all skills which can help VW greatly."
Were Porsche to acquire Volkswagen, it would be a case of a smaller company gobbling up its larger partner.
Porsche sold 97,515 cars in the year ended July 31, with sales rising 3.4 percent to 7.4 billion euros ($10.48 billion). The company expects its pretax profit for that year to be significantly more than the 2.1 billion euros it posted for 2006.
Volkswagen -- with brands including Seat, Skoda, Audi and Lamborghini -- sold 3.1 million cars in the first six months of 2007 and expects its sales for this year to top the 104.9 billion euros it reported in 2006. It earned 1.96 billion euros ($2.78 billion) in the January-June period.
Porsche shares soared 5 percent to 1,724 euros ($2,448). Volkswagen initially rose after the ruling, then dropped back 3.5 percent to 174 euros.