The European Commission has given Germany until the end of next month to scrap a 1960 law protecting Volkswagen from a hostile takeover and renewed its threat to take legal action.

It is understood that Frits Bolkestein, the outgoing internal market commissioner, is determined to clear up the battle over the "Volkswagen law" before he quits office.

The prospect of legal action is the latest threat to VW, which this week was forced to call off plans to give Abu Dhabi a 9.8% stake in the group to finance the €2bn (£1.3bn) purchase of a 50% share in a Dutch car leasing company.

It comes as VW is in negotiations with the IG Metall union over plans for a two-year wage freeze and a 30% cut in labour costs.

Brussels views the VW law as an infringement of treaty rules guaranteeing free movement of capital. It is drawing on a court ruling in May 2003 that the British government's "golden share" in airports group BAA - which limited voting rights of a shareholder to 15% - similarly breached Treaty of Rome rules.

In VW's case it argues that investors in other EU countries are disadvantaged because the law gives the federal German state and Lower Saxony, the carmaker's home state, a blocking 20% minority vote. A majority of more than 80% is needed for important supervisory board decisions.

The commission argues that this, plus a provision capping at 20% any shareholder's voting rights, is a derogation from German company law and liable to prevent other investors buying shares and, eventually, mounting a bid for the group.

(Source: guardian.co.uk)