The Work

January 9, 2012 7:19 PM

Legal Issues Stall Volkswagen-Porsche Merger

Posted by Brian Baxter

Volkswagen CEO Martin Winterkorn said Monday that a proposed merger with fellow German automaker Porsche isn’t possible because of legal obstacles and tax issues that have cropped up since the companies announced plans to merge in May 2009.

Wolfsburg-based Volkswagen, Europe's largest carmaker, bought 49.9 percent of Porsche's sports car business in 2009 for almost $6 billion. Stuttgart-based Porsche, in turn, owns 50.7 percent of Volkswagen. Porsche, whose founding family has close ties to the Piëch family behind Volkswagen, racked up billions in debt in an effort to take control of Volkswagen.

The announcement of the proposed merger came a little more than six months after hedge funds and other investors that had been shorting Volkswagen's slumping shares got stung in October 2008 when Porsche swooped in and announced it had gained control of almost 75 percent of the automaker's stock. The subsequent rise in Volkswagen's stock price resulted in an estimated $38 billion in losses for short sellers, some of whom struck back at Porsche in U.S. courts.

Phil Beck, a founder of Chicago-based litigation boutique Bartlit Beck Herman Palenchar & Scott, joined lawyers from Grant & Eisenhofer and Kleinberg, Kaplan, Wolff & Cohen in representing a group of hedge funds that sued Porsche in early 2010 for $1 billion in damages for allegedly subverting German disclosure laws in order to manipulate Volkswagen’s share price, according to our previous reports.

Sullivan & Cromwell took the lead in representing Porsche in litigation filed in the United States. Two of those suits were dismissed a year ago by a U.S. district court judge in Manhattan citing the U.S. Supreme Court's ruling in Morrison v. National Australia Bank, which effectively bars all securities fraud suits filed in the U.S. for foreign securities traded on foreign exchanges. (Skadden, Arps, Slate, Meagher & Flom and Simpson Thacher & Bartlett are representing Porsche executives named as defendants in U.S. securities suits.)

While the dismissals of those suits remain on appeal, other hedge funds, including some represented by Quinn Emanuel Urquhart & Sullivan, have filed additional suits against Porsche in the U.S. Late last year, a group of investment funds took the advice of federal courts in the U.S. and brought their claims to Germany. The Am Law Litigation Daily reported last week that German firm BRIOCH Partnerschaft was representing hedge funds seeking $2.6 billion in damages from Porsche over its takeover bid for Volkswagen. Porsche has criticized the suits as having no merit.

The unresolved litigation precluded corporate lawyers from finalizing the initial merger agreement between Porsche and Volkswagen. Both companies agreed in September to formally review their merger options because of the lawsuits and other ongoing legal complications.

Magic Circle firms Clifford Chance and Freshfields Bruckhaus Deringer are advising Volkswagen and Porsche, respectively, on aspects of their proposed merger, according to our previous reports. German firm Hengeler Mueller is representing Porsche on both corporate and litigation matters, according to German legal publication Juve.

Austrian firm Schoenherr is providing counsel to Volkswagen on Central European legal issues, while Hogan Lovells is representing members of Volkswagen's supervisory board. Hans-Michel Piëch, a German attorney and member of the Piëch family that founded Volkswagen, serves on the supervisory boards of both Porsche and Volkswagen.

Volkswagen's brands include Audi, Italy's Lamborghini, Spain's Seat, Skoda of the Czech Republic, and England's Bentley. David Geanacopoulos serves as general counsel and executive vice president of public affairs for Volkswagen Group of America, the German automaker's U.S. sales arm. Geanacopoulos replaced longtime general counsel Joseph Folz, who, having retired from Volkswagen in 2008, now serves as the top in-house lawyer for Porsche Cars North America.

Bloomberg reports that Volkswagen still hopes to salvage its combination with Porsche and plans to explore alternative approaches to completing the tie-up.

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you have forgotten about the €2 bn in claims by both short sellers as well as early sellers (those who sold VW shares before the October 26, 2008 announcement and thereby lost out on the take-over premium attached to the new that Porsche was planning to dominate VW. The CLLB and DRRT law firms are activelly pursuing those claims since late in 2010.

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