Explainer-Volkswagen Law: the unique structure behind Europe's biggest carmaker

By Christoph Steitz and Victoria Waldersee

FRANKFURT, June 26 (Reuters) - Volkswagen's plans to close plants in Germany and nearly double planned job cuts to around 100,000 have put the spotlight on its unique governance and ownership structure that have drawn criticism from investors for years.

Like other German conglomerates, the 89-year-old automaker is the result of decades of expansion and strategy shifts, resulting in an empire that stretches from mass-market SEATs to luxury Lamborghinis, as well as stakes in sports car maker Porsche AG and truck maker Traton.

WHAT IS THE VOLKSWAGEN LAW?

The strong influence of workers dates back to the early days of Volkswagen before World War Two, when the Nazis built Volkswagen's main factory in Wolfsburg with money that came in part from assets expropriated from trade unions.

This, and the use of forced labour, formed the financial basis of the company. After the war, the British, who were responsible for the plant at the time, decided to place trusteeship of the company in public hands.

To this day, the state of Lower Saxony, where Volkswagen is based and where it operates five of its six western German assembly plants, has a 20% voting stake.

In 1960, when the company was transformed into a joint-stock corporation, the so-called Volkswagen law was passed, handing significant influence to Lower Saxony and workers to protect the business from outside influence.

WHAT DOES IT SAY?

There are two critical clauses.

Decisions that usually require a three-quarters majority at the annual general meeting must be passed by more than four-fifths of Volkswagen shareholders, giving Lower Saxony a blocking minority.

Any decision to build or move a production plant also needs approval of a two-thirds majority in the 20-strong supervisory board, the law says, without specifically mentioning closures.

This means the 10 members on the board representing German labour can veto any far-reaching plans that affect factories.

WHAT IS VOLKSWAGEN'S OWNERSHIP STRUCTURE?

It's complicated, mainly because there are two different classes of Volkswagen shares: preferred stock that is listed in the German benchmark DAX index, and common stock which carries voting rights.

Most of the group's equity, covering both share classes, is owned by Porsche SE, the investment vehicle of the Porsche and Piech families, which holds a 31.9% stake in Europe's top carmaker.

The German state of Lower Saxony owns 11.8%, while Qatar holds 10%.

When it comes to voting stakes, however, the picture changes: With a 53.3% voting stake, Porsche SE holds a majority. Lower Saxony has 20% of votes and Qatar 17%.

HOW DOES THAT AFFECT GOVERNANCE?

Volkswagen has been criticised by investors for governance shortcomings that are partly related to its ownership structure, which gives Porsche SE great control over the company even though it does not own a majority of all shares.

Volkswagen CEO Oliver Blume gave up his Porsche CEO post at the beginning of this year after years of criticism from some shareholders over his dual role as head of two large and related auto groups.

Along with the market deterioration, governance issues have added to pressure on Volkswagen's shares, which trade around 16-year lows. Uncertainty over succession at the Porsche and Piech families, led by Wolfgang Porsche, 83, and Hans Michel Piech, 84, is also a factor.

(Reporting by Christoph Steitz and Victoria WalderseeEditing by Tomasz Janowski)