Oct. 23 (Bloomberg) -- The European Union's highest court overturned a 47-year-old law protecting Volkswagen AG from a takeover, allowing Porsche AG to take control of the region's largest carmaker.

Volkswagen, based in Wolfsburg, Germany, has been shielded since 1960 by a law that limits investors' voting rights. Porsche, the maker of the 911 sports car, has amassed a 31 percent stake in Volkswagen over the past two years and said last month it wants to ``significantly'' increase the holding.

Germany ``failed to demonstrate why such a position has to be maintained in order to protect the general interests of minority shareholders,'' the European Court of Justice in Luxembourg ruled today. The decision cannot be appealed.

The ruling may bring Porsche Chief Executive Officer Wendelin Wiedeking a step closer to expanding the automotive empire of the Piech and Porsche families. Volkswagen stock has more than doubled this year on speculation Porsche will pursue a takeover. The sports-car maker said today it ``welcomes'' the ruling and will ``exercise its rights'' as an investor.

`Flexing Its Muscles'

``I now see Porsche flexing its muscles and going for outright control,'' said Stephen Pope, chief global market strategist at Cantor Fitzgerald in London with a ``buy'' recommendation on Volkswagen shares. ``That may bolster margins at VW and generate new cross-fertilization ideas.''

Volkswagen shares fell as much as 5.30 euros, or 2.9 percent, to 175.12 euros and were down 2.2 percent as of 11:23 a.m. in Frankfurt. The stock has more than doubled this year, valuing the carmaker at 62.9 billion euros ($89.2 billion).

Wiedeking and Volkswagen Chairman Ferdinand Piech, whose grandfather invented the VW Beetle, aim to make Volkswagen a competitor to Toyota Motor Corp., the world's second-largest carmaker, in both size and profitability.

Stuttgart, Germany-based Porsche first bought a stake in Volkswagen two years ago, saying it wanted to protect a strategic partnership between the two carmakers. Since 2002, Volkswagen has built the body of Porsche's Cayenne sport-utility vehicle, which shares a platform with the VW Touareg and the Audi Q7.

Volkswagen, now Porsche's largest supplier, will also build the body of the Panamera sports car, which goes on sale in 2009.

Porsche offered 35.9 billion euros, the lowest legally permitted amount, in March for full control of Volkswagen. The offer expired on May 29. Porsche is now free to increase its Volkswagen stake to 50 percent without having to make the same offer to all shareholders.

Wiedeking said in a statement today that he supported the ruling because it allows the carmaker to exercise its rights fully as a Volkswagen stakeholder.

EU's Challenge

The European Commission, which brought a lawsuit against Germany in 2005, argued that the so-called Volkswagen law deters investors, comparing it to a golden share that some countries hold in former monopolies. The law, which caps voting rights to 20 percent regardless of the size of the stake, ``restricts the free movement of capital,'' an adviser to the European Court of Justice said in a non-binding opinion in February.

The German state of Lower Saxony, Volkswagen's second- largest shareholder, spent 41 million euros on May 29 purchasing 376,000 shares to ensure its 20 percent holding as employees exercised options. Wolfsburg is located in the state.

``The Lower Saxony government accepts the decision of the European Court of Justice,'' state Prime Minister Christian Wulff said in an e-mailed statement. ``Lower Saxony will keep its Volkswagen holding.''

Lower Saxony and Porsche agreed that the state government will keep two supervisory board seats, both sides said today.

Christine Ritz, a Volkswagen spokeswoman, said the carmaker will comment on the ruling later today.

The case is C-112/05 Commission v Germany.

To contact the reporters on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net; Chad Thomas in Berlin at cthomas16@bloomberg.net.

Last Updated: October 23, 2007 05:27 EDT