The European Commission has taken Germany to court over a decades-old law that prevents the hostile takeover of the carmaker Volkswagen.

The law prohibits any shareholder from owning more than 20 per cent of the company and requires an 80 per cent shareholding majority for key decisions.

The German government and the state of Lower Saxony, where Volkswagen has its headquarters, have mandatory representation on the company's supervisory board and can block any major decision.

The Internal Market Commissioner, Mr Frits Bolkestein, told The Irish Times that the Volkswagen law is in breach of EU rules that allow the free movement of capital.

"The key fact is that it is impossible to take over Volkswagen," he said.

Germany insists that the Volkswagen law is necessary to protect jobs at Europe's biggest car manufacturer and the country's justice minister, Ms Brigitte Zypries, yesterday expressed confidence that the Commission's case would be rejected.

"We are optimistic that we can refute the Commission's arguments before the European Court of Justice," she said.

Volkswagen's shares rose sharply on the Frankfurt stock market yesterday after news of the Commission's decision but Mr Klaus Volkert, chairman of the company's works council, said that Brussels was sending out a disturbing signal.

"This approach will only encourage workers to perceive Europe as a threat to their jobs," he said.

Volkswagen occupies a unique place in German industrial history and in the country's political imagination. The chancellor, Mr Gerhard Schroeder, is a former prime minister of Lower Saxony and has long enjoyed close links with the company.

Volkswagen has recently sought to attract foreign investors in an attempt to prevent the Commission taking it to court.