On 4th June, 1998, Vickers' shareholders vote on the twocompeting offers which BMW and Volkswagen have made for the sharepurchase of the Rolls-Royce Motor Cars Group from Vickers.

Initially, Vickers P.L.C. supported the BMW offer of £340million, but it switched its support to VW after VW put in a bid26% higher than BMW's at £430 million.

Shareholders will be asked to consider both bids, but thedirectors are recommending the VW offer and the majority ofinvestors seem likely to vote in favour of the VW offer.

There are two separate issues for VW: the first is to get theapproval of Vickers' shareholders. The second is to obtain thenecessary intellectual property rights to use the Rolls-Roycename.

Rolls-Royce plc (the aircraft engine makers) is the registeredtrade mark owner of the Rolls-Royce name and bonnet badge. Itlicensed the right to use these marks to Rolls Royce Motor Cars inthe 1970's for perpetuity and at no charge, subject to certainconditions as to the quality of the cars on which the name andbadge are used. Rolls-Royce Motor Cars already owns certain marksrelating solely to the motor cars, for example, the statuette whichis found on the front of the cars and the distinctive radiatorgrill shape.

Rolls-Royce plc and Rolls-Royce Motor Cars have been entirelyseparate entities since 1973 when Rolls-Royce Limited was splitinto two independent businesses. The motor cars business was soldto Vickers and the aircraft engines part was formed into a companywhich later became Rolls-Royce plc.

The licence granted when the companies divided contains a changeof control clause permitting Rolls-Royce plc to veto the sale ofthe Rolls-Royce Motor Cars to a foreign owner.

There a number of reasons why this clause was inserted, one ofthe main ones being that, at the time, Rolls-Royce was felt to bean important national asset which should remain in British hands.

The rationale for the change of control clause is similar to theso-called "golden share" arrangements entered into on manyprivatisations. The government retains golden shares in manyprivatised companies as they enable it to, amongst other things,prevent former nationalised institutions from passing into foreignownership. The government took a golden share in Rolls-Royce plcitself when it was privatised.

The European Commission has recently looked at the legality ofgolden shares in the context of EC Treaty provisions on freedom ofestablishment (Article 52) and free movement of capital(Article 73b) ().

EC, 1997, II(10), 37In particular, the Commission is concerned that golden sharesmay discriminate against foreign investors, preventing them fromtaking part in other EU member states' companies. However, theseTreaty provisions have only ever been held to apply to memberstates, not to private individuals or companies and so would not beapplicable to a dispute over restrictions on foreign ownershipbetween two private enterprises such as Rolls Royce plc andVickers.

Instead Vickers is seeking to have Rolls-Royce's right of vetodeclared unenforceable under EU competition law. Vickers brought acomplaint to the European Commission in January this year allegingthat the clause is contrary to Article 85(1) of the EC Treaty. ThisArticle prohibits agreements which affect trade between memberstates and which restrict or distort competition to an appreciableextent. The infringement in this case is likely to concern the factthat the clause could result in a foreign owner being hindered fromcompeting in the market for luxury cars.

The Commission refused to grant interim measures as it did notthink the conditions for granting such measures were met, however,the case is still pending awaiting the Commission's finaldecision.

The Commission had issued Rolls-Royce with a comfort letter inthe 1970s to the effect that the restriction was not aninfringement of EC competition law. However, the Commissionrecently stated that it did not regard itself as barred fromre-examining the issue since comfort letters are not legallybinding and also because the car market has changed a great deal inthe intervening years. What makes the statement rather surprisingis that the Commission has always been anxious to reassurecompanies that a comfort letter from the Commission providesadequate protection for companies, even though it is not legallybinding. Its statement may make companies understandably a littlemore nervous about relying on them in the future.

VW has not made its offer conditional upon obtaining Rolls Royceplc's consent to waive the change of control clause. Clearly thereis a degree of risk in making an unconditional offer thatshareholders might approve the bid but Rolls-Royce plc mightwithdraw the IP licence. However, VW seems confident either that itwill obtain Rolls-Royce plc's consent or that the veto will be heldunenforceable by the Commission. CAS