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Germany could face legal action from the European Commission over the so-called "Volkswagen law" which effectively protects companies from takeover.

The law enables the German federal government and the regional governments in the Länder to restrict voting rights in companies to a maximum of 20 per cent irrespective of the number of shares actually held.

The law can be used to block takeovers of companies where the state or the regional government has a stake. It has come into controversy because of the holding of just over 20 per cent in Volkswagen by the regional government of Niedersachsen.

The regional government is using the law effectively to block Porsche, which owns 31 per cent of VW and wants to acquire a further 20 per cent giving its a majority shareholding, from taking control.

Last October, the European Court of Justice ruled that the law restricted the free movement of capital by restricting the opportunity for investors to fund companies.

The federal German government introduced a bill with changes to the law in January, but the changes do not remove the ability of a 20 per cent minority being able to block large transactions, which require an 80 per cent voting majority.

A spokeswoman for internal market EU commissioner Charlie McCreevy said: "They haven't fully complied with the court judgment." McCreevy had written again to the German government over the law, she added.

But the German justice minister Brigitte Zypries has responded by saying that she could not see how allowing a blocking minority hindered the movement of capital.