EU Starts Probe Over State Share In Portugal Telecom

BRUSSELS -(Dow Jones)- The European Commission Wednesday began legal proceedings against Portugal to end its special shareholding in Portugal Telecom.

The Portuguese government holds shares which give it special powers to appoint one third of the telephone company's board and the chairman. The government also has veto power on important issues such as profit distributions, capital increases, bond issues - and above all, to block any takeover attempt.

In a statement, the Commission said that "these special powers constitute an unjustified restriction on the free movement of capital."

Portugal has two months to respond to the Commission charges. If the Commission is unsatisfied, it can bring a case at the European Court of Justice.

Portugal's Finance Minister Fernando Teixeira dos Santos, speaking at an event in Lisbon, said he isn't concerned by Brussels' investigation of the state holding in Portugal Telecom. If the E.U. decides that the golden share isn't viable, he said Portugal will have to rethink its strategy for remaining involved in strategic sectors, most likely by holding normal stakes.

Teixeira dos Santos also stressed that Portugal isn't the only country that retains special voting rights in some companies, adding he expects a Europe-wide resolution to the question of golden shares that doesn't discriminate against Portugal.

In June 2002, the European Court of Justice imposed tighter limits on "golden shares" that give governments special voting rights to block foreign buyers. The Court said such special shares were only permitted to safeguard national defense and energy supplies. Since the ruling, the European Commission has threatened cases against recalcitrant governments. Most recently it demanded Italy give up a golden share in aerospace and defense company Finmeccanica SpA, as well as special powers in energy company Eni SpA and power giant Enel SpA. In July, it warned Spain about restrictions on its energy companies. Also in October, the Commission said it plans a court case against Germany's law that caps the voting rights in Volkswagen AG.

-By William Echikson, Dow Jones Newswires; 32-2-741-1482; william.echikson@dowjones.com

(Erik Burns contributed to this story from Lisbon.)

(END) Dow Jones Newswires "

Posted to the site on 14th December 2005