VW Shares Up on Activist Investor Demands for Restructure

BERLIN—Volkswagen AG shares jumped nearly 4% on Monday, outpacing Frankfurt's broader blue-chip index, as traders took heart from activist investor TCI's demands to restructure the company.

But the uptick could quickly fade due to Volkswagen's corporate structure.

The Children's Investment Fund, a London-based hedge fund, is one of the most prominent voices to advocate change at the German car maker.

In an open letter publishedÂ on Friday, TCI launched a scathing attack on Volkswagen's corporate governance, weak profits, and bloated workforce, raising the pressure on management and core shareholders.

Volkswagen declined to comment on the letter.

It isn't the first time Volkswagen's management has come under attack.

Several other major investment funds, such as Norway's sovereign-wealth fund, Union Investment of Germany, and Nordea, a Swedish investment fund, have criticized the company in the wake of Volkswagen's emissions-cheating scandal.

In March, 278 investors, including CalPERS, California's public pension fund, joined a class-action suit in Germany seeking around $3.57 billion in damages as a result of the dramatic erosion of the car maker's share price after the scandal broke in September.

"We are sure that VW CFO Frank Witter has taken a lot of this criticism home from his recent investor meetings in London," Arndt Ellinghorst, head of automotive research at Evercore ISI, said Monday.

Yet, no matter how loud the chorus of criticism from Volkswagen's outside investors may become, they have no voice inside the boardroom and will be nearly powerless at the company's annual general meeting of shareholders on June 22.

Volkswagen issues two classes of stock: nonvoting preference shares and ordinary stock with voting rights attached.

Nearly 92% of the voting stock is held by three core investors.

The Porsche-Piech family clan, heirs of the original Beetle designer Ferdinand Porsche, hold 52.2% via their listed investment company, Porsche Automobil Holding SE, and hold another 2.4% separately from the joint fund.

The state of Lower Saxony, where most of Volkswagen's German workforce is located, holds 20.1% of the voting stock. There are also voting rules in place that prevent Lower Saxony from being outvoted at the annual general meeting on certain strategic issues—such as German plant closures.

The third-largest shareholder is Qatar's sovereign-wealth fund, which holds 17% of Volkswagen's voting stock and has two seats on the supervisory board.

Behind the scenes, Qatar has sharply criticized Volkswagen's corporate governance, according to people familiar with the situation.

The Qataris are trying to get a seat on the board's exclusive executive committee, a six-member group that now includes representatives of the Porsche heirs, Lower Saxony, and the IG Metall trade union. The committee makes most decisions before presenting them to the full board.

The union wields substantial power on Volkswagen's board. Under Germany's system of sharing board seats equally between labor and shareholder representatives, worker delegates hold 10 of the 20 seats on Volkswagen's board.

Lower Saxony holds two seats allotted to shareholders, but almost always votes with labor, giving the worker representatives near complete control of the supervisory board.

Minority shareholders have no representative on the board.

Ben Walker, a TCI partner, said the company has held a stake of around 2% of the company's nonvoting preference shares for about four years.

He said TCI has held no direct talks with any of Volkswagen's core shareholders.

"We are trying to shine a light on this situation," he said in an interview. "The logic of our argument is clear and Volkswagen's shareholders should see that, too."

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

May 09, 2016 12:25 ET (16:25 GMT)

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