Berlin  - Chancellor Angela Merkel's government decided Tuesday to pass legislation which will cement a veto by the German state of Lower Saxony over key decisions at the Volkswagen auto company.

The decision angers the family-controlled Porsche company, which is the biggest shareholder in Volkswagen, and which defies attempts by the European Union to bring Volkswagen under standard corporate- governance rules.

Lower Saxony, a sprawling northern state where Volkswagen is the biggest industrial enterprise, owns 20.8 per cent of the company, but desires the veto powers normally reserved in German law to a shareholder with more than 25 per cent of a company's stock.

Volkswagen's unusual structure means that decisions about layoffs at Europe's biggest automaker are politically influenced, especially when labour groups and politicians ally against value-driven investors.

German Justice Minister Brigitte Zypries said the special act of parliament would renew the requirement that important decisions be backed by more than 80 per cent of shares represented at a Volkswagen stockholder meeting.

Separately, Porsche said Tuesday it had filed suit in a court near Volkswagen's office to reverse an April stockholder meeting defeat.

Porsche, which owns 31 per cent of Volkswagen and seeks more than 50 per cent, is expected to argue that the company's existing articles of association are invalid, and that three-quarters of stock is enough to change the articles.

Porsche denied it was aggressive, saying it merely wished to know what the binding law on the issue was, in the light of a European Court of Justice (ECJ) ruling. It had been obliged to file by Monday midnight to satisfy a legal deadline.

The ECJ ruled last year that parts of existing legislation about Volkswagen breached EU law. The EU Commission argues that Germany's special rules impinge on the freedom of capital investment in the EU.

The Berlin draft legislation carries a rider that its terms would have to be amended if the EU Commission were to launch fresh legal proceedings against Germany or impose a fine for failing to apply the ECJ ruling. (dpa)