The law, which gives special rights to the state, forbids shareholders from having more than 20 percent of the company's voting rights even if the shareholder has a bigger stake in the group's capital.
In addition to limits on voting rights, the European Commission is wary of a part of the law under which important corporate decisions require the approval of at least 80 percent of shareholders.
"There provisions of the VW law make it substantially less attractive for other EU investors to acquire the company's shares with a view to participating effectively in management decisions or controlling it," the Commission told Germany in a second warning statement last March.
The Commission, the European Union's executive arm, is concerned that theses two elements of the 1960 law give the minority blocking powers to Volkswagen's biggest shareholder, the federal state of Lower Saxony, which holds 18.1 percent of Volkswagen shares.
Schröder defends law
German Chancellor Gerhard Schröder, a Social Democrat who sat on the Volkswagen board for eight years as premier of Lower Saxony, has always defended the law, saying it helped to protect jobs at the company.
"The VW law is a legacy of Germany's industrial past that is incompatible with the EU single market," Daniel Gros, director of the Brussels-based Center of European Policy Studies, told Reuters news service.
"There is no intention to punish," he added. "Germany's task is simply to comply with EU rules."
But Germany could face hefty fines if it loses the case in front of the court. A decision is unlikely to come soon, however, as the court usually takes about two years to issue a verdict.
VW has nothing to say
A Volkswagen spokesman at the company's headquarters in Wolfsburg, Germany declined to comment on the commission's action.
"We have nothing to say on the matter," he said. "We are not the party involved in the whole procedure."
But Christian Wulff (photo), the Christian Democratic premier of Lower Saxony, said the lawsuit was as "as useful as a hole in the head."
"We're convinced that the VW law complies with EU law," Wulff's spokesman said. "We believe the European Court of Justice will decide in our favor. We're anxiously awaiting the statement of claim."