A German law that protects Volkswagen from takeovers breaks European Union rules, a top court official has found.
VW is Europe's biggest car maker
The advocate general, one of the eight on the European Court of Justice, said the so-called "Volkswagen Law" wrongly prevented the free flow of capital.
Under the law, any shareholder in the carmaker cannot exercise more than 20% of the firm's voting rights, regardless of their level of stock holding.
The initial finding is expected to become the court's final ruling.
This is due within four to six months time.
Although the initial opinion is not binding, the European Court of Justice backs an advocate general's initial findings in about 80% of cases.
The Volkswagen Law was put into place when the carmaker was privatised in the 1960s.
It allowed VW's home region, the state of Lower Saxony, and the federal German government to prevent the risk of foreign takeover and continue to have a say in any politically sensitive decisions, such as job losses.
Today, Lower Saxony continues to own a 20.8% stake in the firm, which also gives it two seats on VW's important supervisory board.
Advocate General Damaso Ruiz-Jarabo said in his ruling that the current German legislation wrongly "strengthens the position of the Federal Government and the Land of Lower Saxony, preventing any intervention in the management of the firm".
VW has declined to comment on the interim court judgement, but its largest shareholder, fellow carmaker Porsche, which owns a 27.4% share, said it welcomed the ruling.
Analysts were divided on whether Porsche might launch a full takeover move on VW if and when the full Court of Justice finds against the Volkswagen law.
The European Commission first complained about the legislation in 2004.
VW shares rose nearly 1% after the ruling was announced