By Elvira Pollina and Giselda Vagnoni
MILAN (Reuters) - An Italian law that forced French media group Vivendi (PA:VIV) to forfeit most of its voting rights in Italian broadcaster Mediaset (MI:MS) may not comply with European rules, according to European Commission legal advice seen by Reuters.
The advice, though not binding, could strengthen Vivendi's hand in its protracted legal dispute with Mediaset, a row that has been a distraction for both firms as they grapple with competition from new rivals in Europe such as Netflix (O:NFLX).
Vivendi and Mediaset have been at odds since the former withdrew from an 800 million euro (£718 million) agreement to buy Mediaset's loss-making pay TV unit in 2016 and later built a hostile 28.8 percent stake in Mediaset.
That raid on Mediaset's shares left Vivendi, also a major shareholder in Telecom Italia (MI:TLIT), with stakes in the country's biggest private broadcaster and its largest phone group, prompting regulatory action.
The Italian communications watchdog ruled Vivendi's twin stakes broke rules designed to prevent a concentration of power in the telecoms and media sectors and ordered it to reduce one of its stakes to below 10 percent. To comply, Vivendi transferred most of its voting rights in Mediaset into an arms-length trust.
However, the European Commission's legal advice argues that the Italian law conflicts with the EU's rule on freedom of capital movement and the freedom to carry out business activities anywhere in the EU.
If the watchdog's decision is overturned and Vivendi recovers its full voting rights in Mediaset, it could complicate plans by Mediaset's controlling shareholder, the family of former prime minister Silvio Berlusconi, to tighten control of the group.
The European Commission's lawyers gave their opinion to the European Court of Justice which has been asked for a ruling on the matter.
In an emailed statement to Reuters, a commission spokeswoman said its role was not to take sides but to give independent legal advice to the court on how to interpret applicable EU law.
Mediaset and Vivendi declined to comment.
Lawyers for the Italian government have advised the ECJ that the Italian law is consistent with EU rules, according to a separate document viewed by Reuters.
The Italian state lawyer's office did not immediately respond to a phone call seeking comment.
The European court is expected to hand down its decision early next year, two sources familiar with the case said.
Vivendi, led by French billionaire Vincent Bollore, had appealed against Italian watchdog AGCOM's decision to an Italian administrative court which in turn turned to the European Court.