Clifford Chance (CC) and Freshfields Bruckhaus Deringer have advised Volkswagen and Porsche as the two European car icons took the first step in creating a combined company that could challenge Toyota's dominance in global auto sales.

Under the terms of the new merger agreement, VW will initially spend $4.7bn (£2.9bn) to acquire a 42% stake in Porsche as the first step in a long-term combination that will be finalised by 2011. Volkswagen will issue new stock in 2010 to fund that purchase.

CC corporate partners Wolfgang Richter and Johannes Perlitt led the magic circle firm's team on the deal, while Freshfields corporate partners Christoph von Bulow and Thomas Buecker headed up the team advising Porsche.

The two firms have been guiding the car companies through a process that began in 2005, when Porsche (advised by its longstanding counsel at Freshfields) began acquiring shares of Volkswagen in an attempt to take over VW.

Porsche eventually acquired 51% of outstanding VW shares and planned to acquire 75%. But Porsche took on $14bn (£8.6bn) in debt, a burden which proved to be too much. By the spring, Porsche's preferred stockholders would no longer sign off on additional purchases of VW stock, and the sports car maker gave up its plan to acquire VW.

The two companies will also reach out to Qatar's state-run investment fund, which plans to take a 17% stake in the combined company, according to statements the auto makers released on Friday (14 August). Lower Saxony, the German state that holds a 20% stake in VW, will retain that stake as well as the power to block certain business decisions VW makes.

This article first appeared on The Am Law Daily blog on americanlawyer.com.