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On 8 May 2020, the European Commission extended the scope of the ‘Temporary Framework for State Aid measures to support the economy in the current COVID-19 outbreak’ to allow public support in the form of recapitalisation aid in favour of non-financial companies in need (both large undertakings and SMEs).
In a certain way, the latest amendment to the Temporary Framework marks a turning point in the field of State Aid law. While public recapitalisation measures in line with normal market investments do not fall within the prohibition of Article 107(1) TFUE, the European Commission has always been sceptical vis à vis public capital injections in undertakings in difficulty. This traditional approach flies somewhat in the fact of the principle of ownership neutrality provided for in Article 345 of the Treaty.
This latest amendment to the Temporary Framework introduces a number of new features as compared to the financial crisis in 2008/2009. Firstly, the Communication provides for a framework which applies across different industrial sectors and not just a measure dealing exclusively with credit institutions. On the substance the Communication sets out strict conditions concerning both the granting of aids and the remuneration for the investment.
On a closer examination, however, the conditions set by the Communication seem to be less severe compared to other existing instruments (e.g. the Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty). Moreover, the power to assess the compliance with the new provisions adopted by the Commission seems to be conferred on each Member State.
The Temporary Framework sets out a number of safeguards to avoid undue distortions of competition in the EU internal market.
The recapitalisation measure must fulfil the following conditions:
i) without the State intervention the beneficiary would go out of business or would face serious difficulties to maintain its operations;
(ii) it is in the common interest to intervene. This may relate to avoiding social hardship and market failure due to significant loss of employment, the exit of an innovative company, the exit of a systemically important company, the risk of disruption to an important service, or similar situations duly substantiated by the Member State concerned;
(iii) the beneficiary is not able to find financing on the market at affordable terms and the horizontal measures existing in the Member State concerned to cover liquidity needs are insufficient to ensure its viability.
Furthermore, the benefits cannot apply to undertakings that were already in difficulty on 31 December 2019, in line with the other provisions of the Temporary Framework.
That being said, the amended Temporary Framework will be in place until the end of December 2020. However, as solvency issues may materialise at a later stage as this crisis evolves, only for recapitalisation measures the Commission has extended this period until the end of June 2021.
Member States must notify to the EU Commission aid schemes above a threshold of €250 million for individual assessment. States shall grant COVID-19 recapitalisation measures only following a written request for such aid by the prospective beneficiary undertakings.
Member States can provide recapitalisation measures using a) equity instruments, in particular, the issuance of new common or preferred shares; and/or b) ‘hybrid capital instruments’ (in particular profit participation rights, silent participations and convertible secured or unsecured bonds).
In order to ensure the proportionality of the aid, the amount of the intervention must not exceed the minimum needed to ensure the viability of the beneficiary, without establishing, however, a maximum threshold. In any event, the Commission emphasises that the amount “should not go beyond restoring the capital structure of the beneficiary to the one predating the COVID-19 outbreak, i.e. the situation on 31 December 2019”.
The State shall receive appropriate remuneration for the investment. The recapitalisation should be redeemed when the economy stabilises. Any recapitalisation measure shall include a “step-up mechanism” increasing the remuneration of the State, to incentivise the beneficiary to buy back the State capital injections.
This increase in remuneration can take the form of additional shares granted to the State or other mechanisms, and should correspond to a minimum of 10% increase in the remuneration. Four years after the equity injection, if the State has not sold at least 40 percent of its equity participation resulting from the equity injection, the step-up mechanism will be activated. The step-up mechanism will again be activated six years after the equity injection, if the State has not sold in full its equity participation. If the beneficiary is not a publicly listed company, Member States may decide to implement each of the two steps one year later, i.e. five years and seven years after granting of the COVID-19 equity injection, respectively.
The Commission may accept alternative mechanisms, provided they lead, overall, to a similar outcome with regard to the incentive effects on the exit of the State and a similar overall impact on the State's remuneration (point 62 of the Communication).
Beneficiaries other than SMEs that have received a recapitalisation of more than 25% of equity at the moment of intervention must demonstrate a credible strategy for an exit from the participation of the Member State, unless the State’s intervention is reduced below the level of 25% of equity within 12 months from the date of the granting of the aid.
The exit strategy should be prepared and submitted to the Member State within 12 months following the granting of the aid and must be endorsed by the Member State. The exit strategy shall lay out:
If six years after recapitalisation aid to publicly listed companies, or up to seven years for other companies, the exit of the State is in doubt, a restructuring plan for the beneficiary will have to be notified to the Commission.
Beneficiaries of a recapitalisation, other than SMEs, shall provide information on how their use of the aid received supports their activities in line with EU objectives and national obligations linked to the green and digital transformation policies, including the EU objective of climate neutrality by 2050.
With regard to governance, as long as the recapitalisation measures have not been fully redeemed, beneficiaries are subject to bans on dividends and share buybacks. Moreover, until at least 75% of the recapitalisation is redeemed a strict limitation of the remuneration of their management, including a ban on bonus payments, is applied. These conditions also aim at incentivising the beneficiaries and their owners to buy out the shares owned by the State as soon as the economic situation allows.
Lastly, in order to ensure that beneficiaries do not unduly benefit from the recapitalisation aid by the State to the detriment of fair competition in the Single Market, until at least 75% of the recapitalisation is redeemed, beneficiaries, other than SMEs, are in principle prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business, including upstream and downstream operations.
The Commission emphasises that recapitalisation measures should only be considered as a last resort and encourages support granted at EU level, taking into account the EU common interest, in order to reduce the risk of distortions in the Internal Market (point 8 Communication). The Commission refers to other instruments which appear more suitable to protect strategic undertakings of the different Member States (i.e. the Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, together with the Communication of 25.3.2020 from the Commission on Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets).
In any case, the Commission’s flexibility in assessing State aid measures under the Temporary Framework appears significant as well as the scope for the States to intervene. Reference can be made to : i) the notion of “ risk of disruption to an important service, or similar situations duly substantiated by the Member State concerned” which could justify a State’s intervention in situations where there is no market failure; ii) the possibility to adopt alternative mechanisms for remuneration instead of the more severe step-up mechanisms mentioned above; iii) the absence of burden-sharing obligations by individuals, shareholders and subordinated creditors, which has constituted the leitmotiv for the review of State aid rules since 2013.
In this regard, it is important to highlight the amendment to point 7 of the Temporary Framework: if due to the COVID-19 outbreak, banks would need extraordinary public financial support it will have to be assessed whether the measure meets the conditions of a precautionary recapitalisation under the Directive 2014/59/EU (BRRD) (see Monte dei Paschi case). The Commission makes clear that, if those conditions are fulfilled, the principle of burden-sharing by shareholders and subordinated creditors will not apply.
If Member States wish to provide recapitalisation aids to their undertakings, the principles and conditions set out by the new Communication must apply. With regard to the new Italian law, soon to be published (the “Decreto Rilancio”) the Italian Government has expressed its desire to intervene in favour of large companies through the Cassa Depositi e Prestiti, through an asset set up ad hoc, (“patrimonio destinato”) without, however, precisely defining the scheme within which these measures will be adopted. For undertakings with revenues up to 50 million euro, the law provides tax credits in relation to capital injections, as well as the institution of a fund (‘Fondo Patrimonio PMI’) aimed at subscribing, before the end of 2020, bonds or debt securities, in line with the provisions of the Temporary Framework.
The Commission has, to-date, approved an estimated €1.9 trillion in State aid to the EU economy, of which more than 50% is in favour of Germany. 107 State aid measures have been approved under TFEU Article 107(3)(b). Of these, 103 measures have been approved under the Temporary Framework. The other 4 were in direct application of Article 107(3)(b), the rule of the Treaty which allows aid to remedy a serious disturbance in the economy of a Member State.
The content of this article is for information purposes only and does not constitute professional advice.
For further information, please contact Bernard O’Connor, Luca Toffoletti or Francesco Mazzocchi.
