December 01
2020
Dolores Utrilla
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12th May 2020
Competition & State Aid Covid-19

Insight: “State aid and COVID-19: Further extension of the State aid Temporary Framework” by Dolores Utrilla

State aid rules are called on to play a crucial role in the fight against economic crises, as proven by the 2008 financial crisis and by the ongoing coronavirus outbreak. The relevance of State support measures to ensure continuity of companies and therefore to prevent or alleviate situations of massive bailout is indisputable. However, tailored safeguards are necessary to avoid massive capital injections being made by only certain Member States and that leading to massive distortions of competition in the internal market.

In the context of the COVID-19 crisis, EU State aid law is rapidly evolving in the form of soft law instruments purporting to allow Member States the maximum degree of flexibility under the TFEU State aid rules while preventing disproportionate distortions of competition within the single market. The main instrument for this is the State aid Temporary Framework adopted by the Commission on 19 March 2020 on the basis of Article 107(3)(b) TFEU – that allows Member States to grant support to remedy a serious disturbance to their economy.

Over the past two months, this Temporary Framework has allowed the Commission to act swiftly, authorising a considerable number of national measures to support the economy in the context of the pandemic. At the same time, the increased need of companies for public support is easing the use of State aid mechanisms to foster certain policy objectives, shared by the EU and the Member States, such as the fight against tax avoidance.

Now, the European Commission has adopted a new amendment to the State aid Temporary Framework to provide Member States with further flexibility to support the economy in the context of the coronavirus outbreak. This is the second amendment to the Temporary Framework, following the one adopted on 3 April 2020. This extension complements the existing State aid mechanisms by enabling two new forms of support, namely through (i) recapitalisation and (ii) subordinated debt measures.

(i) Aid in the form of recapitalisation

The amendment enables Member States, firstly, to adopt well-targeted public interventions in the form of recapitalisation aid to non-financial companies in need. Member States can notify recapitalisation schemes or individual aid measures. When approving a scheme, the Commission will request separate notification of aid from companies above the threshold of 250 million euros for individual assessment.

Reinforced safeguards are set up in order to avoid recapitalisation measures leading to undue distortions of competition in the single market. These include conditions on, inter alia, (i) the necessity, appropriateness and size of the intervention; (ii) the State’s entry in the capital of companies and remuneration; (iii) the State’s exit from the capital of companies; (iv) the governance of companies; and (v) public transparency and reporting.

(ii) Aid in the form of subordinated debt

The amendment also introduces the possibility for Member States to support undertakings by providing them with subordinated debt at favourable terms. This includes higher remuneration and a further limitation as to the amount compared to senior debt under the Temporary Framework. If Member States decide to provide subordinated debt in amounts exceeding the thresholds, all conditions for recapitalisation measures will apply.

The Commission has made clear that State aid in the form of equity and/or hybrid capital instruments to undertakings, as part of schemes or in specific individual cases, should be considered only if no other appropriate solution can be found, because such instruments are highly distortive for competition between undertakings. It has suggested that aid in the form of subordinated debt is a preferable tool because it is a much less distortive instrument.

At the same time, the recent amendment reveals that  a  number  of  Member  States  are  considering  taking  an  equity  stake  in  strategic companies. In this regard, the amendment notes that, if Member States purchase shares at market price or invest pari passu with private investors, ‘this normally does not constitute State aid’ (at p. 10). However, the fulfilment of the Market Economy Operator Principle will have to be analysed on a case-by-case basis to identify whether an economic advantage has been granted through these transactions, as noted by Juan Jorge Piernas López, Assistant Professor from the University of Murcia and consultant to the World Bank.

The amended Temporary Framework will be in place until the end of December 2020. In the case of recapitalisation measures, it will be applicable until the end of 2021, as solvency issues may materialise only at a later stage as this crisis evolves.

 

Dolores Utrilla is Associate Professor at the University of Castilla-La Mancha and Assistant Editor at EU Law Live.

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