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The European Commission has amended the Temporary Framework for state aid measures to support the economy in the current COVID-19 outbreak (“Temporary Framework”) for the second time, after the first amendment in early April (which we reported here and here).
The Temporary Framework sets out a series of state aid measures for companies, together with the terms for the granting of aid that the Commission will generally consider as compatible with Article 107.3.b) of the Treaty on the Functioning of the European Union (“TFEU”). This provisions of the TFEU authorizes aid measures to remedy a “serious disturbance in the economy of a Member State.”
This new amendment to the Temporary Framework, which came into effect on May 8, (i) clarifies some aspects of the original text and (ii) includes new business support mechanisms in the form of recapitalization aid and subordinated debt at favorable terms.
Among other points, this latest amendment to the Temporary Framework clarifies the aid accumulation criteria. The previous point 20 has therefore been reformulated, so it now refers to the specific rules on accumulation established for each section or type of aid. In relation to section 3.2, which regulates aid in the form of public guarantees on loans (those commonly known as “ICO loans”), the new point 24 bis provides that a single beneficiary can avail of several state-guaranteed loans, provided the overall amount of the loans per beneficiary does not exceed the ceilings set out in point 25, letters d) and e).
Recapitalization aid for non-financial undertakings
The State can intervene through equity investments (particularly by issuing new shares) and hybrid instruments with an ownership component, such as profit sharing, shares without voting rights or convertible debentures (bonds).
Although the Temporary Framework will only be in effect until December 31, 2020, this aid can be granted until June 30, 2021.
Whether the aid is granted as part of a recapitalization scheme or as individual aid, there are two sets of conditions. Investments above 250 million euros will be notified and assessed separately, even if they are granted as part of a recapitalization scheme.
First, it should be the case that the beneficiary company would go out of business or face serious difficulties to maintain its operations without the State intervention. Companies already in difficulty on December 31, 2019 are expressly excluded.
Second, the State intervention must be in the common interest. This will be the case when the loss of the company’s activity causes social problems or the disappearance of innovative or highly important companies in a particular sector.
Third, it must not be possible to obtain financing at affordable terms, and the state measures to cover the company’s liquidity needs already in place must not be sufficient to ensure its viability.
Finally, for the State to provide this type of aid, the beneficiary company must expressly request it.
To avoid undue distortions of competition, aid is granted subject to the following requirements:
First, conditions on the necessity, suitability, and importance of State intervention. The Commission clarifies that recapitalization instruments should only be used when there are no other appropriate measures to ensure the company’s viability. Aid must be proportionate, and the amount cannot exceed the minimum required to ensure the company’s viability or what is necessary to restore the beneficiary’s capital structure before the pandemic, specifically on December 31, 2019.
Second, conditions on the State’s stake in the capital of companies and for its remuneration.
The starting point is that the State’s remuneration for its investment must be as close as possible to market conditions. In listed companies, the purchase price of the shares must be aligned with the average share price in the 15 days before the company’s request. If the beneficiary is not a listed company, the share’s market value will be established by an independent expert.
To ensure that the State’s equity stake in the company is temporary, any State equity investment must be accompanied by mechanisms increasing the State’s remuneration to encourage the beneficiary to buy back the shares as soon as possible (e.g., granting the State additional shares). This mechanism must entail at least a 10% increase of the State’s remuneration for its investment.
This mechanism will be activated (i) if the State has not disposed of at least 40% of the shares acquired in the four years following its investment; and (ii) if the State has not disposed of all the shares acquired in the six years following its investment.
Third, conditions on the State’s exit from the equity of the affected companies. In addition to the mechanisms encouraging the State’s early exit, when the beneficiary is not an SME and the State has acquired an equity stake greater than 25%, the company must give the State a strategic exit plan in the 12 months after the aid is granted.
Fourth, conditions on governance. Measures are included to avoid undue distortions of competition that could occur, e.g., if the beneficiary company uses the State investment for an aggressive commercial expansion.
The beneficiary companies will not be able to distribute dividends or buy back shares from third parties other than the State until the State’s shares have been bought back. Restrictions are also established on management bodies’ remuneration, which may not exceed their fixed remuneration (therefore excluding any type of bonus) at December 31, 2019, until at last 75% of the recapitalization has been redeemed.
Cross subsidies and purchasing shares in rival companies are prohibited. To ensure the beneficiaries do not unduly profit from the recapitalization aid granted by States, they may not use this aid to support economic activities of integrated undertakings that were in economic difficulties before December 31, 2019 and that, therefore, are not in themselves eligible beneficiaries. Furthermore, until at least 75% of the recapitalization is redeemed, beneficiaries other than SMEs cannot acquire a stake of over 10% in rivals or other operators in the same line of business or other vertically related activities.
Specific transparency obligations
If the recapitalization aid is granted to beneficiaries in schemes, Member States will have to publish the identity of the companies that have received aid and the corresponding amounts within three months of the recapitalization. Moreover, beneficiaries other than SMEs must publish information on their use of the aid.
Aid to companies in the form of subordinated debt
Section 3.3 of the Temporary Framework, on aid in the form of subsidized interest rates, is amended to include the possibility of granting aid in the form of subordinated debt instruments.
These are debt instruments subordinated to ordinary senior creditors in case of insolvency proceedings, and they supplement the series of tools available to Member States under the Temporary Framework, particularly to grant higher priority debt to companies that need it.
Given that this debt increases companies’ capacity to contract senior debt in a similar way to capital aid, subordinated debt aid includes higher remuneration and a new ceiling compared to senior debt under the Temporary Framework. If Member States wish to provide subordinated debt in amounts exceeding the thresholds envisaged in the amendment, the aid must be granted based on the applicable criteria for recapitalization measures presented above.
Based on the amendment text, the Commission is not ruling out a third amendment to the Temporary Framework.
Authors: Irene Moreno-Tapia and Pablo García Vázquez
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