This post is also available in: Español
On June 29, the third (and so far, last) amendment to the Temporary Framework for State aid measures to support the economy in the context of the current COVID-19 outbreak (“Temporary Framework”) entered into force.
As on previous occasions, this new amendment extends the possibilities for Member States to grant public aid, while clarifying certain unclear points of the original document.
Although the Temporary Framework was adopted under Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU), the Temporary Framework itself recognizes the possibility for Member States to compensate companies that have been particularly affected by the pandemic under Article 107(2)(b) of the TFEU. This article states that “aid repair damages caused by natural disasters or exceptional occurrences” will be considered compatible with the internal market.
With this amendment the Commission clarifies that aid granted under Article 107(2)(b) of the Treaty must be intended to compensate for damages caused directly by the COVID-19 outbreak, such as those arising from the quarantine measures precluding the company from carrying out its economic activity. However, other aid measures generally granted to mitigate the economic impact of COVID-19 must be assessed in light of the Temporary Framework.
It also expressly states that aid granted under the Temporary Framework cannot be conditional on the beneficiary relocating production from another Member State to the territory of the State granting the aid.
Relaxation of the Temporary Framework for granting aid to micro and small companies
One of the main requirements that all companies had to meet to qualify for State aid under the Temporary Framework was that they were not already in difficulty before the COVID-19 outbreak, i.e., at December 31, 2019.
This third amendment allows aid to be granted to micro and small companies (those with fewer than 50 employees and an annual turnover below EUR 10 million) even if they were already in difficulty before December 31, 2019, provided that these companies: (i) are not subject to a collective insolvency procedure under domestic law, (ii) do not have to repay any rescue aid, and (iii) are not yet subject to a restructuring plan if they have received restructuring aid.
The Commission considers that the exception is justified by the limited risk of distortion of competition that the State aid granted to these companies represents for the internal market, given their small size and limited involvement in cross-border transactions.
Incentives for private recapitalization
The second amendment to the Temporary Framework introduced the possibility for Member States to contribute to the recapitalization of non-financial companies that had been affected by the pandemic, mainly through State participation in the share capital of these companies.
New measures are now introduced to encourage private investors to take the lead in the recapitalization of companies, so that this takes place under actual market conditions and depends as little as possible on public involvement in the company.
In particular, if the Member State grants aid for recapitalization, but private investors make a significant contribution to the capital increase (with at least 30% of the new equity injected) under the same conditions applicable to the State, the acquisition ban of more than 10% in competing companies and the cap on the remuneration of management as a result of the State’s involvement in the equity are limited to three years. In addition, the ban on distributing dividends to the holders of these new shares and to the existing shareholders is lifted, provided that the total interest of the holders of the existing shares is diluted to below 10% in the company.
Finally, where the above conditions for the participation of private investors in the capital increase are met, and the State was already a shareholder before the recapitalization aid was granted and invests pro rata in its existing shares, no specific conditions for the State’s exit will be imposed.
It should be noted that the Temporary Framework itself indicates that the Commission may review this instrument at any time during its validity (i.e., until December 31, 2020); therefore, the Commission is expected to continue to introduce new amendments depending as the pandemic evolves.
The following link will take you to the current consolidated version of the Temporary Framework.
Authors: Irene Moreno-Tapia and Pablo García Vázquez
This post is also available in: Español