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European Union: Commission Adopts Second Amendment to Temporary Framework for State Aid Measures to Support Member States’ Economies during COVID-19 Outbreak

(June 3, 2020) On May 8, 2020, the European Commission adopted a second amendment to extend the scope of the Temporary Framework for State Aid Measures to include recapitalization measures and subordinated debt. The Temporary Framework was first adopted on March 19, 2020, allowing a variety of state aid measures otherwise incompatible with European Union (EU) state aid rules in order to support the EU economy during the current COVID-19 outbreak. This amendment, which follows a first amendment adopted on April 3, 2020, allows member states to provide recapitalization aid to companies in need. Although the Temporary Framework will remain in effect only until December 31, 2020, recapitalization aid will be available until June 30, 2021. (Second amend. para. 48.)

Background

Under the Temporary Framework, member states can put in place a variety of temporary state aid measures, relying on article 107 paragraph 3(b) of the Treaty on the Functioning of the EU. The Temporary Framework complements other possibilities available to member states in line with the EU state aid rules. For example, the Commission acknowledged the COVID-19 outbreak as an “exceptional occurrence” within the meaning of article 107, para 2(b) of the TFEU in its decision of March 12, 2020, responding to the notification by Denmark about the grant of state aid. Since March 2020, the Commission has approved numerous state aid measures under article 107, paragraph 2(b), article 107, paragraph 3(b), and the Temporary Framework.

Aid in the Form of Recapitalization

The suspension of economic activity resulted in a decrease in equity for many companies. Recapitalization aid provides equity and/or hybrid capital instruments to nonfinancial companies that were otherwise viable before the COVID-19 outbreak. (Second amend. para. 37.) Recapitalization aid must be an instrument of last resort and must not exceed the required minimum to ensure viability and to restore the capital structure of the receiving company to its pre-COVID-19 level. (Paras. 6–7; 37, points 44–45, 54.) A number of stringent conditions and governance measures are established to ensure that the aid does not cause distortion of competition and that the receiving company buys back the shares bought by the state as swiftly as possible. (Para. 37, points 49–85.)

Conditions for Receiving Recapitalization Aid

The following conditions must be met for a company to receive recapitalization aid:

  • The company was not in financial difficulty (within the meaning of article 2, paragraph 18 of the General Block Exemption Regulation) on December 31, 2019.
  • The company would go out of business without the aid.
  • The company has not been able to find financing on the market.
  • The intervention is necessary for “the common interest”—for example, to avoid social hardship and market failure due to significant loss of employment. (Para. 37, point 49.)

Following a written request by the company, the member state can grant recapitalization aid on approval by the Commission. (Para. 37, points 50, 52–53.)

The member state must be appropriately remunerated for its investment, and the receiving company must have sufficient time to redeem its shares. In order to incentivize the company to buy back its shares, “a step-up” redemption mechanism must be set up, whereby the remuneration is increased over time. (Para. 37, points 55–58, 61–70.)

The receiving company must present an exit strategy to the member state within 12 months of receiving recapitalization aid in which it lays out the intended use of the aid and provides a repayment schedule. (Para. 37, points 79–82.) The member state must report to the Commission whether the company is complying with the repayment schedule and governance measures. If the state’s intervention is not reduced to 15% of the shares within six years of receiving the aid for public companies or seven years for private companies, the Commission must approve a new restructuring plan. (Para. 37, points 84–85.)

Governance Measures

The receiving company is prohibited from engaging in aggressive economic activities, such as undertaking aggressive and excessively risky commercial expansion, advertising for commercial purposes that it has received the aid, and cross-subsidizing economic activities of integrated companies that were already in financial difficulty on December 31, 2019. Until the recapitalization measure is fully redeemed by the receiving company, it cannot make dividend payments or buy back shares other than those bought by the state. Until at least 75% of the recapitalization measure is redeemed, the remuneration of the management at the receiving company cannot be increased; no bonuses can be paid out; and the companies, with the exception of small- and medium-sized enterprises, can acquire no more than a 10% stake in their competitors in the same line of business. (Second amend. para. 37, points 71–78.)

Large companies are also required to report on the ways in which they have utilized the recapitalization aid in accordance with the EU’s objectives for green and digital transformations, including the objective of “climate neutrality by 2050.” (Paras. 9–10; 37, points 44, 83.)

Aid in the Form of Subordinated Debt

In the second amendment, the Commission also introduces the possibility of providing subordinated debt at reduced interest rates to companies in need. Even though subordinated debt cannot be converted to equity while the company is still in financial difficulty, it increases the borrowing capacity of the company. Aid in the form of subordinated debt must fulfill the conditions for debt instruments set out in section 3.3 of the Temporary Framework, which concerns aid in the form of subsidized interest rates for loans. If the amount of granted subordinated debt exceeds the amounts set out in that section, it would be subject to the same safeguard measures established for recapitalization measures. (Temporary Framework paras. 27 (d), 27(bis); second amend. paras. 11, 28–32.)

Other Amendments

Lastly, the second amendment makes clerical modifications and additional clarifications for state aid measures in

  • section 3.1 (limited amounts of aid),
  • section 3.2 (aid in the form of guarantees on loans),
  • section 3.3 (aid in the form of subsidized interest rates for loans),
  • section 3.4 (aid in the form of guarantees and loans channeled through credit institutions or other financial institutions), and
  • section 3.7 (investment aid for testing and upscaling infrastructures) of the Temporary Framework. (Second amend. paras. 17–36.)

Prepared by Zeynep Timocin Cantekin, Law Library intern, under the supervision of Jenny Gesley, Foreign Law Specialist.