11 May
EU recapitalisation coronavirus

Covid-19: European Commission expands temporary framework to recapitalisation aid to companies

The European Commission has adopted a second amendment to extend the scope of the State aid Temporary Framework adopted on 19 March 2020 to enable Member States to support the economy in the context of the coronavirus outbreak.

This follows a first amendment adopted on 3 April 2020.

Based on these horizontal rules and in close cooperation with Member States, the Commission has to-date approved an estimated €1.9 trillion in State aid to the EU economy – to provide urgently needed liquidity for companies, save jobs, enable research and development and ensure the supply of products to fight the coronavirus outbreak.

This second amendment complements the types of measures already covered by the Temporary Framework and existing State aid rules, by setting out criteria based on which Member States can provide recapitalisations and subordinated debt to companies in need, whilst protecting the level playing field in the EU.

Recapitalisation aid to companies
The emergency measures, which Member States have had to take to manage the coronavirus outbreak, have affected the ability of many European companies to produce goods or supply services, resulting in losses that have decreased their equity and reduced their ability to borrow on the markets.

This second amendment therefore expands the Temporary Framework to enable well-targeted public interventions in the form of recapitalisation aid to those non-financial companies in need, to help reduce the risk to the EU economy as a whole.

At the same time, the Temporary Framework sets a number of safeguards to avoid undue distortions of competition in the Single Market. Furthermore, Member States are free to design national measures in line with additional policy objectives, such as further enabling the green and digital transformation of their economies or preventing fraud, tax evasion or aggressive tax avoidance.

(i) Conditions on the necessity, appropriateness and size of intervention

Recapitalisation aid should only be granted if no other appropriate solution is available.

It must also be in the common interest to intervene, for example to avoid social hardship and market failure due to significant loss of employment, the exit of an innovative or a systemically important company, or the risk of disruption to an important service.

Finally, the aid must be limited to enabling the viability of the company and should not go beyond restoring the beneficiary’s capital structure to before the coronavirus outbreak.

(ii) Conditions on the State’s entry in the capital of companies and remuneration

The State must be sufficiently remunerated for the risks it assumes through the recapitalisation aid.

Moreover, the remuneration mechanism needs to incentivise beneficiaries and/or their owners to buy out the shares acquired by the State using State aid to ensure the temporary nature of the State’s intervention.

(iii) Conditions regarding the exit of the State from the capital of the companies concerned

Beneficiaries and Member States are required to develop an exit strategy, in particular as regards large companies that have received significant recapitalisation aid from the State.

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.

(iv) Conditions regarding governance

Until the State has exited in full, 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.

(v) Prohibition of cross-subsidisation and acquisition ban

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, they cannot use the aid to support economic activities of integrated companies that were in economic difficulties prior to 31 December 2019.

Moreover, until at least 75% of the recapitalisation is redeemed, beneficiaries, other than small and medium-sized enterprises (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.

* Under this amendment, Member States can notify recapitalisation schemes or individual aid measures.

When approving a scheme, the Commission will request the separate notification of aid to a company above the threshold of €250 million for individual assessment. Companies that were already in difficulty on 31 December 2019 are not eligible for aid under the Temporary Framework.

By: Estela Martín

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