COVID-19:European Commission expands the State Aid Temporary Framework

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Date of publication: 14 May 2020

The European Commission has expanded the State Aid Temporary Framework for the second time – how do the updated temporary measures support the economy?

Although ongoing challenges posed by COVID-19 paint a bleak economic picture, updates to certain state aid rules will now allow European Member States to provide additional support to businesses in their efforts to protect the economy.

In summary, European state aid rules continue to apply to the UK and have been updated so as to enable European Member States to provide further support measures in light of COVID-19.

Here, we provide an overview of recent updates to the State Aid Temporary Framework.

COVID-19:European Commission expands State Aid Temporary Frameork

Adapting to a new, temporary State Aid landscape

Since the coronavirus (COVID-19) outbreak earlier in the year, the European Commission (“the Commission”) has taken various helpful steps to facilitate Member States in their efforts to support the economy. These are aimed at:

Protecting health system supplies

Supporting people in terms of impacts on

income and jobs

Supporting firms and ensuring financial

sector liquidity

Allowing Member States to act ‘decisively

in coordinated way’ under the frameworks

The State Aid Temporary Framework

The Commission adopted a State Aid Temporary Framework (SATF) on 19th March 2020, to provide support to the economy in the context of COVID-19, based on Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU). The SATF was amended on 3rd April and 8th May, to allow aid to accelerate research, testing and production of COVID-19 relevant products, to preserve jobs and for further economic support.

The SATF will be in place until December 2020, with recapitalisation measures to be extended until June 2021.

Based on the rules set out in the SATF, and working closely with

Member States, the Commission has, to date, approved around €1.9 trillion1

in state aid to the EU economy.

COVID-19:European Commission expands State Aid Temporary Frameork

Remedying a serious disturbance

Article 107(3)(b) TFEU provides that the Commission may declare aid compatible with the internal market “to remedy a serious disturbance in the economy of a Member State.”

The SATF requires Member States to show that state aid measures notified to the Commission under the SATF are “necessary, appropriate and proportionate to remedy a serious disturbance” in the economy of the Member State concerned.

What kind of support is available under the expanded State Aid Temporary Framework?

The Commission recognises that the emergency measures, which Member States have had to take to address COVID-19, have affected the ability of many companies to produce goods / supply services, leading to losses that have decreased their equity and limited their ability to borrow on the markets. The SATF has therefore been expanded to allow “well-targeted” public interventions in the shape of recapitalisation aid to non-financial companies in need.

Member States can provide recapitalisation measures using two separate sets of recapitalisation instruments (which can be used in combination):

(a)

equity instruments (issuance of new common or

preferred shares)

The recapitalisation instruments and attached conditions should be appropriate to address the beneficiary’s recapitalisation needs and be the least distortive to competition.

(b)

instruments with an equity component (‘hybrid capital instruments’), in particular

profit participation rights, silent participations and convertible secured or unsecured bonds

1 From EU press release ‘State aid: Commission expands Temporary Framework to recapitalisation and subordinated debt measures to further support the economy in the context of the coronavirus outbreak’ (8 May 2020) available here.

Exit of the Member State from the capital of companies concerned:Member States and beneficiaries must prepare an ‘exit strategy’, in particular large companies

receiving substantial recapitalisation aid. The exit strategy should be endorsed by the Member State and submitted by the Member State within 12 months after aid is granted.

Slighly different rules apply as between publicly listed companies and other companies:

If the Member State’s intervention has not been reduced below 15% of the beneficiary’s equity 6 years after the recapitalisation aid has been granted, then the Commission must be notified

with a restructuring plan for approval; and

If the beneficiary is not a publicly listed company, or is an SME, the Member State may decide

to notify a restructuring plan only if the State’s intervention has not been reduced below the level of 15% of equity 7 years after the recapitalisation

aid has been granted.

Conditions / Restrictions on use of SATF

COVID-19:European Commission expands State Aid Temporary Frameork

Necessity, appropriateness and size of intervention:The SATF clarifies that this type of aid should only be granted if no other appropriate solution is available and it is in the common interest for the Member State to intervene. The aid must be limited to allowing the viability of the company and should not go beyond restoring the

beneficiary’s capital structure to before COVID-19.

The Member State’s entry in the capital of companies and remuneration:The Member State must receive sufficient remuneration for the risks assumed through the

recapitalisation aid. In addition, as the temporary nature of the Member State’s intervention should be safeguarded, the remuneration mechanism must incentivise beneficiaries to buy out

the shares acquired by the Member State, using State aid. The closer the remuneration is to market terms, the less likely there is to be potential distortion caused by the intervention.

The expanded SATF also stipulates a number of safeguards to prevent undue distortions of competition in the Single Market. These are:

(a)

(b)

(c)

Conditions / Restrictions on use of SATF (contd.)

COVID-19:European Commission expands State Aid Temporary Frameork

Governance:Beneficiaries may not benefit from dividend payments and share buybacks until after the

Member State’s exit. There is also a strict limitation as regards remuneration of management (including on bonus payments) before at least 75% of the recapitalisation has been redeemed.

Cross-subsidisation / acquisition ban: To prevent companies from unduly benefitting from recapitalisation aid and to ensure the

circumvention of fair competition, beneficiaries may not use the aid to economic activities of integrated companies that were in economic difficulties prior to 31 December 2019. Also under the SATF, beneficiaries (with the exception of SMEs) in principle are banned from acquisitions of more than 10% in competitors or other operators in the same line of business until at least

75% of the recapitalisation has been redeemed.

Public transparency and reporting: Member States have to publish details of the identity of aid beneficiaries and amounts

received within three months of the recapitalisation. In addition, beneficiaries (except SMEs) must publish information on the use of the aid received.

Aid in the form of subordinated debt: The updated SATF also allows Member States to support undertakings facing financial

difficulties due to COVID-19 by providing subordinated debts to undertakings at favourable terms. If subordinated debt goes beyond certain specified ceilings set out in the SATF, such

subordinated debt measure should be assessed in line with the conditions for COVID-19 recapitalisation measures stipulated in the SATF to ensure equal treatment.

(d)

(e)

( f)

(g)

If you have any questions in relation to the SATF, or how MacRoberts can assist you, please get in touch with a member of our team.

Key Contacts

Duncan Osler, PartnerT: 0131 248 2115E: duncan.osler@macroberts.com

Robin Fallas, PartnerT: 0131 248 2158E: robin.fallas@macroberts.com