Prepared by Manfredi de Vita, Andrea Lensi Orlandi, Flavia Caltagirone and Silvia Riga
One month after the first publishing (analysed with our previous newsalert dated April 14, “State Aids Temporary Framework relating to current COVID-19 outbreak”), the European Commission issued an “Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak” on recapitalization measures.
Unlike the State aid measures covered by the Temporary Framework so far, recapitalisation interventions with public funds are certainly more intrusive and, therefore, may have major impacts on the competitive structure of the markets.
Consequently, the text adopted by the Commission seeks a point of balance between different needs: (i) to allow Member States to rapidly intervene in favour of most at risk undertakings and whose failure would have systemic consequences for the economy; (ii) to ensure a high level of Commission control over the proportionality of the aid; (iii) to guarantee that recapitalisations are temporary in order to avoid long-term competitive distortions in the internal market.
Therefore, the Commission stated that providing national public support to undertakings facing financial difficulties due to the outbreak should only be taken into account if no other appropriate solution can be found, provided that clear conditions as regards the State’s entry, remuneration and exit from the undertakings concerned shall be set.
The Commission also took care to the green transition and the digital transformation that will play a central and priority role in ensuring a successful recovery.
In this respect, steps taken by Member States to meet these purposes will be welcome, also because such measures, implemented at a national level, will permit to realise EU’s policy objectives.
Within this background, the Temporary Framework focused on the following aspects regarding recapitalisations measures:
Beneficiaries
New measures do not consider any thresholds with regard to the beneficiary undertaking. However, the beneficiary shall fulfil following four cumulative criteria:
- without aid, the undertaking would be either doomed to bankruptcy or would no longer be able to keep its business alive;
- its failure would cause negative social or employment consequences;
- the beneficiary is unable to find adequate financial resources on market; and
- the beneficiary was not in difficulty as at December 31, 2019.
Notification and monitoring activity by the Commission
Each measure shall be approved by the Commission after notification of the relevant scheme by Member States.
Cumulatively, an individual notification threshold equal to Euro 250 million is set.
In other words, beneath this threshold the requested aid shall be based on a “one-off” notification scheme, which will be particularly relevant for the possible “horizontal” rescue of entire business sectors with a high number of SMEs.
Recapitalization measures
Recapitalisation instruments at disposal of Member States as suggested within the Communication are:
- capital instrument (issuing new ordinary or preferred shares) and/or
- hybrid capital instruments (undertaking profit-sharing, holdings with non-voting or limited liability rights, covered and unsecured convertible bonds).
These instruments shall be equally applicable, either separately or in combination.
Importance and proportionality of public intervention
In light of their high distortive impact on the market, recapitalisations shall be allowed only after demonstrating that no other form of State aid would be equally effective.
Although no maximum aid threshold has been set – either in percentage or in figure terms – public intervention shall be limited to restore pre-crisis level of capitalisation of the beneficiary undertaking, in line with the business situation as at December 31, 2019.
Remuneration and State exit from equity
Public investments shall be properly remunerated and the recapitalisation reimbursed by the beneficiary upon re-establishment of economy.
A step-up mechanism shall also be included in order to provide an incentive for the beneficiary undertaking or its shareholders to repurchase shares, so to assure temporary nature of public intervention.
Furthermore, incentive system – consisting of automatic allocation of shares, distribution of profits, issuance of hybrid or alternative instruments – will come into operation within three years of the intervention.
Ban on cross-subsidisation, on acquisitions and timing of intervention and exit strategy
Recapitalisations shall not be used to carry out intra-group transfers or to acquire other undertakings.
Moreover, recapitalisations shall be allowed up to June 30, 2021 (six months longer than Commission’s original framework).
Should public participation not have fallen below 15% within six years after the intervention, a restructuring plan shall be notified to the Commission pursuant to “Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficult”. The recapitalization measures covered by the Temporary Framework shall, in any case, be carried out by July 1, 2021.
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