COVID-19 update: second amendment of State aid Temporary Framework

In the wake of the publication of the Temporary Framework (see our article of 20 March 2020), the European Commission and the EFTA Surveillance Authority have adopted an impressive number of decisions in application of the Temporary Framework and continue to adopt such decisions on almost a daily basis. The status as of 8 May 2020 can be found here for the European Commission and for the EFTA Surveillance Authority.

On 8 May 2020, after extensive consultation with the Member States, the European Commission adopted a second amendment to the Temporary Framework. In addition to various minor changes (such as adding the option for subordinated loans in the context of subsidised interest rates for loans), the Temporary Framework now also covers public support in the form of equity and/or hybrid capital instruments to undertakings facing financial difficulties due to the COVID-19 outbreak. While the existing rules on direct grants and loans already covered such public support to a certain extent – as explicitly confirmed by the European Commission in in its decision of 11 April approving a German State aid scheme – the amendment was found to be necessary as the cap of €800.000 was considered too low.

In view of the potential significant impact on competition, recapitalisation is seen as an option of last resort, which is only available subject to stringent conditions. The most notable conditions are as follows:

• Recapitalisations should not exceed the minimum needed to ensure the
  viability of the beneficiary, and should not go beyond restoring the
  capital structure of the beneficiary to the one predating the
  COVID-19 outbreak. It is not available to companies which were
  already in difficulty at the end of 2019.

• Recapitalisations should be subject to clear conditions as regards:

  • the State’s entry, including the need for a prior written request by
    the beneficiary;

  • adequate remuneration of the State (different conditions apply for
    equity and for hybrid capital instruments);

  • governance: recapitalisation must be subject to restrictions on the
    remuneration of management, dividend payments and share buyback
    schemes; in addition, there are restrictions on acquisitions and
    cross-subsidisation is prohibited; Member States must also intervene
    to prevent anti-competitive behaviour by the beneficiary;

  • exit from the equity of the undertakings concerned (which needs to
    occur when the economy stabilises), including (i) the need for
    increasing remuneration of the State to incentivize the undertakings
    concerned to look for alternative sources of capital and (ii) the
    need for certain undertakings to demonstrate a credible exit strategy
    for the participation of the Member State.

    Until exit, non-SMEs will be required to periodically publish
    information on the use of the aid received in particular in respect
    of the EU objectives and national obligations linked to the green and
    digital transformation (including in particular the 2050 objective of
    climate neutrality). It remains, however, the responsibility of each
    Member State to design support measures that meet the EU objectives.
    Obviously, this approach could lead to divergent standards within the
    EU, resulting in distortions of competition.

    After six years, absent a reduction of the stake below 15%, a
    restructuring plan will need to be submitted to the European
    Commission in accordance with the Rescue and Restructuring
    Guidelines.

We continue to closely monitor the situation. In Brussels and elsewhere in our network, we have a dedicated group of EU State aid experts able to guide companies and public authorities through the maze of EU State aid law and to assist in the procedure before the Commission.

Should you need assistance, have any further questions regarding this client alert or State aid generally, please do not hesitate to contact any of the individuals listed or your usual contact at Simmons & Simmons.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.