In its recent judgment in Land Burgenland (Joined Cases C-214/12 P, C-215/12 P and C-223/12 P) the Court of Justice of the European Union has confirmed that State aid granted to an undertaking in the past must not be taken into account in the context of the Market Economy Operator Principle to justify further subsidies, even if the prior aid was declared compatible with State aid rules. Public authorities and potential buyers will have to take this into account when privatising or buying publicly owned companies.

In its recent judgment in Land Burgenland (Joined Cases C-214/12 P, C-215/12 P and C-223/12 P) the Court of Justice of the European Union (CJEU) has confirmed that compatible State aid granted to an undertaking in the past must not be taken into account in the context of the Market Economy Operator Principle (MEOP) to justify further subsidies in the context of the Private Investor Test, even if the prior aid was declared compatible with State aid rules.

Background

In this case, Land Burgenland, an Austrian Province, privatised its regional bank, Bank Burgenland, via a public tender procedure.  Two bidders answered the public call for tenders: a consortium that included Austrian and Ukrainian companies and the Austrian insurance company GRAWE.  Land Burgenland awarded Bank Burgenland to GRAWE, even though it had submitted the lower bid.  Land Burgenland argued that the award to the consortium would have increased the risk that the public authorities would have to make payments under a special form of public guarantee, previously authorised by the European Commission (Commission).  On this basis, Land Burgenland argued, the award to GRAWE was overall financially more attractive to the tendering authority.  As the authority had therefore chosen the best financial offer, Land Burgenland claimed it had acted according to the MEOP.

Under the MEOP, the behaviour of a public authority does not constitute State aid if a private market economy operator would have acted in the same way.  Specifically, the State as a vendor does not grant State aid if it maximises proceeds from the sale, in particular if it awards the property to the highest bidder in a public tender procedure.

The consortium complained to the Commission, alleging that GRAWE had been awarded illegal State aid.  The consortium argued that the authorities should have sold Bank Burgenland to the highest bidder.

Commission Decision

In 2008, the Commission decided that Austria had not acted as a private vendor because it did not sell Bank Burgenland to the highest bidder.  The Commission relied on the offer submitted by the consortium to determine the market price of Bank Burgenland.  It did not take into account existing market studies or the cost savings incurred due to the avoidance of the public guarantee.  The Commission therefore ordered the recovery of the illegal aids making up the difference between the two bids.

The EU General Court dismissed an appeal against the Commission’s decision on all grounds and the CJEU has now upheld the General Court’s judgment.  The CJEU found that prior State aid could not be taken into account by a public authority acting as a vendor in order to justify its behaviour under the MEOP.  The CJEU held that there must be a clear distinction between the position of the State as the shareholder that sells a company, and the position of the State as a public authority.  Under the MEOP, only the position of the State as a shareholder/vendor can be taken into account.   The payment risk under the guarantee, although it constituted compatible State aid, did not concern the State as a shareholder, but it did concern the State as a public authority. This risk could therefore not be taken into account in order to offset the lower bid by GRAWE, even if the award to the consortium would indeed have increased the overall financial exposure of the State.

The CJEU further confirmed that, in the situation where a public authority proceeds to sell a publicly owned undertaking by way of an open, transparent and unconditional tender procedure, the highest offer can be presumed to constitute the market price.  Other methods, such as market studies, cannot be taken into account.

To avoid any confusion, it should be noted however that in cases where the State sells a shareholding or asset without a public tender, market studies can still be relied upon to prove that the sale occurred at market price and therefore does not amount to State aid for the acquirer.

Comment

The CJEU’s judgment is in line with previous case law.  It does, however, lead to the somewhat surprising result that the underlying Commission decision restricts public authorities’ ability to choose the most advantageous offer, and may lead to a situation in which the State—in the name of maximising proceeds from the sale—has to choose the offer that leads to higher financial exposure.

It should also be noted that incompatible State aid cannot be taken into account in the context of the MEOP.  In contrast, where additional financial exposure of the State stems from a measure that does not constitute State aid, e.g., a State guarantee that does fulfill the criteria of the MEOP and therefore does not amount to State aid, the State arguably can take this additional exposure into account because it concerns the State not as a public authority, but as a market participant.

These principles will have to be taken into account by investors and public authorities alike in all privatisations of public undertakings (via share or asset deals) in the European Union.