Last Friday (8 May 2020) the EU Commission issued a new communication setting out the conditions under which EU Member States can inject capital in companies in need (the “Recapitalisation Measures”).

This announcement constitutes the 2^nd Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (which we reported here (“Temporary Framework”) and here (“1^st Amendment”) and aims to avoid insolvencies in mass of what would have been, absent COVID-19, viable businesses.

This scheme is however not open to companies which were already “in difficulty” on 31 December 2019 (covering companies “where more than half of [their] subscribed share capital has disappeared as a result of accumulated losses”) and therefore does not apply to (1) private equity-backed start-ups which are not yet making a profit and (2) business relying predominantly on equity or long-term debt financing to operate.

The announced Recapitalisation Measures include:

• Equity instruments such as the issuance of new common or preferred shares;
• Hybrid capital instruments such as profit participation rights, silent participations and convertible secured or unsecured bonds; or
• Any variation of the above instruments, or a combination of equity and hybrid capital instruments.

These measures are designed to be used strictly as (1) a last-resort support for non-financial businesses, (2) in the brink of very serious financial difficulties, and (3) will be approved by the EU Commission only where there is an interest for the State to intervene for such beneficiary – for example to avoid “social hardship” and “market failure”, or any risk of exit of an “innovative” or “systemically important” companies (e.g., pharma/healthcare companies), or “disruption of important services” (e.g., transport).

The measures are accompanied by a set of safeguards primarily aimed at preventing any distortion of competition which could otherwise be caused. These safeguards include:

• Value: any capital injection (or equivalent intervention) shall not exceed the average share price of the beneficiary in the 15 days before the request. If the beneficiary is not a publicly listed company, an estimate of its market value should be independently established;
• Proportionality: the amount of the recapitalisation (1) must not exceed the minimum needed to ensure viability of the business and (2) should not go beyond restoring the capital structure predating the COVID-19 outbreak (i.e., the situation on 31 December 2019);
• Remuneration: the State must be sufficiently remunerated for the risks it assumes through the recapitalisation aid and its remuneration must be sufficiently high to incentivise the beneficiary to redeem the recapitalisation aid and look for alternative capital;
• Acquisition ban: until 75% of the recapitalisation is redeemed, beneficiaries will be in principle prevented from acquiring a stake of more than 10% in competitors or operators in “the same line of business, including upstream and downstream operations”. This restriction can be waived by the EU Commission and does not apply to SMEs;
• Commercial policy: beneficiaries must not engage in aggressive commercial expansion financed by State aid or taking excessive risks. Specific rules apply to beneficiaries of aid exceeding EUR250 million and holding significant market power;
• No advertising of the measures: beneficiaries will be prohibited from advertising the aid for commercial purposes;
• No cross-subsidisation: beneficiaries will not be allowed to use the aid to support economic activities of integrated companies that were in economic difficulties prior to 31 December 2019;
• Governance: beneficiaries will be subject to bans on dividends and share buybacks and limitations on the remuneration of their management (including a ban on bonus payments);
• Information obligation: each 12 months the beneficiary must publish information on the use of the aid received;
• Exit: the recapitalisation amount should be gradually redeemed by the beneficiary as soon the economy stabilises, however: (1) EU Member States will reserve their rights sell at any time their equity stake at market price to purchasers other than the beneficiary and (2) the beneficiary should have at any time the possibility to buy back the equity stake that the State has acquired. In any event, for any recapitalisation above 25%, beneficiaries (other than SMEs) must demonstrate a credible exit strategy within 12 months after the aid is granted and, if six years after the recapitalisation the State’s intervention has not been reduced below 15% of equity, a restructuring plan must be notified to the EU Commission for approval;
• Timing: the provisions relating to recapitalisation will be applied until 1 July 2021 (instead of 31 December 2020 for the other measures in the Temporary Framework).

In terms of practicalities, EU Member States will be able to grant recapitalisation measures under an aid scheme approved by the EU Commission only following a written request for such aid by the prospective beneficiaries, evidence of which must be provided with the notification. Separate notifications will be required for each individual recapitalisation measure exceeding EUR250 million.

We anticipate that the UK and other EU governments will make use of such Recapitalisation Measures (as they did at the time of the 2008 financial crisis). Schemes approved by the EU Commission pursuant to recapitalisation measures will be published on the EU Commission’s dedicated page.