Introduction: the New Guidelines in the Context of the State Aid Modernization Program

The European Commission (the Commission) has recently completed the review process of its guidelines on assessing Member States’ support measures to rescue and restructure companies in difficulty¹. The review of the rescue and restructuring guidelines is a key element of the Commission’s State aid modernization program, which is part of a more comprehensive coordination of national economic policies to achieve the common objective of continued, inclusive and sustainable growth of Member States and to rationalize their public spending.

In furtherance of this effort, on May 8, 2012, the Commission adopted a Communication on State aid modernization², setting out an ambitious State aid reform program aimed at three main goals, as follows.

First, the Commission proposal seeks to identify common principles needed for assessing the compatibility of aid with the internal market. State aid control shall support sustainable growth of the Member States and contribute to improving the quality of public spending by discouraging aid that does not bring real added value and distorts competition. To this purpose, the Commission has revised and streamlined some existing State aid guidelines, including guidelines for the rescue and restructuring of firms, to make such texts consistent with those common principles³.

Second, the Commission wants to strengthen its enforcement activities with respect to the most significant cases relating to the internal market, in order to obtain a deeper ex ante scrutiny of large and potentially distortive aid, as well as perform enquiries by sector across Member States.

Finally, the Commission intends to streamline the rules to allow a faster decision-making process in the field of State aid. In particular, regulations have to be revised; the notion of State aid needs to be clarified, and the Procedural Regulation has to be modernized with regard to complaint-handling and to introduce market information tools and sector enquiries in State aid.

Genesis of Rescue and Restructuring State Aid Guidelines

On July 9, 2014, the Commission adopted the new guidelines on State aid for rescuing and restructuring firms in difficulty (the New Guidelines) after a consultation on draft guidelines launched Nov. 5, 2013. The New Guidelines, entered into force Aug. 1, 2014, will apply until Dec. 31, 2020, replacing a set of rules on rescue and restructuring of companies that have been in force since the 1990’s.

In fact, the original guidelines on the subject matter were adopted by the Commission in 1994⁴. In 1999, the Commission issued an amended version of the guidelines⁵. Then, in 2004, a further version of the guidelines followed⁶.

The revision of the 2004 guidelines, which were originally due to expire in 2009, was postponed a number of times⁷ as a result of the financial crisis, during which the Commission applied a special rescue and restructuring regime for the financial sector⁸. The initial idea consisted of adopting new rescue and restructuring rules applicable to both the financial sector and the real economy. In the end, the New Guidelines only apply to non-financial firms in difficulty.

However, the New Guidelines drew on all of that work, as well as on the basis of the Commission’s experience in applying the pre-existing rules and in assessing rescue and restructuring aid for banks during the crisis. As a consequence, the Commission has considerably tightened the conditions under which rescue and restructuring aid may be approved under the New Guidelines.

Basic Principles of the New Guidelines

The New Guidelines define the criteria for Member States, in line with EU State aid rules, for granting public funding to companies in financial difficulty.

Specifically, in the New Guidelines the Commission sets out the conditions under which State aid for rescuing and restructuring non-financial undertakings in difficulty may be considered to be compatible with the internal market, on the basis of Article 107(3)(c) of the Treaty on the Functioning of the European Union (TFEU)⁹.

First of all, it must be pointed out that in the New Guidelines some key principles of the 2004 guidelines remained unchanged. In particular, the New Guidelines confirm the so-called “rescue aid” to companies undergoing financial difficulties, to allow them to stay in business for long enough to prepare a restructuring plan. Rescue aid may be granted temporarily for a maximum duration of six months¹⁰.

Beyond such period either the aid must be reimbursed or a detailed restructuring plan must be notified to the Commission for the aid to be approved as “restructuring aid.” Restructuring aid aims at supporting a firm’s restructuring and it can be granted for a longer period, but only once over a period of ten years, to prevent companies that are not viable from being kept artificially alive through public support. The plan must ensure that:

(i) The long-term viability of the company is restored without further State support;
(ii) The distortions of competition induced by the State support are addressed by specific and adequate measures¹¹ to minimize them; and
(iii) The company contributes to the costs of restructuring, bearing a sufficient proportion of the costs of its restructuring.

Key Novelties Introduced in the New Guidelines

The guidelines of 2004 focused mainly on ensuring that when aid was granted measures were taken to minimize distortions of competition, whereas the New Guidelines include “filters” designed to check that aid is truly in the public interest to avoid the useless waste of taxpayers’ money.

First, Member States must demonstrate that the aid is necessary to pursue an objective of common interest, such as the need to prevent hardship or address market failures¹². Second, Member States have to present a comparison with a credible alternative scenario not involving State aid¹³.

In addition, the New Guidelines introduce a new concept of temporary restructuring support for small and medium enterprises (SMEs)¹⁴, specifically designed to simplify the granting of State funding for restructuring, while reducing distortions of competition by favoring measures that are less distortive, such as loans and guarantees, over structural aid, such as direct grants or capital injections.

This is a change from the 2004 guidelines under which all forms of restructuring aid were treated alike¹⁵ and, as noted above, rescue aid could be granted temporarily for a period of up to six months, giving the company the necessary time to prepare a restructuring plan. Beyond this period, the aid either would have to be reimbursed or a restructuring plan notified to the Commission for the aid to be approved as restructuring aid.

Now, SMEs that need such support can obtain it on the basis of a simplified restructuring plan for a maximum of 18 months. Up to six months of that support can be in the form of rescue aid, which simply needs to meet certain basic conditions¹⁶. After the end of the six-month period, the recipient of such support must submit a simplified restructuring plan to continue to receive temporary restructuring support. In the simplified plan, the recipient must explain how the aid is intended to be used to achieve long-term viability, but it is not required to provide information on its own contribution or measures to limit distortions of competition¹⁷.

Among the useful concepts and clarifications contained in the New Guidelines, is the simplification concerning “undertakings in difficulty.” This definition has been significantly simplified in comparison to the 2004 guidelines by removing any subjective elements and replacing them with objective criteria linked to financial ratios to assess the health of a company¹⁸.

Finally, to ensure that aid is used to maintain viable economic activity and jobs and not to bail out shareholders, the Commission has refined the concept of “burden sharing.”¹⁹ The New Guidelines require that the stakeholders²⁰ of companies that receive aid contribute to the costs of restructuring. Specifically, company investors will be primarily responsible for covering incurred losses before any State aid is granted and the State²¹ will receive a fair share of any future gains if the restructuring plan succeeds. With respect to the nature of the contribution, the New Guidelines also now require that the company’s own contribution be similar to that of the State aid²². As a result, taxpayers’ costs are reduced and the company may obtain a better outcome by ensuring that private investors are committed to its future.

Practical Implications and Conclusions

The main practical implication of the New Guidelines consists of making it more difficult for companies to be eligible for rescue and restructuring aid and to comply with the compatibility criteria for Commission approval.

However, it is worth mentioning that, in exceptional cases, to simplify the process of granting small amounts of aid to companies in difficulty, the New Guidelines allow Member States to set up aid schemes. Once a scheme has been approved by the Commission, grants of aid to individual companies do not need to be authorized in advance, provided they meet the conditions of the scheme. The New Guidelines make clear that schemes are the best way to grant aid to SMEs.

The New Guidelines apply to all non-financial firms, except to those operating in the steel or coal sector and without prejudice to specific rules concerning undertakings in difficulty in particular sectors²³. The Commission also will apply the New Guidelines to the fisheries and aquaculture sector, as well as to the agriculture sector, including the primary agricultural production sector²⁴.

The Commission will make aid assessments under the New Guidelines with respect to notifications regarding companies in difficulty made after Aug. 1, 2014. All notifications made before such date will be assessed under the 2004 rules, even if the Commission reaches a decision after the date that the New Guidelines entered into force.

Finally, the Member States will have now a six-month time limit to bring any existing rescue and restructuring aid schemes into compliance with the New Guidelines.

This article was written with contributions from By Professor Claudio Biscaretti di Ruffia and Ada Villa.

_{1 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.7.2014, p. 1 ff. For more general information regarding the next changes in the State aid rules, see SANTA MARIA, European Economic Law, 3rd Ed., Kluwer Law International, 2014, p. 470 ff.}  

_{2 Communication from the Commission – EU State Aid Modernization, COM (2012) 209 final.}  

_{3 See, in particular, Regional Aid Guidelines, adopted June 19, 2013; Research & Development & Innovation Framework, adopted May 21, 2014; Draft Commission Guidelines for State aid in the agriculture and forestry sector and in rural areas 2014 to 2020 and New draft Block Exemption Regulation for the agriculture and forestry sector and for rural areas; Environmental and Energy aid Guidelines, adopted April 9, 2014; Communication from the Commission concerning the Criteria for the analysis of the compatibility with the internal Market of State aid to promote the execution of important projects of Common European interests, published June 20, 2014; Risk Finance Guidelines, adopted Jan. 15, 2014; Broadband Guidelines, adopted on Dec. 18, 2012; Aviation Guidelines, adopted Feb. 20, 2014.}  

_{4 Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 368, 23.12.1994, p. 12. On this matter see BISCARETTI DI RUFFIA, State Aid and Insolvency Proceedings, in SANTA MARIA (Ed.), Competition and State Aid. An Analysis of the EC Practice, Kluwer Law International, 2007, p. 123 ff.}  

_{5 Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 288, 9.10.1999, p. 2.}  

_{6 Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 244, 1.10.2004, p. 2.}  

_{7 First, until Oct. 9, 2012, (see Commission Communication concerning the prolongation of the Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 156, 9.07.2009, p. 3) and subsequently, until their replacement by new ones (see IP/12/1042 and Commission communication concerning the prolongation of the application of the Community guidelines on State aid for rescuing and restructuring firms in difficulty of Oct. 1, 2004, OJ C 296, 2.10.2012, p. 3), in order to avoid pre-empting the discussions on State aid modernization (see IP/12/458 and the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on EU State aid modernization program of May 8, 2012, COM(2012) 209 final).}  

 _{8 The revision also takes into account either the “Europe 2020 strategy” adopted by the Commission (Communication from the Commission: EUROPE 2020 - A strategy for smart, sustainable and inclusive growth, COM(2010) 2020 final) and the fact that the negative effects of State aid might interfere with the need to boost productivity and growth, preserve equal opportunities for undertakings and combat national protectionism.}  

 _{9 For a criticism of the extensive application of Article 107 TFEU by the Commission in respect of State aid schemes, see SANTA MARIA, European, cit., p. 470 ff.}  

 _{10 See BISCARETTI DI RUFFIA, State Aid, cit., p. 124.}  

 _{11 Such as asset sale or capacity reductions.}  

 _{12 The New Guidelines provide for a non-exhaustive list of situations in which aid would be justified under the cited provision: for example in areas of high unemployment where the granting of restructuring aid will reduce the scale of job losses; or where the failure of the firm would lead to irremediable loss of technical know-how.}  

 _{13 This requirement does not apply to rescue aid or temporary restructuring support.}  

 _{14 For a definition of small and medium-sized enterprises (SMEs) and an overview on State aid to SMEs, see LANDI, Exemptions from the General Incompatibility Principle under Article 87(2) and (3) of the EC Treaty, in SANTA MARIA (Ed.), Competition and State Aid, cit., p. 63-68.}   

_{15 No differences, indeed, were provided among loans, guarantees, debt waivers, capital injections and even outright cash grants.}   

_{16 For example, conditions concerning the minimum interest rate.}  

_{17 This information, instead, is required to be contained in the detailed restructuring plan.}  

 _{18 For instance, among the added criteria there are those used to evaluate whether the company burden of debt is sustainable and whether it generates enough profits to cover its interest payments.}  

 _{19 This concept was developed during the financial crisis, when burden sharing became necessary to protect the interests of taxpayers and consumers where large amounts of public money were made available to banks, and is now extended to apply to non-financial firms.}  

 _{20 Including subordinated creditors.}  

 _{21 Hence taxpayers.}  

 _{22 For example, if the State grants capital, the company must also contribute through an equity injection.}  

 _{23 See Community Guidelines on State aid for railway undertakings, OJ C 184, 22.07.2008, p. 13.} 

 _{24 "Primary agricultural production" means production of products of the soil and of stock farming, without performing any further operation changing the nature of such products.}