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:

  1. The long-term viability of the company is restored without further State support;
  2. The distortions of competition induced by the State support are addressed by specific and adequate measures11 to minimize them; and
  3. 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.

By Professor Claudio Biscaretti di Ruffia and Ada Villa.