Sometimes recovery of unlawful State aid may require the recovery to be extended to an undertaking to which the original beneficiary has transferred or sold part of its assets. This article examines the possibilities for the purchaser to receive full indemnification in asset sale and purchase agreements in such situations.
As opposed to a penalty payment in antitrust cases, a recovery of aid is not a penalty, but rather the logical consequence of the finding that the aid is unlawful. Furthermore, the beneficiary is not considered a party to the Commission's investigation process in the same way as in antitrust investigations.
It appears from case-law that that the burden of proof with respect to whether the transaction price is to be considered the market price lies with the purchaser instead of the Commission. However, even when the purchaser is able to prove that the transaction price is to be considered the market price, it may still be possible for the Commission to extend recovery of the unlawful state aid to the purchaser if the purchased assets comprise an economical entity in its entirety and the purchaser uses them in the same way as the seller did prior to the transaction.
Warranty and indemnity clauses in an asset sale and purchase agreement providing for a full indemnification of the purchaser by the seller from any unlawful State aid recovery claims may be qualified as separate State aid measures per se, and the exercise of such clauses may be qualified as a circumvention of the recovery of unlawful and incompatible State aid.
Instead, it may be possible to limit the purchaser's risks by acquiring only part of the assets of a company that may have received unlawful State aid and integrating them into the purchaser’s business.
How is State aid regulated in the EU?
The provisions on State aid can be found in the same chapter of the Treaty on the Functioning of the European Union (“TFEU”) as the provisions on competition law. Pursuant to Article 107 (1) TFEU, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.
EU State aid rules apply if the aid measure fulfils the following four cumulative criteria:
- public resources are channelled to public or private undertakings;
- the advantage is selective, i.e. only conferred on certain undertakings;
- the measure distorts or threatens to distort competition by favouring the beneficiary; and
- the measure affects trade between EU Member States.
This assessment falls within the exclusive competence of the European Commission (“Commission”). The primary instrument to control State aids is the obligation to notify the Commission before the aid may be given to its beneficiary.
Recovery of Unlawful State aid
Although there are no rules in the TFEU stating that an incompatible aid is to be recovered from its beneficiary, it is settled case-law of the European Court of Justice (“ECJ”) that abolishing unlawful aid in accordance to Article 108 (2) TFEU by means of recovery is the logical consequence of a finding that the aid is unlawful. The main purpose of the repayment of unlawfully paid State aid is to eliminate the distortion of competition caused by the competitive advantage afforded. In this way, the beneficiary loses the unlawfully gained benefit it enjoys over its competitors.
In this context, it should be noted that unlike a penalty payment in antitrust cases, recovery of State aid is not to be considered as a sanction. Rather, the aim of the recovery is to re establish the previously existing situation. This is why the beneficiary is not considered as a party to the recovery proceedings. As competition rules are founded on fault-based liability, which is limited by, inter alia, the principle of protection of legitimate expectations, the Union Courts have given a restrictive interpretation of the principle of legal certainty in the field of State aid and accepted that recovery may be limited only in exceptional circumstances, to be assessed on a case-by-case basis.
Although the assessment of the compatibility of aid measures with the internal market falls within the exclusive competence of the Commission, it is the Member State that has given the unlawful State aid that is responsible for recovering it from the beneficiary, together with any accrued interest. As the interest is calculated from the day when the aid was made available to the beneficiary until its recovery, the interest may form a substantial part of the recovered amount if the undertaking has benefitted from the aid for a long period.
Recovery of unlawful aid is enforced under national rules and procedures. Member States are obliged to implement an immediate and effective recovery, which may be hindered only due to an absolute impossibility. In practice, recovery is impossible when the undertaking has been liquidated and no assets are recoverable. Furthermore, an effective recovery is not possible in situations where the beneficiary has ceased to exist, without a legal and economic successor. It is to be noted that recovery can, at worst, lead to the cessation of the undertaking having received the unlawful State aid. However, this is considered a permitted possibility and consequence for the sake of effective recovery and full removal of anti-competitive effects.
In some situations, a Member State may be reluctant to recover State aid that the Commission has found to be unlawful. However, the Commission can initiate infringement proceedings against that Member State, and in the past, failure to recover unlawful State aid has led to fines amounting to more than half the value of the unlawful aid.
Extension of the Recovery Order to the Purchaser
Sometimes recovery of an unlawful State aid may require the recovery to be extended to an undertaking to which the original beneficiary has transferred or sold part of its assets. The extension is possible only if it can be inferred from the structure of the deal that there is economic continuity.
The ECJ has drawn a distinction between share and assets deals. The Commission Recovery Notice  explicitly states that the sale to a third party of shares in a beneficiary of incompatible aid does not affect the obligation of the beneficiary to reimburse such aid. In an asset deal scenario, where all or part of the assets of a company are sold, following which the activity is no longer carried out by the original beneficiary, the Commission assesses the existence of economic continuity on a case-by-case basis, using an open set of non-cumulative criteria. In particular, the Commission may take into account the following five criteria:
(i) the scope of the transfer (assets and liabilities, maintenance of the workforce and/or management);
(ii) the transfer price;
(iii) the identity of the shareholders or the owners of the seller and of the purchaser;
(iv) the time at which the transfer takes place (during the preliminary investigation pursuant to Article 4 of the Procedural Regulation or the formal investigation pursuant to Article 6 of the Regulation, or after adoption of the recovery decision); or
(v) the economic logic of the operation.
It is not explicitly specified in case-law which of the above listed criteria are the most important and which are less relevant, but recent case-law enables to draw-up some conclusions.
In April 2021, the ECJ issued its ruling in the Fortischem case , in which it considered, as did the Commission and the General Court, that the recovery could have been extended to Fortischem as the purchaser. It appears that in the Fortischem case, in the assessment of economic continuity, weight is given in particular to the economic logic of the operation and the scope of transfer. In practice, this means that if the purchaser takes over all economic activities and uses the assets in the same way as the seller, there is an almost insurmountable presumption of economic continuity.
However, the transfer price, on the other hand, does not appear to be as important a criterion, since the Fortischem case seems to indicate that even a transaction at market price does not remove the possibility for an unlawful State aid to be recovered. In the context of State aid, market price is considered as the highest price that a private investor acting under normal competitive conditions is ready to pay for the company’s assets, taking into account the seller having enjoyed State aid. It also appears from the case that the burden of proof with respect to the market price lies with the purchaser instead of the Commission. If assets are not sold in an open and public tender procedure, as may often be the case, it might be extremely difficult for the purchaser to prove that the transaction was made at market price.
How can the Risk of Unlawful State aid be taken into account in Asset Deals?
Warranties and indemnities are forms of contractual protection provided by a seller in a sale and purchase agreement. In the event the target has received State aid, it is customary that the sale and purchase agreement contains a specific indemnity clause pursuant to which, in the event the Commission imposes recovery measures on the purchaser, the seller would be liable to compensate the purchaser for any accrued loss. Such a clause may be problematic in the event the seller is a publicly owned entity.
An indemnity clause was recently seen in a sale and purchase agreement concerning Finnish bus services (Helsingin Bussiliikenne), which is still pending before the General Court (T-597/19 and T-603/19). The sale transaction documents in question provided for a full indemnification of the purchaser by the seller from any State aid recovery claims. The Commission recalled that it is settled case-law that such clauses may be qualified as separate State aid measures per se, and the exercise of such clauses may be qualified as a circumvention of the recovery of unlawful and incompatible State aid. The Commission could take this approach as the seller was and still is a publicly owned entity and as such is able to grant State aids of its own.
For this reason, it seems difficult to limit the purchaser’s risks with the seller's warranties or specific indemnities, at least in cases where the seller is a publicly owned entity. Instead, it would seem possible to limit the purchaser 's risks by acquiring only part of the business of an undertaking that has received the unlawful State aid. Even in this situation it is advisable to try to ensure that that the purchase price of the purchased assets is market-based. Another way to reduce risks for the purchaser would seem to be to integrate the assets into the commercial strategy of the purchaser that was in place prior to the asset deal. In this way, it would be easier to argue that the assets are being used in a different way than how the seller was using them prior to the acquisition.