Prolongs the Regime until 30 June 2021, Allows for Short-term Support for Uncovered Fixed Costs and Adapts Conditions for State Recapitalization Measures i
The European Commission (‘Commission’) relaxed the strict EU state aid rules and introduced a Temporary Framework (‘TF’) in March 2020 to allow Member States to address the economic consequences of the COVID-19 outbreak. To date, the Commission has approved approximately 350 national measures via 290 decisions and almost €3 trillion of potential aid.
The TF has been amended on a number of occasions in order to extend its scope and to make it more effective.ii As the EU economy continues to suffer from the on-going impact of the COVID-19 outbreak and the recovery is expected to be slow and uneven, the Commission announced a further amendment of the TF (the fourth) on 13 October 2020.
Further to this fourth amendment, the Commission:iii
(i) is prolonging the TF for an additional six months until 30 June 2021;
(ii) is substantially extending the scope of the TF to enable Member States to contribute to the fixed costs of companies that are not covered by their revenues up to a maximum amount of €3 million per ‘undertaking’;iv and
(iii) is adapting the conditions for recapitalization measures under the TF to allow the State to exit from companies where it was an existing shareholder through an independent valuation.
Extension of the Temporary Framework until mid-2021
The EU economy is expected to shrink by over 8% this year and the impact of the COVID-19 outbreak on economic activity may be more significant than anticipated, especially as countries have started to lock-down parts of their economies to prevent a surge in coronavirus cases over the winter.
The Commission’s extension of the current TF until 30 June 2021 will allow Member States to continue to support their businesses and help to limit the impact of the pandemic on their economies. In view of the temporary nature of such exceptional aid, all types of aid under the TF must be granted by 30 June 2021, except for recapitalization aid which, nonetheless, has to be granted by 30 September 2021.
The Commission is also hoping that the extension will help overcome some of the disparities caused to the Single Market by the relaxation of the EU state aid rules. The richer Member States have tended to be first off the mark in relying on the TF and account for most of the potential aid granted under the TF (Germany alone represents more than half of the potential aid approved under the TF). Extending the TF should give other EU countries the time to put in place further aid measures and help level the playing field.
Introduction of support measures for uncovered fixed costs
This important amendment substantially expands the scope of the TF. The Commission has taken into account the economic uncertainty caused by the pandemic and has introduced a new means to support companies facing a decline in turnover due to the COVID-19 outbreak. It is intended to allow governments to maintain the activity of European businesses by preventing the deterioration of their capital and avoiding unnecessary restructuring and lay-offs.
Temporary government aid under this category may not exceed an aid intensity of 70% of the uncovered fixed costs of an undertaking, except for micro and small companiesv where the aid intensity shall not exceed 90% of uncovered fixed costs. Uncovered fixed costs are the fixed costs incurred during the eligible period which are not covered by a profit contribution (i.e., revenues minus variable costs) during the same period and which are not covered by other sources (e.g., insurance, aid measures under the TF or support from other sources).
Companies will be eligible if they suffer a decline in turnover of at least 30% between 1 March 2020 and 30 June 2021 compared to the same period in 2019 and were not undertakings that were already in economic difficulty prior to the COVID-19 outbreak (i.e., 31 December 2019 under the TF).vi
The TF also now specifies that the overall aid shall not exceed €3 million per undertaking. The aid may be granted in the form of direct grants, guarantees and loans provided the total remains below the €3 million cap.
Adaptation of the conditions applicable to recapitalization measures to address the State’s exit in cases where it was an existing shareholder prior to recapitalization
The second amendment in May 2020 to the TF introduced the possibility for State recapitalizations measures, but always as a last resort. A number of strict eligibility criteria and conditions limit this type of intervention to situations where the beneficiary is a structurally viable non-financial business, but is unable to secure financing on the markets at affordable terms. There must also be a common interest to intervene to avoid that the beneficiary would go out of business or face serious difficulties to maintain its operations. As explained in a previous Baker Botts alert (available here), businesses exploring State recapitalization should carefully analyse the eligibility criteria and the conditions attached to the granting of the aid.
The ability to make use of recapitalization measures is now prolonged until 30 September 2021. The new amendment also adapts the conditions under the TF for recapitalization measures, with a focus on the State’s exit from companies where the State was an existing shareholder prior to the recapitalization. The 4th amendment to the TF allows the State to exit from the equity through an independent valuation whilst maintaining sufficient safeguards to preserve effective competition in the Single Market.
[i] Communication from the Commission on the 4th Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak and amendment to the Annex to the Communication from the Commission to the Member States on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to short-term export-credit insurance, available here. An informal consolidated version of the TF is available here.
[ii] The TF was adopted on 19 March 2020 with an initial expiration date on 31 December 2020. The TF was first amended on 3 April 2020. The Commission adopted a second amendment on 8 May 2020 to extend its scope to recapitalisation and subordinated debt measures. The third and previous amendment was adopted on 29 June 2020 when the Commission extended the scope of the TF to allow further support for micro, small and start-up companies.
[iii] Normally ‘marketable risks’ cannot be covered by export-credit insurance with the support of Member States’ funds. Due to the difficulty for firms to obtain short-term export-credit insurance from the market, the fourth amendment extends until 30 June 2021 the temporary removal of all the countries from the list of ‘marketable risk’ countries under the Commission’s short-term export-credit insurance Communication.
[iv] An ‘undertaking’ is an established concept in EU law. Several companies can form one ‘economic unit’, i.e. a single undertaking. Relevant factors in determining whether companies form one economic unit are the existence of a controlling share and other functional, economic and organic links.
[v] As defined within Annex I of Commission Regulation (EU) No 651/2014 of 17 June 2014 (the ‘General Block Exemption Regulation' or ‘GBER’).
[vi] An undertaking is generally considered to be in difficulty when, without intervention by the State, it will almost certainly be condemned to going out of business in the short or medium term. This will be the case if at least one of the five criteria listed in Article 2(18) of the GBER are satisfied; for example, an undertaking is subject to collective insolvency proceedings.
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