Third amendment of the Commission’s Temporary framework to support micro, small and start-up companies and incentivise private investments

The Commission adopted, on 29 June 2020, a third amendment of the State aid Temporary framework adopted on 19 March 2020 to further extend the scope of the framework to support micro, small and start-up companies and to incentivise private investments. It enables Member States to provide public support under the Temporary framework to all micro and small companies, even if they were already in financial difficulty on 31 December 2019.

Following the coronavirus outbreak, European Commission adopted, on 19 March 2020, a Temporary framework to support the economy in the context of the coronavirus outbreak based on Article 107(3)(b) TFEU to remedy a serious disturbance across the EU economy.

Timeframe of the amendments

The Temporary framework was first amended on 3 April 2020 to increase possibilities for public support to research, testing and production of products relevant to fight the coronavirus, to protect jobs and to further support the economy.

The Commission, on 8 May 2020, extended for a second time the Temporary framework to include recapitalisation and subordinated debt measures.

The Commission adopted a third amendment on 29 June 2020 to further extend the scope of the framework to:

• the support of micro, small and start-up companies, for which the well-known difficulties under “normal” market conditions have been even further exacerbated by the current economic impact of the pandemic; and
• incentivise private investments by encouraging private investors to contribute to the capital increase of companies together with the Member State.

Evolution of the objectives of the Temporary framework

The primary purpose of the Temporary framework consisted in providing financial support to viable companies that suffer from the coronavirus outbreak to such an extent that they entered into financial difficulty after 31 December 2019. Companies that were already in difficulty before that date could therefore only benefit from aid under existing State aid rules, notably the Commission Guidelines of 2014 on rescue and restructuring aid.

The latest amendment aims to allow Member States to provide public support to micro and small undertakings, even if the initial condition of absence of financial difficulty on 31 December 2019 is not fulfilled. By extending the application of the Temporary framework, the Commission seeks to limit the number of bankruptcies of such companies following the COVID-19 crisis.

As is the case for all aid covered by the Temporary framework, the new category of aid provided must be notified by Member States to the European Commission prior to its implementation.

Companies concerned by the new amendment

The extension of the Temporary framework enables Member States to provide public support to all micro and small companies, i.e. undertakings with less than 50 employees and less than EUR 10 million annual turnover and/or annual balance sheet total.

The recognition of start-ups by the Commission is also worth mentioning as these are considered, especially innovative ones which may be loss-making in their high-growth phase, as crucial for the economic recovery of the European Union. The Commission recalls that all small and medium-sized enterprises that were established less than three years before 31 December 2019 could already benefit from the aid measures laid down in the Temporary framework

The easing of the conditions is however not unlimited. The beneficiary undertakings may thus not:

• be in insolvency proceedings;
• have received rescue aid that has not been repaid, or
• be subject to a restructuring plan under State aid rules.

Private investors come into play

The objective behind the latest changes also consists in increasing the incentives for companies to seek market as well as State contributions for their capital needs, whilst maintaining safeguards to preserve effective competition in the Single Market.

The Commission has thus put into place more favourable conditions for undertakings where private investors contribute together with the State to the capital increase of companies.

Consequently, if the State decides to grant recapitalization aid and a private investor contributes at least 30% of this capital increase under the same conditions as the State:

• the acquisition ban and the cap on the remuneration of the management are limited to three years;
• the dividend ban will be lifted for the holders of the new shares as well as for existing shares, provided that the holders of those existing shares are altogether diluted to below 10% in the company.

Additionally, companies with an existing (i.e. before the granting of recapitalisation aid) State shareholding are now able to raise capital from their shareholders similar to private companies without having to impose specific conditions as regards the State’s exit.

Conclusion

The present amendment of the Temporary framework in order to include State aid to micro and small companies follows the consultation by the Commission in June 2020 of the Member States on the draft proposal of the Temporary framework.

It is certainly justified in the current economic context as the vast majority of the States mentioned that small undertakings are particularly affected by the liquidity shortage caused by the economic impact of the current coronavirus outbreak, exacerbating their existing difficulties to access financing. Furthermore, the distortive impact of aid to such undertakings is rather limited.

Through these changes, the Commission shows its will to ensure a level playing field and gives a strong protective signal of the Single Market.

The next step should be sectorial frameworks to focus on sectors that will suffer in the long term from the consequences of the COVID-19 outbreak and possibly an extension of the Temporary framework that expires in principle on 31 December 2020.

CMS keeps you informed of the public measures adopted by Member States in order to support your business enterprises.

CMS has the widest coverage and the broadest team of state aid specialists in Europe. Furthermore, we have extensive experience in setting up aid schemes and in public interventions in favour of undertakings in difficulty.

Please refer to our brochure for the CMS contact in your jurisdiction.