Rescue and restructuring aid for undertakings in difficulty

Under the Market Economy Operator Principle (MEOP), if the Member State (in practice, the public entity deciding on the public measure) can demonstrate that it acted as a private operator in the economic transaction at stake, this will not confer an abnormal economic advantage to the undertaking that benefits from the public transaction in any form and, therefore, does not constitute State aid. This principle has later been applied to all kinds of economic transactions carried out by public entities: capital injections, loans, guarantees, sale and purchase of assets, acquisition of goods and services, etc.

In some cases, the beneficiary is in such serious financial difficulty that it has lost the trust of the banks and no existing or potential private operator will invest in it any longer. If the public intervention cannot comply with the MEOP, it may constitute State aid and the grantor has to verify its compatibility under State aid.

If the beneficiary meets the criteria of the undertaking in difficulty, the Commission will assess the compatibility of State aid under the 2014 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty (hereinafter “the R&R Guidelines”). The aid would then be authorized by the European Commission following an in-depth assessment and under strict conditions.

The Commission is very cautious when it comes to public support that can keep companies artificially alive that ought to have disappeared under normal market conditions. 

The beneficiary must, in principle, be qualified as an undertaking in difficulty.

According to the R&R Guidelines, an undertaking is 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”.

An undertaking is considered to be in difficulty if at least one of the following circumstances occurs:

1. In the case of a limited liability company where more than half of its subscribed share capital  has disappeared as a result of accumulated losses. This is the case when the deduction of accumulated losses from reserves (and all other elements generally considered to be part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital.
2. In the case of a company where at least some members have unlimited liability for the debt of the company and where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses.
3. Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under domestic law for being placed in collective insolvency proceedings at the request of its creditors.
4. In the case of an undertaking that is not an SME, where over the past two years:
   1. the undertaking's book debt to equity ratio has been greater than 7.5, and
   2. the undertaking's EBITDA interest coverage ratio has been below 1.0. 

In this respect, it is necessary to proceed on a case-by-case basis, taking into account the date on which the aid is granted.

Undertakings in difficulty are excluded from most categories of aid provided for by the General Block Exemption Regulation (regional aid, aid for energy, for the protection of the environment, aid for RDI, etc.) and under various Communications, Guidelines and Frameworks. They may benefit from de minimis aid but specific rules apply to those aids granted in the form of loans and guarantees if they fulfil the criteria under domestic law for being placed in collective insolvency proceedings at the request of its creditors, or if in the case of large undertakings their credit rating is below B-.

Rescue and restructuring aid may in some cases be the only legal option for public support.

Rescue aid is urgent and temporary public financial assistance that allows the beneficiary to avoid bankruptcy.

The rescue aid may be authorized by the European Commission if the Member State concerned can demonstrate serious social difficulties or significant market failures, such as a persisting unemployment rate which is higher than the EU or national average, a risk that a service of general economic interest or an important service will be interrupted, a risk that if the company exits the market this would lead to an irrecoverable loss of technical knowledge or essential know-how, etc.

Rescue aid may be granted in the form of a public guarantee or public loan for a maximum period of six months to keep the undertaking afloat while it prepares its restructuring plan. This means that it must not, therefore, finance structural measures, such as the acquisition of assets or the funding of a social plan.

Both forms of public support must provide for remuneration for the public authorities as set out in the R&R Guidelines to incentivize the reimbursement.

Beyond this six-month period, the Member State concerned has three options:

1. the public loan is reimbursed or the guarantee is brought to an end,
2. the Commission is provided with a restructuring plan for the aid to be approved as restructuring aid; or
3. the undertaking is liquidated.

Rescue aid must be restricted to the amount needed to keep the beneficiary in business for six months. The Commission provides a formula which is set out in Annex I of the R&R Guidelines that sets a cap for the rescue aid. Member States may grant aid that exceeds the result of this calculation if it is duly justified by the provision of a liquidity plan which sets out the beneficiary's liquidity needs for the next six months.

Restructuring aid is intended to restore the long-term viability of a company by implementing a realistic, coherent and far-reaching restructuring plan, which generally involves the reorganization and rationalization of its activities, with industrial restructuring being accompanied by financial restructuring.

Restructuring aid can take various forms: capital injections, debt-in-equity conversions, grants, debt write-offs, loans, tax relief, reductions in social security contributions, loan guarantees, etc.
The restructuring aid will be authorised if the Member State can demonstrate serious social difficulties or significant market failures, as mentioned above for rescue aid.

Secondly, restructuring aid must be conditional on the implementation of a restructuring plan that must be submitted with all the relevant details to the Commission, and include, in particular, a market survey.

The plan must demonstrate that it would restore the long-term viability of the company (and not the profitability as with the application of the MEOP) in the shortest possible time on the basis of realistic assumptions and without a need for additional aid in the future. The Commission requires the company to be able to cover all its costs at the end of the restructuring period. The Commission usually verifies the expected return on capital on the basis of the return on equity or the return on capital employed.

Any failure to implement the restructuring plan in accordance with the terms of the plan is considered by the Commission to be a misuse of aid, which can lead to a decision that orders the State to recover part of all of the restructuring aid.

The beneficiary's return to viability should derive mainly from internal measures, entailing, in particular, withdrawing from activities which would remain structurally loss-making in the medium term and comprise both physical and financial restructuring (the termination of structurally loss-making activities; a reduction in operating costs, social plan, rationalisation of geographical presence, capital injections, the writing-off of debts or the rescheduling of short term into long term debts, etc.).

The amount of the restructuring aid should not go beyond the strict minimum needed to ensure the success of the restructuring. Therefore, the restructuring is actually limited to the measures that are essential to restore viability. Furthermore, a significant contribution to the restructuring costs is required from the own resources of the beneficiary of the aid, its shareholders or creditors or the business group to which it belongs, or from new investors. This contribution is considered appropriate if it amounts to at least 50 % of the restructuring costs except for SMEs in exceptional circumstances and in situations of particular difficulty, which must be demonstrated by the Member State concerned.

When restructuring aid is granted, measures must be taken to limit distortions of competition so adverse effects on trading conditions are minimised as much as possible and the positive effects outweigh any adverse ones. The beneficiary must offer counterparts, which can take the form of structural (divestments, reduction of business activities, etc.), behavioural (limitation of expansion) and  market opening measures. The calibration of those counterparts will depend notably on the amount and nature of the aid, the size of the beneficiary and its market power, the characteristics of the market concerned. 

In accordance with the “one-time, last time”-principle, undertakings may normally only benefit from State aid for a single restructuring operation over a ten-year period. Thus, repeated State intervention is prohibited, which allows the Commission to limit distortions of competition resulting from the granting of rescue and restructuring aid.

The change in the ownership status of the recipient undertaking following the granting of aid does not call this rule into question, since it concerns the continuation of the same undertaking.
It is possible to benefit from rescue aid, followed by restructuring aid or from only one of both. 

All individual rescue and restructuring aid must be notified to the European Commission by the Member State concerned prior to its granting to ensure its legality.

Member States may set up schemes for rescue and restructuring aid for SMEs. Such schemes must be notified to and approved by the Commission but individual aid granted on the basis of such schemes is not subject to the notification obligation. Such schemes have already been implemented in Germany, Belgium, Austria, Slovenia, Finland, etc.

The Commission will assess the compatibility of individual aid or a scheme for an SME on the basis of the conditions set out in the R&R Guidelines. Prenotification is essential to guarantee a smooth process.

State aid rules provide for a speedier procedure for rescue aid that can be authorized within one month, while the normal procedure in principle entails a two month deadline. In practice, the whole procedure, including the prenotification process, takes around two months for rescue aid and between six months and one year for restructuring aid depending on the complexity of the case, the amount of aid contemplated and the size of the beneficiary.

In the case of significant restructuring plans, the Commission may require that the payment of the restructuring aid be made in several instalments and make the payment of each instalment conditional on its approval.

Member States must submit regular reports – usually every six months – on the implementation of the restructuring plan.

The Commission must be notified of any change to the restructuring plan and it may authorise the change if it complies with certain conditions, including appropriate adjustment of the level of aid, the company's own contribution or measures to limit distortions of competition. 

CMS lawyers advise both public authorities and private companies on all aspects of State aid rules and, in particular, compliance of economic transactions  with the MEOP and the compatibility of rescue and restructuring aid. This includes:

• Legal assessment of the existence of a State aid or the compliance to the MEOP;
• Assisting public authorities when preparing public economic transactions in compliance with the MEOP;
• Legal assessment of the compatibility of rescue and/or restructuring aid;
• Assisting public authorities with the notification procedure for rescue and/or restructuring aid to the European Commission;
• Assisting public authorities or beneficiaries in State aid investigations by the European Commission on public economic transactions;
• Drafting and lodging complaints with the European Commission;
• Litigation before national and EU Courts.

The CMS State Aid Practice Area Group comprises 40 State aid law specialists practising State aid law in 17 jurisdictions located in 20 cities in Europe and beyond – all committed to assisting you. 
Find your local contact person in our brochure CMS State Aid Group.