State aid and the market economy operator principle (MEOP)

The market economy operator principle (MEOP), which was introduced by the European Commission and upheld by the Court of justice of the EU, is used to assess the existence of State aid in cases of public investments in the form of capital injections. To determine whether a public investment constitutes State aid, the public operator must examine  whether, in similar circumstances, a private investor of a comparable size operating in normal market economy conditions would have made the same investment.

Since its introduction, this principle has been applied to all types of economic transactions carried out by public entities: capital injections, loans, guarantees, sale and purchase of assets, acquisition of goods and services, etc.

Under Article 107 (1) TFEU, a measure must fulfil the following four cumulative criteria to constitute State aid:

1. the measure is decided by a Member State in the broad sense (including regions, counties, cities, chambers of commerce, etc.) and financed by public resources (including through a State-owned undertaking);
2. the measure confers an economic advantage in any form (capital injection, loan, guarantee, subsidy, tax reduction, etc.);
3. it is granted to one or several undertakings: the measure is selective and not general;
4. the measure distorts or threatens to distort competition and affects intra-Community trade.

If one of those criteria is not met, the measure does not fall under State aid rules.

Under the MEOP, if the Member State (in practice the public entity deciding on the public measure) can demonstrate that it acted as a private operator would have done in the economic transaction in question, then the measure is not deemed to confer an abnormal economic advantage to the undertaking that benefits from the public transaction in any form and does not constitute State aid.

For the sake of legal certainty, it is possible to notify a planned economic transaction to the European Commission as non-aid. Member States can request the Commission's approval for sensitive privatisations, capital injections, debt-to-equity swaps or debt write-offs for the benefit of companies in distress or complex public investments.

Article 345 TFEU provides that "the Treaties shall in no way prejudice the rules in Member States governing the system of property ownership." On this legal basis, Member States cannot be prohibited from investing in a private or public company under conditions similar to those that would be acceptable for a private investor. However, the Member States cannot favor their own undertakings as they remain subject to State aid rules under Article 106 (1) TFEU.

In order to clarify its approach to the acquisition of shareholdings by the public authorities, in 1984 the Commission adopted a notice on the application of State aid rules to public authorities' holdings.

In 2016, the European Commission consolidated its decisional practice and the European case law in its Notice on the notion of State aid. The notice pragmatically describes when public spending falls within the scope of EU State aid control and when it does not. Public guarantees are the subject of a specific Notice on the application of State aid rules to public guarantees, adopted in 2008.

In order to exclude State aid in an economic transaction of any kind involving a public body, the Member State must be able to demonstrate that it acted as would a private operator would have done.

A transaction is deemed MEOP-compliant as long as:

• it is carried out under the same terms and conditions, with the same level of risks and rewards, by the public entity and private operators who are in a comparable situation (a pari passu transaction), or;
• a competitive, transparent, non-discriminatory and unconditional tender procedure has been organised in the context of the sale and purchase of assets, goods and services.

In the absence of a private operator or when no tendering procedure has been organised, the Commission may accept alternative assessment methods such as:

• benchmarking of equivalent transactions carried out by comparable private operators in similar situations;
• a profitability assessment using a generally accepted standard methodology. The methodology must be based on available, objectively verifiable and reliable data that should reflect the economic situation of the relevant market at the time the transaction was decided. It is normally based on the an internal rate of return (IRR) assessment or a net present value (NPV) calculation.

In certain specific circumstances, the Commission may take into consideration the counterfactual analysis in the case of prior economic exposure to the undertaking concerned, for instance if a public company is in serious financial difficulties to such an extent that no normal return on the capital injection is anticipated.

In this case, the expected return on an investment in the form of equity or debt conversion can be compared with the expected returns in the counterfactual scenario of the liquidation of the company. If the liquidation or bankruptcy of the undertaking concerned would be cheaper for the public shareholder than the further injection of public funds, the Commission would conclude that this constitutes State aid. If the company can recover and generate more profitability than the amount needed to rescue it, the MEOP test is met.

The public shareholder will have to justify its decision to continue investing in its distressed subsidiary on the basis of a business plan, the counterfactual scenario, market studies, etc.

The validation of its assessment by an external expert is always welcomed by the European Commission in the event of an investigation.

A Member State must assess compliance of its economic transaction with State aid rules prior to its decision to carry out the transaction. To this end, the public entity must gather all necessary information and documentation and carry out its own in-depth ex ante assessment of the strategy and financial prospects of the project in question, based on market studies, business plans, benchmarking, etc, prior to its decision. The scope and method of  the assessment will depend on the form of the transaction and financial situation of the beneficiary of the public measure.

When the European Commission investigates certain transactions, either following a complaint or on its own initiative (for example, following the publication of press reports on a suspicious public transaction or investment), it will verify that this assessment was well-documented, sufficiently thorough and showed prospects of a normal return within a reasonable time or could corroborate the market price for the goods/services acquired or sold.

Therefore, the European Commission will put aside all ex post economic evaluations presented by the Member State in the course of an investigation and will disregard them in its assessment of the transaction's MEOP compliance.

The European Commission can initiate an investigation into any kind of public economic transaction after receiving a complaint or on its own initiative following the publication of press reports.

Although the Commission bears the burden of proving the existence of State aid, it is up to the Member State concerned to demonstrate that it acted as a private operator would have done by providing all relevant documentation. Confidentiality may be invoked in order to protect the beneficiary's business secrets.

At the end of the investigation, the Commission may conclude that either the State acted in compliance with the MEOP and will close the procedure, or that the public economic transaction entails State aid. In that case, it will assess its compatibility with Article 107 (2) and (3) TFEU depending on the objective and modalities of the public financing. If the aid cannot be authorised and has already been disbursed to the beneficiary, the Commission will order the relevant Member State to recover the unlawful and incompatible aid. The amount of aid will depend on the form of the economic transaction. For instance, in the case of capital injections the full amount must be recovered, whereas in the case of public loans, the difference between the market rate and the rate granted by the State usually constitutes the amount of aid to be recovered.

State aid rules do not provide for a fine to be imposed on either the State or the beneficiary.

CMS lawyers represent both public authorities and private companies on all aspects of State aid rules and in particular MEOP compliance of economic transactions. This includes:

• Legal assessment of the existence of a State aid or the potential application of the MEOP;
• Assisting public authorities in preparing the public economic transaction to ensure MEOP compliance;
• Assisting public authorities in notifying a public economic transaction to the European Commission as non-aid;
• Assisting public authorities or beneficiaries in State aid investigations by the European Commission into public economic transactions;
• Drafting and lodging complaints before 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 assist you. 

Find your local contact person in our brochure CMS State Aid Group.