State aid rules applicable to COVID-19 recapitalizations

The first State aid measures authorized by the European Commission (Commission) following the COVID-19 outbreak were aimed at helping companies to cover their immediate liquidity needs, mainly through bank loans guaranteed by EU Member States. The significant losses incurred by companies as a result of the lockdown will compel some of them to increase their capital in order to finance their operations, satisfy financial ratios to obtain financing from banks or issue bonds and/or to avoid entering into insolvency proceedings.

Some companies will ask Member States, their affiliated entities (State agencies) and/or local authorities (collectively referred to as the "State") to participate in their capital increase. Furthermore, outside of capital increases, States will acquire shareholdings in companies in financial difficulty.

If a State acquires shares at market price or invests pari passu with private shareholders, its investment does not qualify as State aid. For instance, in 2014, the Commission considered that the French State's acquisition of a 14% stake in PSA Peugeot Citroen did not amount to a State aid since a Chinese car manufacturer simultaneously invested the same amount of money under the same conditions.

However, if a State acquires existing shares, subscribes for new shares or other capital instruments at other than market conditions, it will need to comply with the requirements set forth by the Commission in the amendment of 8 May 2020 to the COVID-19 Temporary Framework adopted on 19 March 2020.

These requirements apply to both State aid schemes and individual aids that must be notified and cleared by the Commission before being implemented (individual aids must be notified if they depart from such approved schemes or exceed €250 million). Furthermore, equity investments may be subject to merger control clearances if they lead States to acquire exclusive or joint control over companies.

Read more: State aid rules applicable to COVID-19 recapitalizations

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