EU state aid: Commission must ensure aided companies do not gobble up unaided companies

In a webinar on June 17, jointly hosted by FIPRA, Arnold & Porter Kaye Scholer LLP and moderated by MLex Market Insight, an esteemed panel discussed the hot-button issue of what happens to industry when EU state aid runs out.

The panel, moderated by Nicholas Hirst, Mlex Chief Correspondent for EU Competition, featured:

• Alexander Italianer, Special Advisor Arnold & Porter; former EC Secretary-General & Director-General for Competition
• Luc Gyselen, Partner, Arnold & Porter
• Dirk Hudig, Partner, FIPRA International

Panellists pointed out that in relation to rescue and restructuring aid geared towards large firms, there is a risk that if a large firm is given money for nothing, this can create overcapacity because there is no need to reward the capital that has been given, and prices you can charge if you have no capital to reward are much lower.

The Commission will have to make sure that there are certain constraints on aided companies not gobbling up unaided companies, to make sure that the even playing field and the competitive relationships are not too disturbed.

It is expected there will be a wave of consolidation after the crisis.

Also needed are some sector-specific measures to survive beyond the deadline of the end of this year. The EU recovery package can compensate some countries that have smaller wallets than others.

Parallels with the financial crisis of 2008

On a legal basis, in the current situation, the Commission has also reminded Member States that other provisions than the “serious disturbance in the economy of a Member State” can be used.

As for duration, some legislation adopted in the context of the 2008 crisis is still in place, having partially been taken over by special legislation (e.g. Banking Communication taken over by the Banking Recovery and Resolution Directive).

The Covid-19 framework is broader and contains additional types of measures than those contained in banking framework (e.g. deferral of taxes and social contribution).

In terms of aid, it is estimated that 35% of EU GDP was approved as aid under the banking framework, and around 20% until now under the Covid-19 framework. Recapitalizations under the banking framework had stricter conditions attached to them.

Similarities between state aid control and merger policy

Conditions Member States need to fulfill to recapitalize a company are similar to rules relating to acquisition of companies in financial distress but not exactly the same. E.g. para. 49 excludes from its application companies that have been loss-making for several years (so different from failing firm defense).

“Additional measures” enacted to preserve effective competition need to take the form of the type of remedies contained in merger cases. E.g. structural remedies.

The power to review mergers where a third country company acquires a certain stake in an EU company (to see whether state aid granted to the acquirer might have distorted competition). Even for mergers facilitated by an intra-EU subsidy, the bar for the Commission to intervene and interfere with the state aid is very high.

White paper on foreign subsidies

The power to look into whether subsidies given by third countries distort competition may exceed scope of Article 107 TFEU (potential territoriality issue).

Speakers agreed it was unsure if the white paper will give the Commission a bazooka instrument to interfere with foreign subsidies.

For more information or detail on the discussions, contact FIPRA’s Competition & Antitrust team.