March 27, 2020
Governments across the EU and in the UK are scrambling to put in place financial support measures for businesses of all sizes in response to the COVID-19 pandemic. This brings the EU and UK state aid rules into sharp focus, since these rules, monitored by the European Commission in Brussels but also enforceable through national courts, restrict the freedom of individual countries to provide funding to their businesses. Recipients may need to repay with interest any financial support which is not provided in accordance with the rules.
As was the case during the financial crisis 10 years ago, the Commission is keen to ensure that the state aid rules are part of the solution, not the problem, during the COVID-19 crisis. During a crisis, the law allows for a flexible approach that also maintains the EU market integration objectives which underpin the rules. The Commission has taken full advantage of this flexibility — and very quickly — to provide guidance to EU member states and the UK as to what is permitted and to approve measures put in place by various countries.
On 13 March 2020, the Commission adopted a communication on a coordinated economic response to the COVID-19 outbreak, setting out these possibilities. Aid which a market economy investor would have provided — albeit this is not likely to be relevant in the current circumstances — falls outside the state aid rules. EU member states and the UK can also make generally applicable changes in favour of all businesses (e.g., deferring taxes or subsidising short-time work across all sectors), which again fall outside state aid rules, since no selective advantage to a particular company or companies is provided. They can also grant compensation to companies for damage due to and directly caused by the epidemic. There are other possibilities.
On 19 March 2020, the Commission adopted the state aid temporary framework to support the economy in the context of the COVID-19 outbreak. The framework complements the other routes available to member states to mitigate the socioeconomic impact of the epidemic, in line with EU state aid rules. The Commission is now regularly approving, in an extremely compressed timetable, national aid schemes put in place under the framework, such as one in Germany.
The key practical point is that it is the recipient’s responsibility to ensure that any aid or advantage it receives is legal. A company cannot rely on the governmental body (local or national) — or a bank — to confirm this.
Therefore, it is very important for any company taking advantage of state funding of any nature to make sure that the assistance is covered by formal state aid approval or does not need one. The scope of “funding” for the purposes of state aid law is very wide, including not only grants but also low-interest loans, loan guarantees, tax waivers and any other measure which provides a financial advantage and comes from or is supported by the state (in whatever form). A company may need to make rapid and difficult decisions to manage its financial situation, but should recognise that getting this issue wrong can lead to significant negative consequences down the road.
Potential recipients should consider the legality of aid under the state aid rules from the outset, while putting together a financial package with public authorities and banks (which will often be channeling aid from the government). The issue can then be considered in parallel with the actual application process for the loan, grant, guarantee or other measure that is contemplated.
Then, before finalising anything, confirm the position with separate antitrust advice. It’s important to appreciate in this regard that some of the Commission’s rules on permissible aid may be narrower than measures which individual countries put in place (therefore putting in doubt the legality of those measures under the EU and UK state aid rules).
It’s also possible to complain about a third party’s (e.g., a competitor’s) receipt of aid to a regulator or challenge it in court. These routes are commonly used and are another reason why recipients need to be careful. While they may not issue a formal challenge during the crisis, aggrieved third parties will have a long period afterward to consider doing so.
This issue is not theoretical. There is, naturally, special pleading coming from various quarters and even lobbying against aid to competitors. As an example, the Alliance of Rail New Entrants (ALLRAIL) — a Brussels-based trade association for independent, third-party (i.e., non-state-owned incumbent) passenger rail operators and ticket vendors — issued a press release expressing concern about bailouts for airlines. It said:
“At this moment in time, ensuring the survival of all passenger rail companies is
essential not only for the preservation of millions of jobs, but also towards the
attainment of a climate neutral future and integrity of the single transport market.
[ALLRAIL Secretary General Nick Brooks stated]: “This tragic crisis should be the catalyst towards rebalancing the economy away from less sustainable transport modes. Is it sensible to bailout short haul flights where passenger rail is also a viable option?”
Then, even within the air transport sector, there is competing lobbying. Several sector organisations representing airport operators and service providers wrote to the European Commission on 23 March 2020 to express their concern about aid to airlines:
“Further to the requests submitted by our respective trade associations last week and following the adoption by the Commission of a comprehensive temporary State aid framework allowing for full flexibility in adopting supporting measures for those sectors and companies most impacted by the current COVID-19 pandemic, ACI EUROPE, ASA, ACA and the ETRC are hereby jointly complementing their above mentioned requests for urgent supporting measures for airport operators and service providers at airports … In doing so we are calling on the European Commission to …
2) Ensure that on top of their comprehensive supporting measures to airlines, Member States also implement comprehensive, inclusive and non-discriminatory support to the entire aviation eco-system.
3) Ensure that EU and national supporting measures adopted do not
benefit one actor at the expense of another actor in the aviation
It is clear that complaints to regulators and court litigation are likely, as companies and industry sectors fight for their share of government funding. Those cases may take time to appear in public, but there is no doubt they will come.
For more information, see McGuireWoods’ related alerts:
McGuireWoods will provide more detail on these topics in future alerts.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.