Introduction
The past three articles have dealt with cases where the Commission or an EU court concluded that they were free of state aid or there were doubts as to whether they constituted state aid.
Today’s article reviews another case concerning a state intervention that was free of state aid. In decision SA.100862, the Commission found that transfer of state assets to a Finnish undertaking did not confer an advantage in the meaning of Article 107(1) TFEU.1 Nor, were any public funds used to finance investments carried out by that undertaking. What also makes this case interesting was the Commission’s assessment of an allegation of infringement of anti-trust rules and its supposed link to state aid rules.
In November 2021, the Commission received a complaint from the Finnish Federation of Food and Drinks Industries [abbreviated as ETL in the Commission decision]. ETL claimed that state aid had been granted to Oat Mill Finland [OMF] which 100% owned by Suomen Viljava which is itself 100% state-owned. The alleged aid supported investment by OMF in a new oat mill at the grain terminal at Rauma port, north-west of Turku.
The Commission dealt first with the claims concerning infringement of anti-trust rules of the EU. In particular, it addressed the argument that Viljana benefitted from special rights.
Article 106(1) [special or exclusive rights] and transfer of assets
Article 106(1) requires that the granting of special or exclusive rights to undertakings does not lead to infringement of competition rules by, for example, facilitating concerted practices or enabling abuse of dominant market position.
The Commission, first, clarified that “(93) it has a wide margin of discretion on whether or not it takes action based on Article 106 (1) TFEU. Secondly, in the case at hand the State has not granted Viljava any special or exclusive rights. Moreover, the present case does not concern an alleged State measure that by laws, regulations or administrative measures would put a public undertaking or undertakings with special or exclusive rights in a position which the said undertakings could not themselves attain by their own conduct.”
“(95) Moreover, the Commission notes that Viljava had sought advice from the KKV [the Finnish Competition Authority] before conducting the oat mill investment and KKV has previously initiated measures concerning Viljava’s operations. In addition, the operations of Oat Mill Finland are located in Finland. A National Competition Authority is usually well placed to deal with agreements or practices that substantially affect competition mainly within its territory. It follows that the Commission considers that KKV can adequately safeguard the rights and interests of the complainant.”
“(96) Finally, the Commission notes that according to settled case law, State aid which contravenes provisions or general principles of EU law cannot be declared compatible with the internal market. However, as it will be concluded in the assessment part, the Commission concludes that the measures at stake do not entail State aid and therefore the existence of an antitrust breach -if at all existent- should be dealt under an antitrust procedure and not within a State aid complain.”
In other words, the Commission will examine possible anti-competitive behaviour using its state aid powers, if the public measure involves state aid and the anti-competitive behaviour is “indissolubly” linked to the aid measure. This may be the case where the anti-competitive behaviour is caused by the aid or is mandated by the aid measure.
At any rate, the Commission did examine the complaint concerning Viljana’s special right of access to the emergency stockpiling system managed by public authorities. It found that “(164) emergency stockpiling between the HVK, the public authority managing the State’s emergency stockpiling, and undertakings is made through competitive selection procedure based on public tenders. The Commission acknowledges that the volume of the State’s emergency stockpiling has a direct impact on undertakings that are entering contracts with the HVK and indirect impact on storage services. However, undertakings entering contracts with the HVK are free to purchase the needed storage capacity from any service provider, therefore there are no obligations to purchase the storage services from certain providers. Thus, undertakings entering contracts with the HVK are not obligated to use Viljava’s storage services.”
The Commission concluded that “(165) as regards Viljava’s storage services, the emergency stockpiling is carried out through a competitive, transparent non-discriminatory and unconditional tender procedure and any indirect impact on the demand for storage services due to the State’s decisions on increasing emergency stockpiling levels do not provide an economic benefit to Viljava which an undertaking could not have obtained under normal market conditions. All undertakings operating in the storage sector face the same indirect effect of the emergency stockpiling level.”
The complainant also claimed that a transfer of state assets reinforced Viljava’s position on the market. Before Finland joined the EU in 1995, the trade in grain products was a legal monopoly. With the accession to the EU, the monopoly was phased out and the state-owned assets [e.g. warehouses, silos, etc] were transferred to state-owned companies which did not have any special or exclusive rights. The Commission concluded that even if the initial transfer contained state aid, it would be existing aid as it took place long before the Commission received the complaint and as it was not altered in the meaning of Article 17(3) of Regulation 2015/1589 [the procedural regulation].
Imputability
Given that the investment was carried out by OMF and that OMF was a wholly owned subsidiary of Viljava, the Commission examined whether the investment decision could be imputed to the Finnish state.
It first recalled the relevant case law. “(116) Even if the State is in a position to control a public undertaking and to exercise a dominant influence over its operations, actual exercise of that control in a particular case cannot be automatically presumed. … The imputability to the State of an aid measure taken by a public undertaking may be inferred from a set of indicators arising from the circumstances of the case and the context in which that measure was taken.’”
Then it noted “(118) that in the context of the Finnish State-owned undertakings [in question] … do not have specific duties, objectives or public interests that would have been stipulated in laws, by-laws or company specific articles of association; and … the State transparently publishes its interest in undertakings operating under commercial terms, but it does not bind board members of the State-owned undertakings.”
“(119) The Commission considers that despite of the rhetoric used by Viljava as regards its role to protect the domestic food chain in exceptional circumstances, it does not have any specific obligations or objectives to pursue public policy objectives. Furthermore, the mere fact that a public company takes into account the objective of the shareholders, in this case the State, is not sufficient to prove that the decision to invest on the new oat mill is imputable to the State and not an autonomous decision by Viljava.”
“(120) Although the State has explicitly expressed its interest in Viljava, the board of Viljava has no other binding objectives than to act with due care and promote the interests of the company, notably to generate profits for the shareholders.”
“(122) The Commission considers that a board has a wide discretion to decide how it aims to generate profits to its shareholders. Furthermore, it is inherent nature of limited liability companies that boards consider and take account shareholders’ strategic objectives.”
“(123) The Government Resolution on State-Ownership Policy notes that ´[a]s a rule, operative and business decisions are made by the company management and board of directors´ and an individual board member has no veto right. The Commission notes that in the case at hand there are no evidence that would suggest that this principle was not respected.”
“(124) The Commission notes that the oat mill investment decision was made by the board of Viljava and not by the State in its role as a shareholder”.
“(126) Moreover, the Commission considers that the mere facts that in the case at hand the State has explicitly expressed its interest in Viljava and Viljava transparently expresses, including its annual reports, its aim to respect the State’s strategic objectives do not directly establish imputability. That interest is not binding for the board of Viljava and it is based on the premise that Viljava can operate under commercial terms as a market economy operator.”
“(127) The complainant has not shown that the public authorities would have been involved, in one way or another, in adopting the investment decision and that Viljava would have had other objectives than to pursue the general aims of the company and to generate profits for the State as a shareholder, thereby respecting States strategic objectives. Moreover, the material provided by the Finnish authorities does not indicate that the public authorities would have been involved, in one way or another, in adopting the investment decision. The Commission also notes that the information provided by the Finnish authorities and information published in Viljava’s and Oat Mill Finland’s financial reporting, i.e. annual reports and financial statements, corroborates that the oat mill investment has been exercised on the market in normal conditions of competition by private undertakings.
“(128) The Commission notes that: (a) the investment is estimated to be profitable; (b) according to an external expert report Oat Mill Finland has a capital structure that a private investor would require for similar investment; and (c) the board’s decision or the investment plan did not include references to any formal or informal ex-ante or ex-post approvals from public authorities nor ex ante communication with the State.”
“(131) Furthermore, the Commission notes that before the investment, Viljava (and not the State) had commissioned external experts to assess the viability of the investment under the market economy operator principle what would have not been necessarily if Viljava had to follow the State indications. Those reports confirm that the oat mill investment has been made in line with the market economy operator principle.”
Of all the statements in paragraphs 116-131 above, the most convincing is the last one. The fact that the investment was profitable, as stated in paragraphs 127 & 128, or that OMF’s capital structure was adequate, or that there were no references to instructions from the state does not prove that a private investor would have undertaken that investment.
I suppose that the Commission referred to the profitability of the investment to demonstrate that the board took into account the interest of the company, not that of the state. But then, how did the board also satisfy the its sole shareholder, as stated in paragraphs 119 & 122, which was the state.
Imputability is about the influence that the state actually exerts on a specific decision of a company it owns or controls. Therefore, the Commission rightly went on to examine whether the state’s possibility to appoint the board members could establish imputability.
“(133) The Commission notes that … the State has appointed the board members of Viljava”. To its credit, “(134) the Commission acknowledge[d] that States may exercise influence on limited liability companies through their possibility to appoint board members and that it is very difficult for a third party to demonstrate that measures taken by State owned undertakings were adopted on instructions of the public authorities in a particular case.”
“(136) The Commission notes that according to section 10 of the Corporate Governance Code 2020 “[t]he majority of board members must be independent from the company. At least two board members who are independent of the company must also be independent of the company’s significant shareholders.”, whereas in the case at hand only one of the board members is not independent of the company’s significant shareholders. It follows that, although Viljava is not a listed company, it complies with section 10 of the Corporate Governance Code 2020.”
“(137) In addition, the Commission notes that according to the information provided by the State there is no evidence of indirect or direct and precise instructions from the State to Viljava to carry out the oat mill investment.”
“(138) Consequently, the mere fact that one board member is working as an official does not alone establish imputability, taking into account that board members do not have veto right and the circumstances of the case do not indicate that the State would have been directly or indirectly involved in the decision making.”
On the basis of the above reasoning, the Commission concluded that “imputability is not established”.
Since the criteria of Article 107(1) TFEU are cumulative, the Commission could have stopped its assessment at this point with a finding of no state aid. However, it went on to examine whether OMF derived any abnormal advantage.
Advantage
After explaining the concept of market economy investor principle [MEIP], the Commission stated that it “(150) must check whether the State intervened in the economy complying with the MEIP. … For such assessment, it is necessary to produce evidence showing that the oat mill investment is based on economic evaluations comparable to those which a rational private investor would have had carried out, before making the investment, in order to determine its future profitability.”
“(151) Whether a State intervention is in line with market conditions must be examined on an ex-ante basis, having regard to the information available at the time the intervention was decided upon.”
(153) In particular, the Commission notes that the board based its decision to make the oat mill investment on investment analysis, furthermore, the board required that an external expert estimate the capital structure and the market-based interest rate that a private investor would require for similar investment reflecting the return expectations of a private investor in making a similar investment.”
“(155) The Commission notes that the board based its decision to invest in Oat Mill Finland on an ex-ante investment plan, assuming marked based pricing between Viljava and Oat Mill Finland and including a sensitivity analysis for different demand estimates, that showed that the oat mill investment would be profitable.”
“(156) Moreover, when the board of Viljava decided to invest in Oat Mill Finland, the board considered the level of risk, future expectations and the economic situation at the time when the transaction was decided compared to the economic situation when the oat mill investment was planned.”
“(158) As regards the ex-ante investment plan, the Commission notes that an external expert based its report on a generally-accepted standard assessment methodology and that methodology was based on the available objective, verifiable and reliable data which was sufficiently detailed and reflected the economic situation at the time at which the transaction was decided, taking into account the level of risk and future expectations estimating. The external expert analysed hybrid and capital loans issued by listed or public Finnish undertakings and solvency rations of undertakings that are comparable with the oat mill investment.”
“(159) The ex-ante investment plan included four scenarios on the demand, falling demand, conservative, growth and booming demand. With conservative and growth scenarios internal rate of return (‘IRR’) was estimated to be [6-15%] and the net present value (‘NPV’), with the weighted average cost of capital (‘WACC’) of 6.2%, was estimated to be EUR [1 to 9] million. The Commission concludes, although the estimated profitability of the oat mill investment is sensitive to the estimated terminal value in 2031 that is assumed to be five years earnings before interest, taxes, depreciation, and amortization, that the IRR referred to above, taking into account that market based interest rate for hybrid and capitals loans is estimated to be 7% to 9% indicated that a private investor would have, in the same circumstances, could have taken a comparable investment decision.”
“(160) Furthermore, the Commission notes that the board’s decision on the oat mill investment followed the conclusions of two external expert results who concluded on the compliance with the market investor test.”
Conclusion
The overall conclusion of the Commission was that neither OMF, nor Viljana had received state aid.
