State aid that is incompatible with the internal market has to be paid back, unless the repayment would be contrary to a general principle of EU law. Last November the Court of Justice ruled in case C‑622/16 P, Scuola Elementare Maria Montessori v European Commission that “(79) the principle that ‘no one is obliged to do the impossible’ is among the general principles of EU law”. In the same judgment, the Court also said that it is not enough for Member States to claim that it is absolutely impossible for them to recover incompatible aid. They must first actually try to recover it and exhaust all possible options and legally available means.
Aid beneficiaries rarely ever return subsidies willingly. Not only do they put up long legal fights, they may also try to siphon away money to prevent public authorities from recovering it. For example, they may transfer or sell the subsidised assets to another company. Under certain circumstances, the case law makes the new owner liable for the incompatible aid.
In a recent article I examined the case of NCHZ, a Slovak chemical company that had to pay back incompatible aid [see case T-284/15, AlzChem v Commission]. The article can be accessed at: http://stateaidhub.eu/blogs/stateaiduncovered/post/9439
NCHZ was under administration. At some point, its assets were sold through a competitive process to Via Chem Slovakia which immediately afterwards sold them to Fortischem. The Commission, however, considered that the sale process did not reflect market conditions and that there was “economic continuity” between NCHZ and Fortischem. For these reasons, the Commission ordered Slovakia to recover the aid from Fortischem. The Commission decision was reviewed here on 4 November 2015 http://stateaidhub.eu/blogs/stateaiduncovered/post/4021
Although that decision is now almost four years old, the issue of who has to repay the incompatible State aid is still not settled [the General Court has yet to deliver its judgment in case T-121/15, Fortischem v Commission].
The broader and more important question of how State aid can be passed on from one company to another has not been given a definitive answer. The Commission has provided us with a menu of different elements while the case law seems to be vacillating from one element to another. Therefore, this article attempts to provide a more structured answer with a ranking of the various elements.
Section 2 examines the conditions under which an economically rational operator would want to pass on State aid to another company and develops a test for detecting State aid that is passed on. Section 3 reviews briefly landmark judgments and important Commission decisions. Section 4 applies the test of section 2 to the case of NCHZ.
- The economics of passing on State aid
According to Article 16(1) of Council Regulation 2015/1589 [the Procedural Regulation] the Commission shall decide that the Member State concerned shall take all necessary measures to recover unlawful and incompatible aid “from the beneficiary”. By definition, the beneficiary can only be a (natural or legal) person, not a group of assets. Normally, the recovery is directed against the person to whom the State aid was initially granted, i.e. the aid recipient. However, there may be cases in which the recipient passes on the aid to another person, who enjoys the benefit from the aid, so that this latter person can be considered to be the ultimate beneficiary. It is only in this case that the Commission may extend the recovery order to persons other than the initial recipient. But, in order to extend the recovery to other persons, the Commission must prove that the aid was passed on to them. Whether aid is passed on is an event that can be objectively determined. That is why it is necessary to understand the economics of passing on State aid.
Sale of an asset
Assume company A receives State aid of 40 to buy an asset which has a market price of 100. If it subsequently sells the asset at a price of 100 to company B, then the aid of 40 stays with company A. If the sale price is 80, i.e. 20 less than the market price, then the State aid of 40 is shared 50/50 between company A and company B. In other words, the amount of State aid that is passed on is the difference between the market price of the asset and the sale price. In notation, Sp = M – P, where Sp is amount of aid that is passed on, M is the market price or market value and P is the sale price.
If in the meantime the asset depreciates, say by 10, then its market value is 90. If it is sold by company A to company B at a price of 80, then the amount of State aid that is transferred to company B is 10. Always, the amount of State aid that is passed on is the difference between the market price and the sale price. Later on we need to ask the question why a rational operator would want to pass on State aid to a third party.
Sale of assets and liabilities
Often, State aid that is found to be incompatible with the internal market is granted for the purpose of covering the liabilities of a company. What happens when assets and liabilities are sold together as a package? Assume that company A has a loss-making subsidiary. The subsidiary has assets of 100 [e.g. land, buildings, machinery, inventories and goodwill] and liabilities of 120 [e.g. accumulated debt]. The subsidiary has received State aid of 40. This means that its market value is 20 [= 100 + 40 – 120]. Then company A sells the subsidiary to company B for 20. How much State aid has remained with company A? Company A, as owner of the subsidiary, is responsible for its liabilities. If company A would close down the subsidiary it would incur a loss of 20 [= 100 – 120]. But as a result of the sale, it makes a profit of 20. Therefore, company A enjoys a benefit of 40. To put it differently, if company A would sell the subsidiary without any State aid, then it would have to pay 20 to company B to accept ownership of it. Instead of paying 20, it receives 20. Therefore, the 20 it did not have to pay and the 20 it actually receives make up a sum of 40.
Once more, we see that sale at market price ensures that all aid is kept by the seller. The amount of State aid that goes to company B is only the difference, if any, between the market value and the sale price [or Sp = M – P].
Since often incompatible aid is granted for the purpose of covering operating costs, would there be a different conclusion if aid is used to extinguish operating costs or operating losses before a company is sold? The answer is no, even if seems that the aid goes to pay creditors other than the buyer of the company. Let the subsidiary in the example above have at the beginning of the financial year assets of 100 and liabilities of 100. But at the end of the year it incurs operating losses of 20 for which it receives State aid of 20. The aid is consumed in paying the creditors of the subsidiary. However, the aid enters the balance sheet of the subsidiary as an asset. Therefore, the assets and liabilities of the subsidiary are 120 and 120, respectively. If company A transfers the subsidiary to company B for free or sells it to company B for a nominal price of 1, again all the aid stays with company A because company B pays the market value which is zero.
Amount to be recovered
If the State aid is incompatible with the internal market and has to be recovered, then part of the aid must be recovered from the seller and part of the aid has to be recovered from the buyer. The part that has to be recovered from the seller is the difference between the market value and the sale price.
When do aid recipients pass it on?
State aid may increase the value of the company that receives it. This immediately raises a question. Why would a rational operator not increase the price of the asset or company it sells by the amount of the aid that is incorporated in the asset or company?
The answer is fairly simple and indeed the Commission has often referred to and investigated this possibility. A rational operator would want to pass on State aid to the buyer in order to avoid to pay it back. It is an attempt to circumvent a recovery order. EU courts and the Commission correctly insist that incompatible aid must be recovered from the ultimate beneficiary. If the ultimate beneficiary is the new owner of a subsidised asset or company, then the new owner is liable to pay back.
But there is a logical weakness in this explanation. If the seller is presumed to be a rational operator, it would not want to give away something for nothing. If the subsidised asset or company has more value with the aid, then the rational operator would be willing to sell it at a price that is equal to its increased market value. But if the sale price is equal to the market value, as already shown above, no aid is passed on to the buyer. All aid stays with the seller.
Therefore, it is logically inconsistent to argue that a rational seller would want to pass on State aid to a buyer because that would contradict the assumption that the seller is a rational market operator. The “pass-on” explanation is logically consistent only in two situations: a) the seller is economically related to the buyer or b) the buyer compensates the seller through means other than price.
The first situation is when the seller and buyer are interlinked. For example, they may both belong to the same group of companies. In this case, the ultimate owner gets to keep all of the amount of aid passed on through the sale.
The aid is passed on to the ultimate owner even if the sold company is broken up and different parts are sold to different buyers. What matters is that at least one part of the company can be sold back to the ultimate owner at a price that is below its corresponding market value by the amount of the aid while all the other parts are sold at their true market value.
However, if the objective of the sale is to circumvent a recovery order, since the seller is still formally liable for the aid, the seller must be liquidated or be left only with net liabilities for which the ultimate owner bears no responsibility. Otherwise, the sale would be futile as a means of avoiding paying back the aid.
Therefore, three conditions must hold cumulatively in order for the aid to be passed on. First, the seller and the buyer must be related. For example, the seller can be owned by the buyer or the seller and buyer belong to the same holding company which is the ultimate owner. Second, the transfer of the asset or at least a part of the company must take place at a price that is below market value. Third, the seller must be left with net liabilities for which the ultimate owner cannot be held responsible.
What is not necessary is that the asset or company is transferred intact or as a bloc. Different parts can be sold to different buyers, as long as at least one part can be priced below its true market value by the amount of the aid.
The second situation in which State aid can be passed on is when an unrelated buyer compensates the seller by the amount of the aid that is included in the asset or company that is sold. However, such compensation must be offered in a specific way. It cannot enter the company that is formally liable for the aid. It must reward the seller outside the framework of that company. In addition, if repayment of incompatible aid is to be avoided, the company of the seller must be left with net liabilities for which seller is not responsible.
In conclusion, in both situations there must be under-pricing of the asset or company and what is left behind must be worthless to the seller. Otherwise, the recovering authority will be able to sell assets of the seller to recover the aid. What is not necessary is that the assets or the company are sold as a bloc.
As will be seen later on, one of the criteria in the case law and the decisional practice of the Commission for aid to be recovered from the purchaser of an asset or company is the “economic continuity” of the asset or company. This term appears to have distinct meanings in the Commission’s decision-making practice. Sometimes it means that the asset or company is used by the new owner for the same purpose as under the previous owner. Sometimes economic continuity means the same activities. Sometimes it means that the asset or company constitutes a self-contained or self-supporting entity under the new owner in the sense that it is not absorbed into any of the other operations of the new owner. Finally, sometimes it means that the seller and buyer are related or have the same shareholders.
It also appears that the Commission believes that if there is economic continuity, then the transferred asset or company takes with it the previously granted incompatible aid and is able to carry on the subsidised activity. However, as explained earlier, aid can be passed on regardless of whether the asset or company is sold as a bloc. What is necessary is that the transfer takes place at a price that is below the market value. Economic continuity meaning sale “en bloc” or the same activity is neither a necessary nor a sufficient condition for aid to be passed on. Economic continuity should be replaced by “continuity of ownership”. The existence of a link between the seller and buyer is the only thing that matters.
In conclusion, the table below shows the necessary and sufficient conditions in a four-step test to determine whether incompatible State aid is passed on for the purpose of avoiding recovery.
Four-step test to detect whether incompatible State aid is passed on
|Is the asset or company sold at a price below its market value?||No: No aid is passed on
Yes: Proceed to step 2
Continuity of ownership
|Are the seller and buyer related?||No: Proceed to step 4
Yes: Proceed to step 3
Responsibility for liabilities
|Is the buyer responsible for the net liabilities of the seller?||No: Aid is passed on
Yes: No aid is passed on
Compensation outside transaction
|Is the buyer compensated by the seller outside the sale transaction?||No: No aid is passed on
Yes: Aid is passed on
- The law of passing on State aid
The review in the section of the landmark judgments on detection of aid that is passed on to avoid recovery will show that EU courts appear to be undecided on what conditions are necessary and what are sufficient. Given the fact that it is the Commission that introduced the principle that aid may be recovered from the new owner, it is instructive to identify first the criteria laid down in two important Commission decisions.
Commission decision 1989/661 on aid to Alfa Romeo, which was passed on to Finmeccanica
“Section XI: In principle, the aid should be repaid by the beneficiary, i.e. Alfa Romeo. However, …, Alfa Romeo SpA went into liquidation on 31 December 1987 and transferred all its remaining assets and liabilities to Finmeccanica (see Section V). Thus, whilst it is no longer possible to recover the total amount of the aid of Lit 615,1 billion from the Alfa Romeo Group, the Commission would stress that the situation is the result of an infringement of Article 93 (3) of the EEC Treaty by the Italian Government.”
“It has to be considered that Fiat did not acquire the totality of Alfa Romeo’s assets and restricted its financial liability towards Alfa Romeo’s net financial debts to not more than Lit 700 billion. Therefore, Fiat is not liable for the repayment of the aid, given also the fact that it paid a fair price for the acquired assets of Alfa Romeo.”
“In view of the very special circumstances, therefore, the aid should be recovered from the legal entity which is liable for all the debts of the former Alfa Romeo group exceeding the Lit 700 billion taken over by Fiat, the owner of the Alfa Romeo Group, and which acted as vendor of that Group, i.e. Finmeccanica. Moreover, Finmeccanica is the sole beneficiary of all the revenue generated by the sale of the assets of the former Alfa Romeo Group, i.e. Lit 1 223,5 billion, of which Lit 1 024,6 billion was received from Fiat and Lit 198,9 billion from Credito Italiano and Banco di Roma.”
Here the Commission identifies three issues without, however, explaining whether they are necessary or sufficient. Those are: a) whether a “fair” price was paid, b) who is responsible for the liabilities of the aid recipient and c) who benefits from the proceeds of the sale.
Commission decision 2000/536 on aid to Seleco, which was passed on to Multimedia
“(116) Furthermore, in order to prevent the effectiveness of the decision from being frustrated and the market from continuing to be distorted, the Commission may be compelled to require that the recovery is not restricted to the original firm but is extended to the firm which continues the activity of the original firm, using the transferred means of production, in cases where certain elements of the transfer point to economic continuity between the two firms.”
“(117) The elements examined by the Commission include the purpose of the transfer (assets and liabilities, continuity of the workforce, bundled assets, etc.), the transfer price, the identity of the shareholders or owners of the acquiring firm and of the original firm, the moment at which the transfer was carried out (after the start of the investigation, the initiation of the procedure or the final decision) and, lastly, the economic logic of the transaction.”
“(118) In the case under examination, Seleco hived off in March 1996 its most profitable assets (video projectors and monitors) to Multimedia (set up the preceding year by its only private shareholder, Mr Rossignolo); it injected ITL 29 billion into Multimedia and became its sole owner. This transaction, which thus helped to deprive Seleco doubly of its substance (assets and capital), occurred after the Commission decision of 10 October 1994 to initiate the Article 88(2) procedure. Multimedia is fully controlled by Seleco, which became its sole owner. It is also likely that the transaction was not limited to a transfer of assets and that the transfer of Seleco’s main assets was accompanied by the transfer to Multimedia of the corresponding workforce (or part of it) and hence of its social security debts at the very least.”
In this case, the Commission attaches significance to a new element: the timing of the transaction. Here too, however, several elements are identified without further explanation of their necessity or sufficiency.
This rather confused state of affairs is reflected in landmark judgments, although EU courts seem to attribute more importance to the pricing of the transaction.
C-305/89, Italy v Commission (Alfa Romeo)
“39 In Section XI of the preamble to the contested decision the Commission sets out in detail the grounds on which it decided to demand the recovery of the aid from Finmeccanica, as the legal entity liable for the debts of Alfa Romeo exceeding the liabilities taken over by Fiat and as the beneficiary of all the proceeds of the sale of its assets.”
“40 As regards the argument of the Italian Republic that the obligation to repay the aid should not be borne by Finmeccanica, which had transferred the undertaking to an economic agent in the private sector, it is sufficient to note that Finmeccanica, as the holding company to which Alfa Romeo belonged at the material time, must be regarded as the recipient of the contested aid. As such, it is therefore required to repay that aid.”
Here the Court of Justice correctly points out to the significance of who bears responsibility for the remaining liabilities of the aid recipient. But other issues are not considered.
“77 The fact that the State companies which succeeded British Coal were acquired subsequently in the context of an open and competitive tendering procedure under market conditions suggests that the element of aid enjoyed by British Coal and those State companies does not exist in relation to the private undertakings which won tenders, such as RJB. Since those undertakings bought the companies in question under non-discriminatory competitive conditions and, by definition, at the market price, that is to say at the highest price which a private investor acting under normal competitive conditions was ready to pay for those companies in the situation they were in, in particular after having enjoyed State aid, the aid element was assessed at the market price and included in the purchase price. In such circumstances, the undertakings to which the tenders were granted cannot be regarded as having benefited from an advantage in relation to other market operators … Private undertakings such as RJB, to which tenders were awarded, could not therefore be asked to repay the aid element in question.”
“78 Nevertheless, in principle, where a company which has benefited from aid has been sold at the market price, the purchase price reflects the consequences of the previous aid, and it is the seller of that company that keeps the benefit of the aid. In that case, the previous situation is to be restored primarily through repayment of the aid by the seller.”
Here the Court of Justice is right in identifying the sale price as the decisive element and that if the sale price reflects the market value of the sold company it is sufficient to ensure that no aid is passed on to the buyer.
C-328/99 and C-399/00, Italy and SIM 2 Multimedia v Commission
“69 The Commission was also right to state in points 113 to 115 of the grounds of the contested decision, that:
– The proceeds of the sale of the assets allow the creditors, including the Member State, to be repaid even if they are not sufficient to cover all the debts of the firm and even if, consequently, the aid is not recovered in full. In such circumstances, the liquidation of the firm is still important from a competition standpoint as it frees the market segment previously held by the firm and makes it available to creditors, while giving them the opportunity to acquire the assets and reallocate them more effectively.
– There are, however, circumstances which can hamper that process, jeopardise the effectiveness of the recovery decision and frustrate the rules on State aid. Such is the case when, following a Commission investigation or decision, the assets and liabilities of the firm as an ongoing concern are transferred to another firm controlled by the same persons at below-market prices or by way of procedures that lack transparency. The purpose of such a transaction can be to place the assets out of reach of the Commission decision and to continue the economic activity in question indefinitely.”
“77 If it were permissible, without any condition, for an undertaking experiencing difficulties and on the point of being declared bankrupt to create, during the formal inquiry into the aid granted to it, a subsidiary to which it then transfers its most profitable assets before the conclusion of the inquiry, that would amount to accepting that any company may remove such assets from the parent undertaking when aid is recovered, which would risk depriving the recovery of that aid of its effect in whole or in part.”
“78 Thus the Commission pointed out at points 116 and 117 of the grounds of the contested decision that:
– in order to prevent the effectiveness of the decision to recover the aid from being frustrated and the market from continuing to be distorted, the Commission may be compelled to require that the recovery is not restricted to the original firm but is extended to the firm which continues the activity of the original firm, using the transferred means of production, in cases where certain elements of the transfer point to economic continuity between the two firms;
– the elements examined by the Commission include the purpose of the transfer (assets and liabilities, continuity of the workforce, bundled assets, etc.), the transfer price, the identity of the shareholders or owners of the acquiring firm and of the original firm, the moment at which the transfer was carried out (after the start of the investigation, the initiation of the procedure or the final decision) and, lastly, the economic logic of the transaction.”
In this case, the Court of Justice endorses all the elements identified in Commission decisions without explaining whether they have to be present cumulatively or what their ranking is. The Commission is, of course, correct to stress the importance of the transaction price and the links between the buyer and the seller. But there is no ranking of the various elements in terms of a logical decision-making sequence. It also refers to other issues that do not necessarily have any bearing on whether State aid is passed on, such as the continuity of the workforce or the bundling of assets.
C-277/00, Germany v Commission (SMI)
“92 First of all, the German Government has pointed out, and the Commission has not denied, that both the sale of SMI’s shares to MD & D and the sale of SMI’s assets to MD & D were made at the market price. Consequently, these transactions did not remove resources from the bankrupt undertaking’s assets.”
“93 Secondly, none of these transactions was carried out by SMI: they were performed on the initiative of the bankruptcy administrator who, acting under judicial supervision, was responsible for working to satisfy creditors as far as possible. … the Commission has shown nothing to suggest that, in this case, any actions were performed which defrauded the creditors and may have reduced the assets of the insolvent company, nor has it maintained that there was any breach of the principle of the equal ranking of creditors to the loss of the public creditors. In such a situation, if the claims in respect of recovery of the disputed aid were properly listed among the liabilities of the liquidation, the sale of SMI’s assets at the market price cannot have led to any form of evasion of the obligation to recover that aid.”
“94 Thirdly, it is likewise not possible to accept the argument put forward by the Commission that the distortion of competition cannot be eliminated in the present case by listing the relevant claim among SMI’s liabilities, since the sale of SMI’s assets to MD & D was made, firstly, ‘en bloc’, and, secondly, without employing an open and transparent procedure, thus allowing MD & D to continue the subsidised activities.”
Here the Court of Justice correctly places the equivalence between the sale price and market value in the position of the overarching principle. Moreover, once the sale price is equal to the market value, it becomes irrelevant that the sale is “an bloc”, that subsidised activities are continued or that the sale was effected through a process that was not open.
This last finding of the Court is important. An auction or a competitive bidding procedure is just one means of ensuring that the sale price is equal to the market price. But it is not the only way of identifying the market value of the sold asset or company.
T‑415/05, Hellenic Republic v Commission
“135 The time of the transfer of the assets to the new company is among the criteria which may, to varying degrees according to the case, be taken into account. Indeed, it is clear from the case-law that, in order to determine whether the obligation to recover aid paid to a company in difficulty can be extended to a new company to which the former company has transferred certain assets, where that transfer gives rise to the conclusion that there was financial continuity between the two companies, the following elements may be taken into consideration: the purpose of the transfer (assets and liabilities, continuity of the workforce, bundled assets), the transfer price, the identity of the shareholders or owners of the acquiring firm and of the original firm, the moment at which the transfer was carried out (after the start of the investigation, the initiation of the procedure or the final decision) and, lastly, the economic logic of the transaction”.
The General Court endorsed the elements used by the Commission without taking into account the ranking and nuances introduced by the Court of Justice in previous judgments.
T-123/09, Ryanair v Commission (sale of Alitalia)
“155 Concerning the obligation to recover aid paid to a company in difficulty, it should be recalled that, as is apparent from the case-law, it may be extended to a new company to which the company in question has transferred part of its assets, where that transfer permits the conclusion that there is an economic continuity between the two companies. For a finding of the existence of an economic continuity, the following factors may be taken into consideration: the subject-matter of the transfer (assets and liabilities, maintenance of the workforce, grouped assets), the price of the transfer, the identity of the shareholders or the owners of the undertaking which takes over and of the initial undertaking, the time at which the transfer takes place (after the beginning of the investigation, the opening of the procedure or the final decision) or the economic logic of the operation”.
“156 [The] case-law does not require the Commission to take into account the whole of the above factors, as is demonstrated by use of the expression ‘may be taken into consideration’. It follows that the Commission was not required to examine, in particular and over and above the other criteria, the time at which the transfer of the assets of the Alitalia group to CAI took place, which is one of the factors which ‘may’ be taken into consideration in order to set aside the economic continuity between those two entities.”
“157 It is apparent … that there was no continuity between Alitalia and CAI, on the basis of the subject-matter and the price of the transfer of assets, of the fact that the shareholders were not identical, and of the economic logic of the operation.”
“158 Those assets had not been offered in a grouped manner in the context of the call for declarations of interest and did not therefore correspond to homogeneous economic units, which could have had the effect of limiting the choice of prospective buyers.”
“159 Concerning the shareholders of Alitalia and CAI, … they were not one and the same.”
“160 No automatic transfer of employment contracts took place between Alitalia and CAI.”
“161 The Commission examined and confirmed the economic logic of the operation.”
In this case, the General Court appears to give a preeminent role to the economic continuity between companies. As seen from earlier judgments of the Court of Justice and from the economic analysis in section 2, the primary consideration should be whether the sale price is equal to or below market value. The General Court confirms the view of the Commission that several elements “may be” taken into account without prioritising them and without identifying which are the necessary or sufficient conditions. As argued earlier, some of those elements such as “employment contracts” or the grouping of the assets are not really relevant.
C‑127/16 P, SNCF Mobilités v Commission (sale of Sernam SA to Financière Sernam)
SNCF sold the assets of Sernam SA en bloc to Financière Sernam for a negative price. Before the sale, SNCF recapitalised Sernam and waived debt it was owed.
“56 The General Court was correct in holding [that there was] a clear contrast between the sale of Sernam in its entirety, including assets and liabilities, and the sale of its assets en bloc, and in inferring therefrom, …, that the transfer of Sernam’s assets en bloc …, had to be construed as excluding the liabilities.”
“106 The illegal aid must be recovered from the company which carries on the economic activity of the undertaking which initially benefited from the advantage associated with the grant of State aid and which, therefore, retains the actual benefit thereof”.
“108 It must be remembered that such [economic] continuity between companies who are parties to a transfer of assets is assessed in the light of the subject matter of the transfer (assets and liabilities, maintenance of the workforce, bundled assets), the transfer price, the identity of the shareholders or owners of the acquiring undertaking and the original undertaking, the moment when the transfer takes place (after the commencement of the investigation, opening of the procedure or the final decision) and also the economic logic of the operation”.
“110 Secondly, …, the General Court was justified in finding that the offer from Sernam’s management team was not the result of an open and transparent tendering procedure. It was thus correct in holding, …, that for that reason the negative price paid in the present case was not a market price.”
“111 In substantiating that determination, moreover, the General Court looked to other factors, …, inter alia by observing, …, that the alleged market price had been perceived as operating aid and that the expert reports provided did not show that the transfer price was a market price.”
“113 The General Court was accordingly correct, …, in agreeing with the Commission when it took into account the links between Sernam and Sernam Xpress before going on to find that Sernam Xpress was the debtor of the obligation to repay the illegal aid, an obligation ultimately passed on to Financière Sernam by reason of its merger with Sernam Xpress.”
“143 Inasmuch as the applicant disputes the General Court’s conclusion … regarding the sale price of Sernam’s assets en bloc, it should be observed that it was in the light of the obligation to exclude the liabilities from that transfer that the General Court found that the possibility of obtaining a negative price was by definition excluded.”
In this recent judgment, the Court of Justice concurs with the General Court, first, in stressing the significance of market price. Second, when liabilities are excluded from the sale of a company, the seller may not pay the buyer to accept ownership of the company [i.e. the so-called negative price]. Third, links between old and new owners cannot be disregarded.
In conclusion, EU courts attach significance to whether a sale takes place at a market price, whether assets are transferred together with liabilities and whether there are economic links between old and new owners. However, at the same time, they keep referring to the Commission’s list of criteria. The pending NCHZ case gives them an opportunity to clarify that the market price is the primary criterion and that other issues should be taken into account only when the sale does not take place at a market price.
- The sale of NCHZ to Fortischem
In view of the importance of the sale price in determining whether State aid is passed on from one company to another, this section examines how the Commission actually assessed the pricing of the sale of NCHZ to Fortischem. What makes this case particularly interesting is that NCHZ was first sold through a bidding process to a company called Via Chem Slovakia which then sold it to Fortischem.
Section 5.7 of Commission decision 2015/1826 examined whether State aid was passed on to Fortischem. It focused on the economic continuity between NCHZ and Fortischem, the selling price, the scope of the transaction, the identity of the owners, the timing of the sale and the economic logic of the operation. It concluded that State aid was passed on to Fortischem and, therefore, ordered Slovakia to recover it from Fortischem.
Before, turning our attention to the selling price, it is important to point out that the Commission used the term “economic continuity” to describe the transfer of assets as a “going concern”. In fact, the Commission acknowledged in section 5.7.3 of its decision that “(162) … there are no links between the original and the new owners of the NCHZ business transferred to Fortischem.”
The review of the case law in the previous section shows that EU courts refer to “economic continuity” both in the sense of single ownership – that the seller and buyer are one and the same person or that they are economically linked – and also in the sense that assets, and in some cases, liabilities, are transferred as a single unit. These are two different meanings which need to be kept apart. As argued in section 2 of this paper, what matters is single or related ownership, not whether assets are transferred as a bloc or as a going concern.
In this connection, it also needs to be pointed out that the Commission stated that “(149) … the larger the part of the original business that is transferred to a new entity, the higher the likelihood that the economic activity related to these assets continues to benefit from the incompatible aid”. This is an unsubstantiated claim. A description of the assets and activities that were transferred is not the same as proving that they contained State aid. Aid is contained in an asset only when its transfer price or sale price is below its economic value.
Now, with respect to the sale price, the Commission justifiably noted that the tender process was unusual. Bidders could choose whether to undertake certain commitments or not. If they chose to undertake those commitments, they had the right to match the offer of the highest bidder who did not choose to undertake commitments.
It is a well-understood and uncontroversial principle that when bidders have to assume costly commitments, the value of the asset that is sold declines and, therefore, bidders also lower the price they are willing to pay for the asset. This kind of conditional sale is not consonant with maximisation of revenue from the sale. For this reason (138) … the Commission considers that this possibility for one bidder to raise his bid after all the bids have been submitted is likely to discourage potential participants and/or have a negative impact on the bids that are made.” The Commission made several similar statements, such as, for example, “(137) the tender came with conditions attached that appear likely to have lowered the value of the assets”, “(140) … this condition could discourage bidders who do not wish to bid with commitments because they know that”, “(148) … the price paid … was probably not a true market price”.
It is true that a bidder who accepted the commitments would have an advantage over the highest bidder who did not accept the commitments because the former was offered the option to match the offer of the latter. But this is the wrong starting point. This reasoning is valid only after the bids were submitted. I will prove that the commitments were irrelevant and no bidder would have any incentive to undertake the commitments. Indeed, as the Commission admits “(144) … no bids with commitments were received”. The correct starting point for the assessment of the tender is to ask whether any bidder would have any incentive to undertake the commitments, despite the fact that the undertaking of commitments provided them with the option to match the offer of the highest bidder with no commitments.
Assume that there are two bidders A and B. Bidder A can operate the asset over its life for a cost of 30. Bidder B’s cost is 40. To simplify the calculations without any loss of generality, let these costs include the cost of raising finance for the project. Also assume that over its life, the asset can generate revenue of 100 and that the acceptance of commitments increases operating costs by 20.
Auction theory says that if bidders do not know the costs of their competitors or how many companies would be interested to submit offers, they maximise their chances of winning the auction by submitting the highest possible offer.
Option 1: Acceptance of commitments: Highest offer: 50 [= 100 – 30 – 20]
Option 2: No commitments: Highest offer: 70 [= 100 – 30]
Option 1: Acceptance of commitments: Highest offer: 40 [= 100 – 40 – 20]
Option 2: No commitments: Highest offer: 60 [= 100 – 40]
Since neither bidder knows how high others will bid, they cannot be sure that they can match the highest offer with no commitments if they themselves accept commitments. On the other hand, if they do not accept commitments, they can maximise their offer so that those that accept commitments will not be able to match it. This is shown by the fact that if bidder A accepts commitments, it will make an offer of 50. Bidder B, by not accepting commitments, can make an offer of 60 that cannot be matched by bidder A, even if bidder A has the possibility to make a new offer once the bids are revealed and even if bidder A is more efficient than B.
Therefore, the dominant strategy of all bidders was not to accept the commitments. Since the commitments were not obligatory, they were in fact irrelevant. Not surprisingly, no one submitted bids with commitments. The winning price was the highest that could be obtained and, therefore, it must be regarded as the market price of the sold assets of NCHZ.
This article has made four arguments. First, the case law on how State aid may be passed on to escape from recovery needs clarification. Different judgments appear to give priority to different aspects of transactions between aid recipients and third parties to which previously subsidised assets are sold.
Second, the Commission’s approach is based on a checklist that contains both relevant and irrelevant elements. The list is not structured in terms of necessary or sufficient elements. The concept of economic continuity appears to have distinct meanings. Only continuity of ownership is relevant.
Third, the article has proposed a structured four-step test to determine whether incompatible State aid is passed on from the aid recipient to another entity which is economically linked with it.
Fourth, the Commission’s assessment of the selling price of NCHZ to Via Chem Slovakia and then to Fortischem appears to be logically incorrect.
1 The full text of the Commission decision was published in OJ L 269, 15 October 2015, and can be accessed at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2015.269.01.0071.01.ENG&toc=OJ:L:2015:269:TOC.