A private investor may invest in a troubled company that is restructuring is order to increase its future profitability.
From July 2002 to December 2002, the French government made a number of public announcement declaring its intention to support France Telecom which at that time was in financial trouble. Initially the Commission also considered that the public pronouncements in favour of France Telecom constituted State aid because they shaped investors’ perception of the company and helped it to gain access to capital markets. In October and November of 2002, the shareholders of France Telecom expelled its old management and the company initiated a restructuring programme. The credit rating of France Telecom was raised and shareholders, including the French government, agreed to inject additional capital. In December 2002, France offered a shareholder loan of EUR 9 billion. In view of the troubles of France Telecom, the Commission was of the opinion that the loan did not conform with the market investor principle. The Commission assumed that the loan was the outcome of the earlier public pronouncements. However, EU courts faulted the Commission on the grounds that it had ignored the improvement in the credit outlook and commercial prospects of France Telecom as a result of the restructuring process.
The case law principles
The Commission neatly summarised in paragraph 134 of its decision the main points of the judgment of the Court of Justice in case C-399/10 P, Bouygues v European Commission [they are extracted from paragraphs 103-110 of that judgment]:
First, several consecutive measures of state intervention must be regarded as a single intervention where, having regard to their chronology, their purpose and the circumstances of the undertaking at the time of those interventions, they are so closely linked to each other that they are inseparable from one another.
Second, state intervention capable of both placing the undertakings which it applies to in a more favourable position than others and creating a sufficiently concrete risk of imposing an additional burden on the state in the future, may place a burden on the resources of the state.
Third, advantages given in the form of a state guarantee can entail an additional burden on the state.
Fourth, where in economic terms, the alteration of the market conditions which gives rise to an advantage given indirectly to certain undertakings is the consequence of the public authorities’ loss of revenue, even the fact that investors then take independent decisions does not mean that the connection between the loss of revenue and the advantage given to the undertakings in question has been eliminated.
Fifth, for the purposes of establishing the existence of State aid, the Commission must prove a sufficiently direct link between, on the one hand, the advantage given to the beneficiary and, on the other, a reduction of the state budget or a sufficiently concrete economic risk of a burden on that budget.
Sixth, however, it is not necessary that such a reduction, or even such a risk, should correspond or be equivalent to that advantage, or that the advantage has as its counterpoint such a reduction or such a risk, or that it is of the same nature as the commitment of state resources from which it derives.
On the basis of those principles, the Commission re-assessed the facts of the case.
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Links between the various state interventions
Although the Commission found in its present decision that the measures taken by France between July and October 2002 had a significant effect on market sentiment and the credit rating of France Telecom, they were not inextricably linked to the December 2002 loan.
“(142) The General Court held that the shareholder loan offer granted by the State to France Telecom came only in December 2002, that the French Government had made no firm commitment in July 2002, and that the decision to provide France Télécom with financial support through the shareholder loan offer had been taken not in July 2002 but in early December 2002.” “(143) The General Court also concluded that, between the months of July and December 2002, a private investor might have displayed behaviour similar to that displayed by the French State.”
Indeed the General Court said that it was natural for shareholders to support publicly their companies.
“(145) In addition, the General Court noted ‘a number of relevant factors which effectively determined the French State’s decision in December 2002, that is, in addition to restoring the confidence of the financial markets and preserving FT’s credit rating, primarily the restructuring and rebalancing measures taken within FT, including the … plan drawn up by its new management between October and December 2002, which provided in particular for the implementation of a plan, “the TOP plan”.’ It also considered as ‘key factors’ in the case ‘the commitment given in September 2002 by a banking syndicate to underwrite that part of an increase in the capital of FT which was intended for private investors, the sale by FT of some EUR 2,5 billion in non-strategic assets between July and December 2002, the appointment of a new management team for the company in October 2002, and the resolution in November 2002 of the dispute between FT and the German operator Mobilcom. Taken as a whole, those factors brought about a marked improvement in FT’s operational prospects and performance during the second half of 2002.’”
“(146) [The Court of Justice] found that ‘…, deciding in advance in July 2002 the time when the prudent private investor criterion fell to be assessed would have necessarily excluded from that assessment relevant factors that occurred between July 2002 and December 2002.’”
On the basis of the above considerations, the Commission concluded that “(147) there is no inextricable link between the measures that the French authorities took prior to December 2002 and the measures that they took in December 2002. It is necessary therefore to examine whether, between 4 December 2002 (when the State announced its shareholder loan to France Télécom) and 20 December 2002 (when the State sent France Télécom a signed and initialled draft shareholder loan agreement), the conditions for State aid were met, and in particular, whether the State acted in the same way as a prudent private investor in a market economy.”
The Commission found in the present decision that the measures taken by France in December 2002 conformed with the market economy investor principle.
“(148) The December 2002 shareholder loan appears to confer an advantage on France Télécom, since it enables it to increase its means of financing and to reassure the market as to its ability to meet its maturities. Even if the loan agreement has never been signed, the appearance given to the market of the existence of such a loan is, a priori, likely to confer an advantage on France Télécom as the market has considered the Company’s financial situation to be more secure. This may have influenced France Télécom’s borrowing terms. The advantageous effect of the measures taken by the State in December 2002 in favour of France Télécom is thus apparent.”
“(151) The announcement of 4 December 2002 and the shareholder loan offer of 20 December 2002 must be jointly examined.” “(152) In December 2002, it appeared that the confidence of the financial markets in France Télécom’s future had been largely restored and that France Télécom’s credit rating had been preserved, mainly as a result of the restructuring and rebalancing measures taken within FT, including the appointment of new management and their development of the Ambition 2005 plan between October and December 2002, which included the implementation of a plan, the ‘TOP plan’, to improve the Company’s operational performance.”
“(154) France’s participation in the strengthening of the Company’s capital base was conditional on the presentation to the market of a credible plan for the restructuring of France Télécom. The Ambition 2005 plan and the TOP plan together form a complete and rational coherent plan. It permits among other things the generation of a EUR 15 billion cash flow via an operational improvement and a disposal of assets that does not involve any amputation of core businesses.” “(155) The TOP plan represents a considerable effort on France Télécom’s part. It is an overall plan for a change of management direction based on specific actions The French authorities stress that the plan makes possible an increase in the Company’s profitability with a rate of return on investment (RRI) of 43% in 2005 for those investors who participated in the April 2003 capital increase, that is, a much higher return than the reference RRI (11%) expected by a private investor in the telecommunications sector. The TOP plan also includes a staff management optimisation chapter.”
“(156) As regards the expected return, the French authorities state that compliance with the prudent private investor principle is also demonstrated by the high profitability prospects of the TOP plan, as confirmed by the plan’s favourable reception by the market. France Télécom’s share price rebounded on 2 October 2002 (up more than 10.4% on the previous week) following the announcement of the appointment of the new CEO, and the share price’s progress continued upwards with the announcement of the TOP plan and of the new executive board on 5 December 2002, which led to a rise of more than 25% in two days.”
“(158) The State had already received the undertaking, conditional on the presentation to the market of a credible plan, from the banking syndicate and it knew full well at the end of November that that condition would be met given the market’s positive reaction to the appointment of the new management. In addition to the commitment given in September 2002 by the banking syndicate to underwrite that part of an increase in the capital of FT which was intended for private investors, consideration must be given to other key factors, namely the sale by FT of some EUR 2,5 billion in non-strategic assets between July and December 2002, the appointment of a new management team for the company in October 2002, and the resolution in November 2002 of the dispute between FT and the German operator Mobilcom. Taken as a whole, those factors brought about a marked improvement in FT’s operational prospects and performance during the second half of 2002.”
“(159) France Télécom’s operating costs were increasing more slowly than its turnover, which meant that its profitability was improving. Moreover, operating results and cash flow were increasing (with cash flow up 15 % on the first half of 2001). This performance was confirmed when the 2002 accounts were published. Furthermore, France Télécom was not in a cessation of payments situation.”
“(161) Market confidence in a recovery of France Télécom’s financial situation may also be based on the fact that the losses were mainly due to the exceptional provisions and write-downs linked to the depreciation of assets acquired prior to the entirely unforeseeable reversal of the markets and that France Télécom’s operating costs were increasing more slowly than its turnover. Moreover, operating results and cash flow were increasing.”
“(162) The State shareholder took every step to ensure the participation of public and private shareholders in the strengthening of France Télécom’s capital base. Thus, the announcement of the State’s intention to participate in the strengthening of the Company’s capital base dates from 12 September 2002, and on that date the banking syndicate had already undertaken to underwrite, when the time came, that part of a capital increase which was intended for private investors alongside the public shareholder, on condition that a credible rebalancing plan was announced to the market. According to the French authorities, the State’s participation was also conditional on the announcement of a plan considered by the market to be credible, and the State did not commit itself formally prior to the banks’ formal undertaking. The terms of the operation were the same for the public bodies and all the private operators participating in the strengthening of the Company’s capital base.”
“(164) On 4 December 2002, once the condition for the banking syndicate’s commitment had been fulfilled — namely, the announcement to the market of a credible rebalancing plan — the State announced the shareholder loan to France Télécom.” “(165) In this situation, it would have been rational for a prudent private operator in similar circumstances to the State (France Télécom’s majority shareholder) to express its oral support for France Télécom. The loan granted by the State, as majority shareholder, in view of the planned investment, was in this case a low-risk, profitable and normal transaction — pending a capital increase (on equal terms) — aimed at safeguarding the majority shareholder’s financial interests at a time (the month of December) when it was not possible to recapitalise France Télécom for reasons of scheduling.’
“(166) Indeed, as France Télécom explains, the market window virtually closes at the end of November, since investors have to take into account their financial year-end on 31 December and major deals can be difficult to arrange. In addition, a minimum of 15 days’ notice must be given before holding an extraordinary general meeting to approve a capital increase, which takes a further 30 days to complete.” “(167) The loan is temporary and provides bridging finance for the capital increase, which by many accounts is expected to be a success. France Télécom has cited several examples of shareholder loans dating from the time of the events as evidence that a loan from a majority shareholder to be converted into equity during a capital increase is standard practice.”
In conclusion, the announcement of the shareholder loan of 4 December 2002 and the offer of the shareholder loan of 20 December 2002, “(174) meet the criterion of the prudent private investor in a market economy. Therefore, this measure should not be considered as an advantage for France Télécom.”
Consequently, the interventions of the French state did not constitute State aid.
1 The full text of the Commission decision may be accessed at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018D1616&from=EN.