A new misnomer in State aid law: single economic unit with separate legal personality (C 357/14 P, Dunamenti Erőmű/Commission)

electricity grid cables
The following blog post is a contributory piece by Emanuela Matei, Associate Researcher at the Centre of European Legal Studies, Bucharest. Matei holds a Juris Master in European Business Law (Lund University, June 2012), a Magister legum (Lund University, June 2010) and a BSc in Economics & Business Administration (Lund University, June 2009). We are very glad to welcome her on the blog today.
Market Economy Investor Principle (‘MEIP’) postulates that ‘State exist, or can exist, with the same modus vivendi as a private company’[1]. In establishing the existence of State aid the Commission applies the MEIP. In the case of an aid element derived from a guarantee, the premium must be deducted from the difference between the market rate and the rate obtained because of the guarantee. Moreover, the previously strict delineation between the regulatory and commercial functions of the State has been lately blurred in the EU case law[2]. The present case brings about a new form of misnomer[3]: a revised single economic unit theory, where the separate legal personality of the entities would actually matter.

I. Facts

In the context of the accession of Hungary to the EU in 2004, a major change in the legal and economic features of the electricity market has certainly occurred. Hence, under such circumstances a State aid might become incompatible, while the legitimate expectations of the interested party or the principle of legal certainty could still offer protection to the beneficiaries. The necessary condition for this protection is the notification of State aid as provided by Article 108(3) TFEU.

Dunamenti Erőmű is a Hungarian power plant operator, former public company, which, at the relevant time, was owned by a Belgian investor, Electrabel SA. The rest of 25% was held by the state-owned undertaking, MVM. Prior to its privatisation in 1995, Dunamenti Erőmű entered into a power purchase agreement (‘PPAs’) with MVM. The PPAs contract was meant to remain in force for a period of 15 and respectively, 20 years and it had two main components:

  • It reserved for the parent company, MVM, all or a substantial part of the power plants production and
  • It required MVM to purchase at a regulated price a definite minimum quantity of electricity from each power plant operated under a PPA.

The obligation to purchase a minimum quantity of electricity at a price covering capital, fixed costs and variable costs over a significant part of the lifetime of the generating units inferred a guaranteed return on investment for the electricity generators covered by the PPAs contracts. This assurance was found to constitute incompatible State aid by the Commission in its Decision 2009/609/EC of 4 June 2008.

In April 2009, Dunamenti Erőmű lodged an appeal against the negative Commission Decision of 4 June 2008 claiming that:

  1. The cumulative criteria of the definition of State aid in Article 107(1) TFEU were not fulfilled;
  2. In alternative, if it were State aid, then it would not be new aid;
  3. Commission committed several errors as to the compatibility of the State aid;
  4. The legality of the order for recovery of that aid was disputed.

The General Court rejected the action for annulment on 30 April 2014 and that ruling makes subject to contestation before the CJEU in the present case.

II. The judgment of CJEU Case C‑357/14 P, Electrabel v Commission

Time assessment is of essence for the present judgment. The main issue under review is the appropriate moment for the application of the MEIP test. Is it the period pre-liberalisation of the Hungarian electricity market, when the PPAs agreement was concluded or the period post-accession, when the Article 107 TFEU has become directly applicable on the measure in question?

The CJEU established in its jurisprudence that all the relevant evidence, including the nature, subject-matter, context, objectives and terms imposed on a measure must be considered by the Commission for the appreciation of the fact whether the Member State adopted the measure under State aid examination as a shareholder or as a public authority. (Commission v EDF, C‑124/10 P, EU:C:2012:318 [86]). The information serving as evidence must have been available at the very moment, when the decision to grant the aid was adopted, taking into account the fact that the measure must be notified in advance (Commission v EDF, C‑124/10 P, EU:C:2012:318 [104-105]).

On the sole ground that the change in the ownership of the power plants took place before the date of the accession of Hungary to the EU, the General Court dismissed the argument of the applicant that the aid flowing from the PPA had been repaid through the sale of shareholdings (Dunamenti Erőmű v Commission, Case T‑179/09, EU:T:2014:236 [69]).

The CJEU indicated that the dismissal led to an error of substance, though it did not consider that this substantive error could affect the result of the appeal, in the present case, since other valid legal grounds supported the operative part of the contested ruling (Lestelle v Commission, C‑30/91 P, EU:C:1992:252 [28], and FIAMM and Others v Council and Commission, C‑120/06 P and C‑121/06 P, EU:C:2008:476 [187]).

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The privatisation of Dunamenti Erőmű took place in the middle of the 1990s, when MVM sold its holdings to Electrabel SA. After its privatisation, the acquired company continued nonetheless to operate on the Hungarian electricity market. Thus, it continued to carry out the activities affected by the State aid and retained the benefit of the advantage resulting from the PPAs.

According to the judgment of the CJEU in the present case, the acquirer of the holdings would not retain any advantage, provided that it purchased the holdings at ‘the highest price which a private investor acting under normal competitive conditions was ready to pay’ [112]. The advantage, which the guarantee granted by the PPAs entailed had been considered distinctly by the CJEU and attributed to the acquired company, Dunamenti Erőmű.

The CJEU departed from the expected application of the doctrine of single economic unit, allowing in the present case a distinction based on the principle of separate legal personality, which is the antithesis of the concept of single economic unit in matters of competition law, in general and more specifically, of State aid law.

In particular, even if that company was sold by the Hungarian State to Electrabel at the market price and that price fully reflected the value of the advantage resulting from the PPA at issue, it follows from the findings of fact made by the General Court, as set out in the preceding paragraph, that after its privatisation, Dunamenti Erőmű retained its legal personality and continued to carry out the activities affected by the State aid at issue, and consequently Dunamenti Erőmű in fact retained the benefit of the advantage resulting from that agreement, as it applied as from 1 May 2004 and from which Dunamenti Erőmű benefited on the market in relation to its competitors [115].

In this way, the acquired entity could be represented as the actual beneficiary of State aid, while Electrabel SA has been regarded as a fully separate entity, despite the fact that it held 75% of the acquired company. Moreover, the PPAs contract was already in place, when the acquisition has been fulfilled. From the perspective of a private investor as Electrabel unequivocally is, the benefit of the PPA stretching on a time horizon of 15-20 years must have definitely played a role in its decision to acquire the Hungarian operator. The idea that the price paid by Electrabel in 1995 did not cover the PPAs appears to be purely speculative. The Commission should have assessed the matter whether the price paid by Electrabel took into account the PPAs as part of the MEIP test. This is unfortunately not the conclusion of the CJEU and in this perspective, AG Wathelet had a different view.

III. Opinion of AG Wathelet of 1 July 2015

The AG projects the following line of argumentation. Even if the PPA had entailed an advantage, the acquisition of Dunamenti Erőmű by Electrabel following a tendering procedure could have compensated any alleged advantage [99-100]. Moreover, the accession of Hungary to the EU had no effect on the link between the PPA and Dunamenti Erőmű’s privatisation [101].

The applicant criticises the General Court for endorsing the contradictory approach adopted by the Commission. The Commission recognised that, in the context of the privatisation, the PPA was an ‘essential condition’ for the sale of Dunamenti Erőmű at a profit, or at least ‘on market terms’, though, in the next step, it completely overlooked that ‘essential condition’ when assessing the PPA’s compliance with the State aid rules. Did the Commission misapply the private investor test?

The proper application of the private investor test according to the Commission could not take into account events that occurred a decade before the accession to the EU. Consequently, the link between the privatisation and the PPAs agreement has been fully disregarded by the Commission. First, the AG and later on, the CJEU, disagreed with the view adopted by the Commission.

‘[i]t is for the Commission to carry out a global assessment, taking into account — in addition to the evidence provided by that Member State — all other relevant evidence enabling it to determine whether the Member State took the measure in question in its capacity as shareholder or as a public authority. In particular … the nature and subject-matter of that measure are relevant in that regard, as is its context, the objective pursued and the rules to which the measure is subject’. (Commission v EDF C‑124/10 P, EU:C:2012:318 [86])

The MEIP test is construed to reproduce the decisional state of mind of a hypothetical market operator acting in the same way as the State had actually acted, when it granted the aid. Hence, the temporal context should describe a market, which was about to be liberalised, not the situation of the market in May 2004. The AG emphasised that there was nothing in the Accession Act that could prevent the Commission to apply the MEIP test with reference to the position of MVM on the market as it was in 1995.

Since the unlawfulness of such a State aid refers to the lack of notification and the notification must be done before the adoption of a measure with State aid character, it appears even clearer that the MEIP shall apply to the situation before the implementation of State aid. This finding concurs with the practice of the Commission (See, in particular, recitals 81 and 82 of Decision 2008/214, recital 57 of Decision 2009/174 and recital 169 et seq. of Decision 2010/690).

The AG concludes that by rejecting Dunamenti Erőmű’s arguments concerning the Commission’s refusal to consider, when examining the Commission’s application of the private investor test, the intrinsic link between PPAs and privatisation, the General Court erred in law and, in that respect, its judgment should be set aside.

IV. Same criticism, different outcomes

The CJEU agreed with AG Wathelet as to the existence of a substantive error committed by the General Court in paragraph 69 in its ruling of 30 April 2014, but it did not attach the same legal relevance to it.

1. Single economic entity

Referring to the judgment in Elliniki Nafpigokataskevastiki (T‑384/08, EU:T:2011:650 [66-8]), the Commission held that the absence of an advantage to the purchaser does not exclude the presence of an advantage to the acquired business. However if the latter forms a single economic unit together with the acquirer, then no such difference could be made.

The Greek case is not directly comparable with the Hungarian case. First, the Greek case concerns a chain of transactions involving several parties, which culminates with the integration of the initial two acquirers and the acquired entity in ThyssenKrupp Marine Systems AG, a division of ThyssenKrupp. Secondly, the type of aid is an indemnification guarantee that gives an insurance against the application of the State aid rules providing for the recovery of illegal State aid. Consequently, the Commission did not decide that by granting the guarantee the public company in question did not act like a prudent private investor. The Commission concluded, mainly, that there was an advantage in favour of the acquired entity on the ground that the private investor test was not applicable in this case.

If the acquirer actually exercises control over the acquired entity by involving itself directly or indirectly in the management, it must be considered as taking part in the economic activity carried on by the controlled undertaking (Case C‑222/04 Cassa di Risparmio di Firenze and Others [112, 118]). The possibility to exercise functions relating to control, direction and financial support – going beyond the simple placing of capital by an investor – could be illustrated by the existence of organic and functional links between an entity owning a controlling shareholding in a company and the controlled company itself. If members of the management committee and the controlling body of the acquirer are appointed to the equivalent bodies of the controlled company, this possibility exists (Cassa di Risparmio di Firenze and Others, [116-7]).

In case C-480/09 P, AceaElectrabel Produzione/Commission, the CJEU concluded that notwithstanding the fact that each of the newly constituted manufacturing companies had a legal personality separate from the former company, as far as the aid granted is concerned, they formed together a single group [47]. This finding appears to have been reversed by the present ruling.

2. MEIP applied on the sale of holdings and the PPAs contract

The argument of the applicant supported the idea that in its quality of shareholder of the company Dunamenti Erőmű, the Hungarian state acted as a private investor, first when it entered into the PPAs agreement in order to prepare a good ground for the privatisation and, second, when it sold its holdings in Dunamenti Erőmű. From the perspective of the buyer, the PPAs constitute a guarantee for obtaining an expected return on investment and this guarantee implies an incentive to pay a higher price. The key question is whether the buyer would not get involved in the activity of its subsidiary taken into account the long term type of investment.


If the arguments presented by the applicant can be confirmed and the acquirer and the acquired entity form a single economic unit, the existence of State aid would be questionable and the error committed by the General Court would not be inconsequential as to the provisions of the operative part of the named ruling. In any case, the importance of maintaining a separate legal personality from the perspective of determining the actual beneficiary of the State aid in the aftermath of an acquisition of shares should be subject to future clarifications.


[1] M. Parish, ‘On the private investor principle’ (2003) 28 ELR 70.

[2] Commission/EDF, C-124/10 P, [108]. ‘It has been found that, where a Member State confers an economic advantage upon an undertaking belonging to it, the fiscal nature of the process used to grant that advantage does not mean that the applicability of the private investor test can automatically be ruled out. It follows, a fortiori, that the precise modus operandi chosen by the Member State is irrelevant for the purposes of assessing whether that test applies’.

[3] I paraphrase P. Nicolaides (Maastricht, 2008), Essays on Law and Economics of State Aid, p. 233-234.

[Photo by Nick Page from flickr.com]



Emanuela Matei

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