The Market Economy Investor Principle also applies to transactions between related companies. A private investor enjoys a margin of discretion in deciding in favour or against an investment. However, despite that margin of discretion, a prudent private investor always carries out an assessment of the potential profitability of the investment before it commits any money.
When a public authority, such as a ministry, or a municipality, invests in a company, it is well understood that the investment will be deemed to be State aid unless the invested amount is de minimis or the terms of the investment satisfy the market economy investor principle [MEIP]. The question that often arises is whether the MEIP applies as well to transactions between a parent company and a subsidiary. This situation, of course, falls within the scope of State aid rules only if the company belongs to the state or is somehow under the control of the state. But still the question remains whether the same criteria apply to transactions within the same group of companies.
The recent judgment of the General Court in case T-305/13, SACE and Sace BT v European Commission provides an unequivocal answer. Yes, the same criteria apply. It is irrelevant that the investment is made by one entity of the group into another entity of the same group. In this situation, the parent company does not have to confine itself to the pursuit of short-term profitability. It can also take into account broader implications of the investment on the group as a whole. Broadening the range of considerations beyond short-term profitability may appear as softening the MEIP. But in fact, it may also make it stricter because an investor who is already an owner must consider not just the prospect of profitability but also the possibility of disposing the company completely.
If the judgment that is reviewed in this article can be distilled in a single sentence, it is this. A prudent private investor always carries out an assessment of the potential profitability of the investment before it commits any money.
SACE was a public entity which was converted to a limited company with the Italian Ministry of Finance being its sole shareholder. SACE provided export credits. After the Commission requested Member States to adjust their programmes on export insurance so that no State aid would be granted to the coverage of normal commercial risk, SACE established Sace BT as a legally separate subsidiary. The purpose of Sace BT was to manage cover for commercial risk. SACE would continue with provision of insurance for non-commercial risk. The latter type of insurance may not be granted for exports within the EU and to any other OECD country. It basically protects exporters from political or war risk.
SACE and Sace BT requested the General Court to annul Commission decision 2014/525 [OJ L 239, 2/8/2014]. In that decision the Commission found that SACE had injected capital in Sace BT which was not State aid in the meaning of Article 107(1). However, three other measures, reinsurance for excess risk and two subsequent re-capitalisations, were deemed not to be in conformity with the Market Economy Investor Principle [MEIP]. Those three measures contained State aid that was incompatible with the internal market and had to be recovered.
The Court had to examine whether the reinsurance and the two subsequent capital injections represented transfer of state resources and, if yes, whether they were MEIP conform.
Transfer of state resources
The General Court first recalled the principles in the case law for establishing whether payments made by entities controlled by the state can be considered to result in transfer of state resources and, if yes, whether the specific decision to make the payments can be attributed to the state. The Court draw guidance from the judgment of the Court of Justice in case C-482/99, France v Commission (Stardust Marine).
In Stardust Marine the Court of Justice explained that even if the state controls an undertaking and exercises over it decisive influence, it cannot be concluded that every decision of that undertaking can be attributed to the state. This is because public undertakings enjoy varying degrees of autonomy.
However, in order to attribute a decision of a public undertaking to the state it is not necessary to carry out a special investigation into the decision in question. Taking into account the close relations between the state and public undertakings, State aid may be granted through public undertakings in opaque procedures. For this reason, the influence of the state over public undertakings can be demonstrated by the overall framework of those relations and in particular by the following factors:
- Whether the public undertaking in question could not have acted without taking into account state demands.
- The nature of the activities of the public undertaking and the extent of its involvement in market transactions.
- The legal status of the undertaking.
- The degree of control exercised by the state.
The General Court inferred that these factors can be used to determine whether the state exercised decisive influence over the measure in question or whether the absence of such influence is unlikely, without having to examine how the involvement of the state affected the measures in question. [Paragraph 48 of the judgment]
The Court then carried out a detailed analysis of all the structural and organisational links between SACE and the Italian state and concluded that, without having to establish the specific influence of the state in shaping the precise contents of the measures in question, SACE could not have ignored public policy aims, despite the fact that it had a certain degree of operational autonomy [in other words, its autonomy was exercised within the boundaries of public policy]. SACE was used by Italian public authorities to support their economic policy objectives. [Paragraph 84]
In summary, the General Court has said the following in establishing transfer of state resources and attribution to the state:
It cannot be concluded by the fact that an undertaking is controlled by the state, that such an undertaking always acts to promote public policy.
However, in order to attribute a decision of a public undertaking to the state, it is not necessary to prove that the state was involved in that specific decision or that state involvement determined the contents of that decision.
It is sufficient to show, on the basis of several factors concerning structural and organisational links, that the public undertaking could not have deviated from the directives of the state or could not have ignored state instructions.
Private reinsurer (MEIP)
The Court began its analysis by recalling, as before, the general principles concerning the behaviour of a prudent private investor. The burden of proof is on the Commission to prove that the Member State in question did not act as a private investor. However, Member States are required, under their obligation for sincere cooperation with the Commission, to provide the Commission with all the necessary information. The Commission has to confine its assessment to the known facts at the time the measure in question was adopted. It is up to Member states to demonstrate that, before they decided to invest, they carried out an economic assessment of the future profitability of that investment. [Paragraphs 93-97]
Then the Court focused on each of the contested measures, starting with the reinsurance. Sace BT had obtained reinsurance for 26% of its risks from private investors. The remaining 74% of the risks were reinsured with SACE. The Commission considered that no private investor would accept such high risk and that the premium that would have been paid had to be 10% higher than what was actually paid.
SACE, Sace BT and Italy argued that SACE had acted on the basis of a report that showed that its reinsurance was on the same terms as the reinsurance by private investors. However, the General Court rejected this argument because it did not consider the impact on SACE from increasing its exposure to 74% of the risks borne by Sace BT [paragraph 118]. But then the Court, surprisingly, stated that the fact that SACE had not carried out an ex ante assessment of the return on its investment, given the risk it was to assume, was not sufficient to conclude that it did not act as a private reinsurer. [Paragraph 123]
The Court went on to examine the various arguments put forth by the appellants. They contended that private reinsurers refused to increase their exposure to Sace BT because of the economic crisis and that past premiums varied widely with some being lower while others were higher. The Court rejected these arguments because they, in fact proved that SACE did not act as a private reinsurer. In addition, the Court agreed with the Commission that a private reinsurer would be very cautious in assuming more risk exposure towards Sace BT because the latter had registered significant losses in previous years. The Court also agreed with the Commission that a private reinsurer would demand a higher premium to compensate for the risk and that assuming 74% of the risks was not in conformity with reinsurance practice of not exceeding the threshold of 25% of risks with a single company.
How much aid?
Once it was established that SACE had not acted as a private investor or in this case, as a private reinsurer, the next issue that had to be tackled by the Court was to establish how much aid had actually been granted. Sace BT paid a premium of EUR 1.56 million, while the Commission developed in a different case that the premium had to be at least 10% higher, which in the Commission’s view resulted in aid amounting to EUR 156,000.
In order to determine that the premium had to be higher by 10%, the Commission used a method it had developed in a different case which concerned export credits in Portugal [see decision 2014/532, OJ L 244, 19/8/2014]. The Court rejected this approach. It explained that the concept of State aid is objective, based on the facts of each case, and cannot be dependent on past Commission practice. The Commission must consider all relevant facts not only when it establishes the existence of aid but also when it calculates that amount of aid that has to be recovered. The Commission cannot escape from the obligation to explain fully its reasoning simply by referring to a methodology that was developed in a different case [paragraphs 152-154]. Because the Court found that the Italian and Portuguese measures were different it accepted the argument of the appellants that the Commission failed to justify why the premium paid by Sace BT to SACE had to be at least 10% higher. This part of the Commission decision had to be annulled.
The General Court moved on to examine the other two measures that consisted of injections of additional capital. The appellants claimed that as a result of the financial and economic crises, numerous insurance companies had to be recapitalised. But the Commission had found that here, too, was no prior assessment of the prospective profitability of the recapitalisations. At issue was the standard of proof of the prospective profitability; i.e. the amount of information and the depth of detail that a private investor would need to have at its disposal and the extent of its discretion. The Court had to evaluate whether the Commission’s reasoning was up to the required legal standard.
It began by reiterating that it is for the public investor to prove that it carried out an assessment of the prospective profitability prior to the investment. The accuracy and correctness of the assessment depend on the available facts, market changes and economic developments. But, in the event of a crisis and of inability to make accurate predictions about future outcomes, it cannot be concluded, the Court added, that the absence of a detailed plan with precise and full analysis means that the public investor did not act as a private investor [paragraph 179]. This sentence appears to impose a heavier burden of proof on the Commission. But in the very next paragraph, the Court appeared to backtrack when it stated that even in the situation of crises and erratic changes, a private investor who cannot make predictions with sufficient accuracy would not invest without a prior analysis of the chances for realising profit and without considering alternative scenarios including the sale of the loss-making subsidiary [paragraph 180]. More importantly, the margin of discretion enjoyed by a private investor does not relieve it of the obligation to carry out a prior economic assessment of the prospects of the investment [paragraph 188].
After it examined the documents that had been put at the disposal of the Commission, the Court found that they only indicated the need for recapitalisation of Sace BT without any estimation of potential future return. The Court noted the absence of information concerning possible cost reduction, risk analysis, and expected market developments [paragraph 195]. For these reasons the Court concluded that the Commission did not commit any error of assessment.
However, it proceeded to annul part of the contested Commission decision because, as explained above, the Commission miscalculated the amount of aid that was incorporated in the low premium that Sace BT paid to the parent company SACE.
 The full text of the Commission decision can be accessed at: