Attempting to Minimise Past State aid Is of No Interest to a Private Investor

Attempting to Minimise Past State aid Is of No Interest to a Private Investor - StateAidHub blogpost43 privateinvestor

A public authority acting as a private investor ignores past State aid.


It is now a settled principle that when a public authority intends or pretends to act as a private investor it must not take into account any past aid it has granted to the company in which it wants to invest. On 19 September 2019, the General Court applied this principle in case T‑386/14 RENV, FIH v European Commission.[1]

FIH, a Danish bank, had applied for annulment of Commission decision 2014/884 concerning the transfer of property-related assets from FIH to the Financial Stability Company [FSC], a state agency. About five years earlier FIH had benefited from several State aid measures during the financial crisis. In June 2009, FIH received a capital injection of DKK 1.9 billion [about EUR 225 million] which was approved by the Commission.

Then, in July 2009, Denmark granted FIH a guarantee amounting to DKK 50 billion [about EUR 6.31 billion]. It was also approved by the Commission. FIH issued bonds that were backed by that state guarantee.

In December 2011, the value of the bonds issued by FIH and guaranteed by the Danish State was DKK 41.7 billion (approximately EUR 5.56 billion), constituting 49.94% of FIH’s balance sheet. Those bonds were due to mature in 2012 and 2013.

As the situation of the bank continued to deteriorate, Denmark decided in early 2012 to transfer the most problematic assets to NewCo, a new subsidiary of FIH. The Financial Stability Company also injected into NewCo an amount of DKK 13 billion, so as to enable FIH to repay its state-guaranteed loans. In the process, FIH Holding gave an unlimited loss guarantee to the FSC, guaranteeing that the FSC would fully recover the capital it provided to NewCo. The Commission found that those measures constituted compatible State aid to NewCo and FIH.

In July 2012, FIH repaid Denmark the capital of DKK 1.9 billion that it had received in 2009.

In March 2014, the Commission adopted decision 2014/884 concerning the transfer of property-related assets from FIH to the FSC. This transaction was found to constitute State aid, which, however, was compatible with the internal market in the light of the restructuring plan that was in the meantime implemented by FIH.

More specifically, the Commission found that, contrary to the assertions of the Danish authorities, the transaction did not conform with the market economy investor principle [MEIP]. According to the Commission, the Net Present Value [NPV] of a DKK 2 billion share purchase agreement for various liquidation values in respect of NewCo’s assets, ranged from DKK 5.1 billion to DKK 28.3 billion [see graph 1 below]. The probability of each situation materialising was indicated by the dotted line (from 0.1% to 7.5%). Even in the most likely scenarios, the return was slightly negative.

Attempting to Minimise Past State aid Is of No Interest to a Private Investor - Picture 1

The Commission concluded that the overall probability-weighted average NPV of the share purchase agreement amounted to DKK 726 million. As a result, the share purchase agreement generated a loss rather than a profit for the FSC. Moreover, a market economy operator would have required an equity remuneration of at least 10% per annum on a similar DKK 2 billion investment, which would have generated about DKK 1.33 billion over the seven-year existence of NewCo.

The Commission calculated the amount of State aid to be about DKK 2.25 billion.

In May 2014, FIH appealed against the Commission decision. In September 2016, in its initial judgment, the General Court annulled that decision. The Commission lodged its own appeal before the Court of Justice which, in March 2018 in case C‑579/16 P, Commission v FIH, set aside the initial judgment of the General Court and returned the case back to the General Court to decide on an issue that had not been adjudicated earlier. In its judgment, the Court of Justice reiterated and elaborated the principle first expounded in the seminal Land Burgenland case [C-214/12 P] that past aid must be ignored by the authority that acts as a private investor.


The Commission challenged the admissibility of the action brought by FIH. Indeed, the arguments on admissibility are interesting in this case because the Commission had approved the aid. But as will be seen below, FIH wanted to contest the conditions attached to the approval of the aid.

The General Court, first, recalled that “(48) only measures with binding legal effects capable of affecting the interests of the applicant by bringing about a distinct change in his legal position are capable of being the subject matter of an action for annulment.”

“(50) The mere fact that a Commission decision declares aid compatible with the internal market and that thus, in principle, it does not have an adverse effect on the applicant does not dispense the Court from examining whether certain Commission assessments produce binding legal effects such as to affect the applicant’s interests”.

“(51) An action for annulment brought against a decision declaring existing aid compatible with the internal market on the basis of commitments given by the Member State concerned is admissible”.

“(53) In the present case, […] the State aid in question is declared to be ‘compatible with the internal market, in the light of the restructuring plan and the commitments set out in the Annex’.” “(54) Consequently, and contrary to the Commission’s submissions, the action is admissible also in so far as it seeks to challenge the commitments and/or the restructuring plan which the Commission accepted.”

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Errors in the calculation of the value of the transferred assets

FIH claimed that the Commission erred in calculating the value of the transferred assets, arriving at a value that was too low, which affected the assessment of the amount of State aid.

The General Court explained that “(69) in order to establish that the Commission made a manifest error in assessing the facts such as to justify the annulment of the contested decision, the evidence adduced by the applicant must be sufficient to make the factual assessments made in the decision at issue implausible”.

“(70) In the light of the foregoing, it must be held that the choice of method for evaluating a loan portfolio for the purposes of calculating the amount of aid within the meaning of Article 107(1) TFEU requires such a complex economic appraisal. Therefore, the fact that the Commission relied on its own analysis of the loan portfolio, instead of relying on the assessment provided by the Kingdom of Denmark, cannot be criticised, provided that that action is warranted in the reasonable exercise of its discretion.”

The Commission explained that it calculated the value according to what that a potential purchaser would be prepared to pay in order to acquire the assets immediately. This price is lower than the accounting value, because the market value includes a substantial risk discount, reflecting expected losses. The Commission’s view was that the methodology of FSC was inappropriate in the present case.

In addition, after checking a sample of loans, the Commission found cases with the wrong credit rating for certain debtors, which indicated that the default probabilities used by FIH were not as reliable as was claimed and therefore the value of its assets was lower than what appeared in its books.

The General Court found that “(74) in the light of the explanations provided by the Commission, the applicants have not shown that the Commission exceeded the limits of its discretion when it decided to carry out its own assessment of the loan portfolio.”

The Court also accepted that the certain factors used by the Commission to determine default probabilities were based on empirical evidence and credible studies and went on to reject claims to be contrary by the applicant. [Paragraphs 75-79]

The applicant also disputed the fact that the Commission’s calculations were based on a loss of 100% in the event of default by the debtor. FIH thought that, in the event of the debtor’s default, a loss of approximately 30% on unsecured loans was appropriate.

On this point too, the Court sided with the Commission. It accepted that “(82) the assumption of loss given default of 100% on unsecured assets is standard practice. Where the loss given default is determined on the basis of collateral values, if no collateral is present, as is the case for unsecured assets, a loss rate of 100% automatically applies.”

Next, FIH alleged errors in the calculation of the 10% remuneration in respect of FSC’s DKK 2 billion capital investment. It criticised the Commission for disregarding the impact of the reduction of the risk for Denmark on the calculation of the remuneration of the capital investment of FSC in NewCo.

In response to this claim, the General Court recalled that “(112) the risks to which the State is exposed and which are the consequence of State aid that it has previously granted are linked to its actions as a public authority and are not among the factors that a private operator would, in normal market conditions, have taken into account in its economic calculations. It follows that, in the present case, the Commission was fully entitled, when applying the private operator principle for the purposes of Article 107(1) TFEU, not to take into account risks related to State aid granted to FIH by the 2009 measures.”

“(113) However, although the economic exposure of a Member State resulting from the earlier grant of State aid and its desire to protect its economic interests are not taken into account in the assessment, under Article 107(1) TFEU, of the existence of State aid, the fact remains that, …, such considerations may be taken into account in the assessment, under Article 107(3) TFEU, of the compatibility of any subsequent aid measure with the internal market and may therefore lead the Commission to find, as in the present case, that the measure is compatible with the internal market”.

“(114) In the light of the foregoing, irrespective of whether the Commission was required or merely had a discretion to take account of certain considerations relating to the reduction of the risk for the Kingdom of Denmark in the context of the analysis of the compatibility of the measures at issue with the internal market, it must be held, in the present case, that the Commission took into account those considerations to a certain extent, in particular the fact that FIH had redeemed the State-guaranteed bonds and had also reimbursed the hybrid capital which the State had granted to it, as is apparent from recital 125 et seq. of the contested decision. As the Commission points out, it is apparent from the contested decision that it took those factors into account in its examination of the viability of FIH and the existence of adequate burden-sharing.”

The last two criteria mentioned in paragraph 114 of the judgment [i.e. viability and burden sharing] are among the conditions for the compatibility of aid.

“(115) As regards the conclusion that that remuneration should have been at least 10% per annum of the capital investment, it should be noted that the Commission observed that, when the measures were adopted in 2012, FIH’s senior unsecured bonds were quoted on the market with a yield greater than 10%. Therefore, according to the Commission, it is logical to assume that a market economy operator would require a higher return for equity, which has a more junior credit position.”

The General Court concluded that FIH failed to show that the Commission exceeded the limits of its discretion.

The amount of capital relief resulting from the transfer of assets

Despite losing the argument on the pleas raised above, FIH was able to get the Commission decision annulled because of what appears to have been an avoidable error by the Commission. The General Court found that the Commission made a mistake in its calculation of the amount of capital relief resulting from the asset transfer.

“(129) As regards the argument that the amount of the reduction in the capital relief effect was incorrectly fixed at DKK 375 million, it must be stated that the Commission’s assertion that it relied on documents provided by the Kingdom of Denmark, which does not dispute that amount, is incorrect. While it is true that the Kingdom of Denmark referred to that amount, […], it must be observed that it stated in that document that the correct amount, in its view, was DKK 275 million.”

“(130) In addition, in the footnote to which that sentence refers, which is at the end of the document, the following is stated:

‘Based on these updated calculations the capital relief in FIH Holding Group is DKK 275 million (from liquidity risk) […]’”

“(133) In the light of the foregoing, it must be held that the Commission was not entitled to confine itself to maintaining that the Kingdom of Denmark and the applicants had provided the data and that they had accepted that data.”

“(136) Accordingly, the contested decision must be annulled since it found that there was a capital relief effect in the amount of DKK 100 million relating to the earnings risk at FIH Holding level.”

Now the Commission has to rectify the error and re-issue its decision.

A few concluding thoughts

This case does not break any new ground. It applies established case law to clarify technical issues. It reiterates the main point in the judgment of the Court of Justice of March 2018 in case C‑579/16 P, Commission v FIH, that the state must ignore past State aid it granted to an undertaking when it considers whether to make an investment in the same undertaking. This is because when the state acts as a private investor it may not take into account any commitments it has assumed as a public authority.

The ruling of March 2018 has since then been discussed in a number of conferences. The question that has been raised on several occasions is whether a public authority is condemned to choose the expensive option of honouring a previous commitment that was classified as State aid when it can do something else, achieve the same objective, but at a lower cost or expense to it. For example, if the state has granted to a company an unsecured and unconditional guarantee that covers a loan of a 100 that has to be repaid in two instalments of 50, and if the company is unable to pay the first instalment, can the state inject capital of 50 [or provide a bridging loan of 50] to the same company to enable it to pay the instalment and prevent the lending bank from foreclosing the loan and activating the guarantee that will cost a 100 to the state?

The answer of the Court of Justice [and, now, of the General Court] is that if a Member State considers another intervention in favour of the company in order to reduce its total outlays, then the second intervention must be classified as State aid and be subject to compatibility assessment.

I argued on the StateAidHub on 20 March 2018

and in a longer article in EStAL [2018, volume 17, no. 2]

that the answer must be nuanced. The answer depends on whether the amount of State aid is equal to the nominal amount of money that was granted to the aid beneficiary in the first place.

If you consider the numerical example above, the first step in considering the existence of State aid is to ask whether the company obtains any undue benefit from the second intervention. The state has to repay the loan whenever the company cannot do so.

At this point it should also be said that a 100% guarantee creates perverse incentives. The company has no interest to repay the loan. For this reason even when granting a 100% guarantee, the state would or should try to impose certain obligations on the aid recipient. And, the Commission is right to consider unconditional guarantees covering 100% of the underlying loan as State aid equivalent to the nominal amount of the loan.

But assume that no such obligations have been defined in this case. The pertinent question from a State aid perspective is whether the company obtains a new advantage when the state repays on its behalf the first instalment in order to prevent the triggering of the guarantee of 100. The answer is no. If the same situation arises at the moment the second instalment falls due, then the state will have to pay another 50, which together with the first instalment of 50 do not exceed its initial obligation of 100.

One may counter-argue that in the end the company is relieved from bearing the cost of the repayment of the loan. But that is exactly the benefit from the unconditional guarantee. In our example the existence or not of an advantage depends on how the inability to repay the loan is defined. If the state eagerly steps in when the company simply refuses to repay the loan, then the company may obtain a new advantage. But if the guarantee is triggered only when the company runs out of liquidity for reasons external to itself, then it receives no new advantage.

Therefore, we must conclude that the state must ignore the past obligations it assumed only when any new measure that reduces the amount that the state is pre-committed to pay creates a new advantage for the beneficiary. In other situations, it may be possible for the state to reduce its outlay without creating a new advantage for the company.


[1] The full text of the judgment can be accessed at:



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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