How a Private Investor Behaves: EDF v Commission

How a Private Investor Behaves: EDF v Commission - 17.10. imputability stateaid

A private investor carries out an assessment of the prospective profitability of a company before it invests in it. Ex post assessment is not sufficient. Evidence that the investment is likely to be profitable is not enough. The return must be high enough to satisfy a private investor in a similar situation (by compensating it for the risk it assumes).

 

Introduction

On 16 January 2018, the General Court ruled in case T-747/15, Electricité de France (EDF) v European Commission.[1] EDF had appealed against Commission decision 2016/154 which had found that conversion of tax liability into share capital was incompatible State aid that had to be repaid. The Commission decision was reviewed in an article that was published here on 1 March 2016 [View the article here: http://stateaidhub.eu/blogs/stateaiduncovered/post/5433]. The history of the dispute between EDF and the Commission was described in that article.

In a nutshell, the Commission had concluded that France had granted illegal and incompatible State aid to EDF. Despite the fact that France argued that it acted as a private investor, the Commission did not examine properly the merits of that argument because it considered that no private investor had the option to convert tax liability into share capital.

On appeal by EDF, both the General Court [case T-156/04] and the Court of Justice [case C‑124/10 P] found that the Commission was wrong to consider that conversion of tax liability was automatically State aid. This is because the state acquires its resources from taxation. There is no obligation on Member States to borrow money from the financial markets any time they wish to make an investment in a company. The EU courts therefore faulted the Commission for focusing on the source of the money and the form of the investment and for neglecting to carry out a proper analysis of the effect of the investment in EDF; i.e. whether it conferred an objective advantage to EDF. This would have been the case if the investment would not have been made by a hypothetical private investor. Indeed, private investors may have been reluctant to commit any of their own money because at the time of the tax conversion EDF was experiencing financial difficulties.

But even though the Commission lost the battles before the General Court and the Court of Justice, it did not lose the war. The Commission simply re-opened its investigation and after a thorough analysis of whether a private investor would provide the same amount to EDF at the same time as France did, it reached the conclusion that France did not act as a market investor. While a private investor would expect at minimum 12% return, the likely return from France’s investment was less than 6%.

The text of the new judgment of the General Court is very long. The decision runs to more than 60 pages with about 420 paragraphs. It also deals with several disagreements between EDF, the Commission and their respective consultants on the findings of the various reports and the veracity of the evidence that was used by either side. The Court found that several Commission calculations used were based on wrong numbers. Nonetheless, these errors were not enough to affect the validity of the overall assessment of the Commission. In addition, and not surprisingly, the judgment addresses a number of disputes on procedural issues. Therefore, this article is selective and focuses only on how a public authority is supposed to behave when it acts as a private investor.


Do you know we also publish a journal on State aid?

EStAL banner

The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.


 

How does a private investor behave?

The General Court stated in paragraphs 128-142 of its judgment that it was incumbent upon France to establish, on the basis of objective and verifiable elements, that it acted as a private investor. The Court noted, however, that there were no studies or documents in that respect, nor any assessment of whether and how the tax conversion could impact on the performance of EDF.

In paragraphs 143-176, the Court went into a rather detailed analysis of whether the non-payment of the tax owed by EDF affected its capital base and what return the French state could have hoped to obtain. This is because France had argued that the benefits to the investor would also have to be measured in terms of the improved equity to debt ratio of EDF and the supposed advantages that would flow from that. However, the Court could not find any evidence that a shareholder could expect to derive any benefits from the debt reduction. The Court also rejected quite sophisticated studies submitted by France and EDF on the grounds that they were carried out ex post and on the basis of data that were not available at the time France made the investment.

Then the Court examined where the burden of proof lied. It confirmed the principle that when it appears that the private investor test may be applicable, it is for the Commission to determine its validity, independently of any request to that effect by the Member State concerned. [Paragraph 241]

Even when the private investor test is not invoked by the Member State, the Commission must consider the economic nature of the action of the Member State and not the subjective way in which that Member State intended to act. [Paragraph 242]

If, on the other hand, a Member State invokes the private investor test, it is also obliged to establish unequivocally, on the basis of objective and verifiable evidence, that it has acted as an investor or shareholder and that it has decided to do so before it made the investment. [Paragraph 243]

Economic valuations made after the investment, retrospective assessment of the actual profitability of the investment or subsequent justifications are not sufficient to prove that the Member State has acted as a private investor. [Paragraph 244]

Only the benefits and obligations related to the situation of the state as an investor or  shareholder, to the exclusion of those related to its status as a public authority, are to be taken into account [paragraph 245]. The Court confirmed that the Commission did ignore all other issues related to the capacity of France as a public authority.

EDF submitted many documents that showed that the situation of the company would improve with the tax conversion and the increase of its capital. But the Court rejected them because they did not show explicitly that the injection of fresh capital would have generated a sufficient return that would compensate a private investor for the risk it assumed.

Even though the Court acknowledged that there were documents that determined the remuneration of the French state from the recapitalization of EDF and, consequently, demonstrated the profitability of the investment, it still considered that they were not sufficient [paragraph 318]. This is because they only showed that the investment was capable of generating some profit. They did not show that the profit was enough to satisfy a private investor.

According to the Court, France was obliged to submit evidence showing that its decision was based on economic valuations comparable to those which a rational private investor in a situation similar to that of France would have carried out, before making such investment, in order to determine the future profitability of such an investment. Ex post economic valuations were not acceptable. [Paragraph 319]

The Court stressed that even a supposed great difficulty of making complete or correct forecasts about future profitability cannot exempt a public investor from making an appropriate prior assessment of the profitability of its investment. [Paragraph 321]

In the end, the Court concluded that there were no grounds for upholding any of the pleas in the appeal, despite the fact that the Commission had made several mistakes in its calculations. The mistakes were not sufficient to cast doubt on the validity of the assessment of the Commission. That is, the mistakes could not lead to a different conclusion.

 

Conclusions

This judgment has not broken new ground. Rather it has confirmed already established principles. A public authority that wants to invest in a company or commercial project has to assess the prospective profitability of the investment on an ex ante basis. Even if the company is financially robust or the project commercial viable, or the investment will benefit the recipent or the investment is likely to generate a positive return, the proper test is whether the return is sufficiently high to satisfy a private investor in a similar situation. A private investor would be satisfied only when the return compensates it for the risk it assumes.

——————————————

[1] The full text of the judgment, only in French, can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=198443&pageIndex=0&doclang=FR&mode=lst&dir=&occ=first&part=1&cid=946644.

Tags

Über

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.

Hinterlasse eine Antwort

Zusammenhängende Posts

18. Okt 2022
von Phedon Nicolaides
Public Authorities Acting as Private Investors - State Aid Uncovered SM posts 5

Public Authorities Acting as Private Investors

It is a well-established principle in the case law that when a public authority acts as a private investor, it must disregard all public policy objectives and its obligations as an arm of the state. Many judgments of EU courts and Commission decisions have examined in detail the various elements that underpin the reasoning of a private investor such as […]
19. Apr 2022
State Aid Uncovered von Phedon Nicolaides
Injection of Capital in a Postal Operator - State Aid Uncovered SM posts 2

Injection of Capital in a Postal Operator

The resources of a public undertaking necessarily count as “state resources”, regardless of the degree of autonomy of the public undertaking. However, not every decision of a public undertaking can necessarily be “imputed” to the state. A prudent investor may take into account authorised State aid. A prudent investor may tolerate short-term losses if it can realise sufficient profits in […]
09. Jun 2020
State Aid Uncovered von Phedon Nicolaides
pills on money

Private Investor and Preferential Regulatory Treatment

The existence of an advantage has to be proven, not presumed just because its absence cannot be confirmed. Preferential treatment may distort competition but it is not necessarily State aid if there is no transfer of state resources. Temporary Framework: Number of approved covid-19 measures, as of 5 June 2020: 148* Legal basis: Article 107(2)(b): 13; Article 107(3)(b): 125; Article […]
12. Mai 2020
State Aid Uncovered von Phedon Nicolaides
Road sign "Wrong Way"

Advantage Must be Proven, Not Assumed

The European Commission has to consider whether the private investor principle is applicable in cases of state investments. It is for Member States to prove that their investments conform with the private investor principle. Temporary Framework As of 9 May 2020, the European Commission had approved 113 State aid measures to combat covid-19. Their legal basis was: Article 107(2)(b): 10; […]
23. Dez 2019
State Aid Uncovered von Phedon Nicolaides
A Preferential Electricity Tariff Is Selective, Confers an Advantage and Distorts Competition - StateAidUncovered blogpost53 Alouminion

A Preferential Electricity Tariff Is Selective, Confers an Advantage and Distorts Competition

A judicial decision on interim measures is a selective measure. The private investor test does not apply to judicial decisions on interim measures. Introduction On 11 December 2019, in case C‑332/18 P, Mytilinaios Anonymos Etairia — Omilos Epicheiriseon v European Commission, the Court of Justice probably wrote the last chapter in a long-running case concerning privileges that had been granted […]
16. Okt 2019
State Aid Uncovered von Phedon Nicolaides
Attempting to Minimise Past State aid Is of No Interest to a Private Investor - StateAidHub blogpost43 privateinvestor

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

A public authority acting as a private investor ignores past State aid. Introduction 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 […]
25. Jun 2019
State Aid Uncovered von Phedon Nicolaides
How to Value Land in Complex Land Swaps - StateAidHub blogpost25 LandSwap RealdMadrid

How to Value Land in Complex Land Swaps

A private investor assesses all components of a complex transaction and takes into account not just profit, but also the legal implications of the prospective transaction and possible future liability.   Introduction   When a public authority sells land, it should either auction it through a competitive and unconditional process or have it valued beforehand by an independent expert.Sometimes, public […]
14. Feb 2019
State Aid Uncovered von Phedon Nicolaides
What Does a Private Investor Take into Account before Investing? - StateAidHub blogpost6 2019 Lexxion investment Stateaid commission EU telecom

What Does a Private Investor Take into Account before Investing?

A private investor may invest in a troubled company that is restructuring is order to increase its future profitability.   Introduction   The answer to the question posed above is short and simple: everything relevant. A private investor does not ignore anything that can affect the profitability of the prospective investment.This implies that the other side of the coin is […]
20. Mrz 2018
State Aid Uncovered von Phedon Nicolaides
Private Creditor v Private Investor - m 4

Private Creditor v Private Investor

A private investor never agrees to an unprofitable transaction while a private creditor may agree to a loss in order to avoid a bigger loss from non-recovery of debt owed to it. A public authority acting as a private operator must disregard any losses it may incur from State aid it granted in the past.   Introduction   A question […]
05. Sep 2017
State Aid Uncovered von Phedon Nicolaides
Sale, Liquidation and Other Options for Private Investors - m 33

Sale, Liquidation and Other Options for Private Investors

A private investor chooses the less costly option between selling a company at a loss and liquidating it. In addition to avoiding losses, a private investor also cares for its image, quantifies its value and factors it in the sale or liquidation option.   Introduction On 6 July 2017, the General Court ruled in two closely related cases: T-74/14, France […]