Restructuring and the Market Economy Investor Principle

Restructuring and the Market Economy Investor Principle - m 20 2
Different interventions that aim to finance the same restructuring plan constitute a single measure. A private investor may consider a possible damage of its reputation from laying off workers but the damage has to be quantified. Finance support of employees provides an indirect benefit to the employer.

In this article I review two similar cases: a judgment of the General Court concerning the restructuring of SeaFrance and a Commission decision concerning the restructuring of SNCM, another French shipping company. In both cases France contested the existence of State aid and argued that its public funding of the two companies satisfied the market economy investor principle. Both cases have a long and meandering history of support by the state. In both cases, France failed to prove that its measures were free of State aid.
i) SeaFrance
When a public authority makes an investment in a financially troubled company, the State aid bells should start ringing. However, it is now a well-established principle of the case law on State aid that even when a public authority invests in a troubled company, there is not necessarily State aid if there is a reasonable prospect that the investment will turn the company around and generate a sufficient return.France appealed against Commission decision 2012/397 in which the Commission found that three measures in favour of shipping company SeaFrance were not compatible with the internal market and had to be recovered. SeaFrance was in financial difficulty. [Since then it went into bankruptcy.] The three measures concerned injection of new capital and two loans. All the funding was granted by SNCF, the state-owned parent company of SeaFrance. France’s position was that the recapitalisation was State aid but the loans were granted on market terms and, therefore, did not constitute State aid.

The General Court in its judgment in case T-1/12, France v Commission, first examined whether the three measures were separate or distinct interventions.[1] It recalled that apparently distinct interventions are in fact the same measure when they are i) closely timed, ii) they have the same purpose, and iii) the beneficiary is in the same condition. [Paragraph 34]

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Single measure

The Court agreed with the Commission that, given the precarious situation of SeaFrance, all three interventions were a single measure because they aimed to finance the rescue and restructuring of the company and they were implemented simultaneously while the condition of the company did not change [paragraph 40]. The Court also stated that the cosmetic differences between recapitalisation and loans do not prove that they are separate [paragraph 50].

Then the Court examined whether the funding complied with the market economy investor principle. It rejected French arguments to that the funding was market conform on three grounds. First, all funding came from the same source; i.e. SNCF. The Court explained that SNCF could not “dissect” itself and pretend to be acting both as a public authority granting State aid [the recapitalisation] and as a private investor giving loans at market rates [paragraph 48]. The Commission had challenged France to provide evidence that a private investor would have been willing to provide similar funding but France failed to furnish any proof.

MEIP and different interventions

Second, the expected return on the loans was positive but this was feasible only when they were considered on their own. When assessed as a single measure together with the recapitalisation, the return evaporated. This is correct reasoning. Take, for example, two investments of equal amount, say, 100 each. Assume the expected return on the sum of the two investments is 5. This means an overall rate of return of 2.5%. Further assume that the return demanded by the market for similar investments is 4%. Clearly, the two investments together are unprofitable. But if you take just one investment in isolation, then the return is 5% [= 5/100] which is clearly above market expectations. This, of course, is financial trickery. It cannot be claimed that one of the two investments is commercially viable when the two are in fact inseparable.

Third, the Commission also examined the rate of interest of 8.5% which was actually charged on the loans. It concluded that, given the financial situation of SeaFrance, a private investor would require 14%. The Court agreed with the Commission.

Lastly, the Court also agreed with the Commission that the overall funding, which was State aid, could not be declared compatible with the internal market. According to the rescue & restructuring guidelines, beneficiaries have to make a significant contribution of their own to their restructuring. This contribution has to be free of State aid. Normally, the own contribution comes from private investors, from disposal of assets or from commercial loans. France argued that the two loans which were claimed to be at market rates represented the own contribution of SeaFrance. But since all the money came from SNCF and all of it was State aid, the public funding of the restructuring plan did not satisfy the requirements of the guidelines. Unavoidably, it had to be declared incompatible with the internal market.

ii) SNCM

In 8 July 2008, the Commission took the view that certain measures in favour of Société Nationale Maritime Corse-Méditerranée [SNCM] did not constitute State aid and certain other aid measures were compatible with the internal market. The 2008 decision was partially annulled in September 2012 by the General Court in its judgment in case T-565/08, Corsica Ferries v European Commission. The General Court held that the Commission’s analysis of restructuring funding of SNCM should be reviewed because it erroneously concluded that it was free of aid. Only the aid for compensation of SNCM’s public service obligations was not annulled.

Consequently, Commission had to re-open the case and re-assess the measures which concerned: i) the negative price of EUR 158 million on the sale of SNCM, ii) a capital increase of EUR 8.75 million subscribed by state-owned Compagnie Générale Maritime et Financière [CGMF], and iii) an amount of EUR 38.5 million for staff laid off by SNCM. It concluded its investigation with Commission decision 2014/882.[2] This is a textbook assessment that touches in many different aspects of State aid. The reasoning of the Commission is also detailed and meticulous.

The sale of SNCM at a negative price of EUR 158 million

The starting point of the Commission was the statement of the Court of Justice in case C-334/99 Commission v Germany that “an open, transparent and non-discriminatory public selection procedure at the end of which the State disposes of the undertaking after a prior recapitalisation (for an amount greater than the sale price) does not necessarily exclude the presence of aid, liable to benefit both the privatised undertaking and the purchaser of that undertaking.” [Paragraph 142]

The Commission also recalled the following principles that emanate from the case law. First, “(220) […] when injections of capital are made by a public investor without any prospect of profitability, even in the long term, the provision of such capital constitutes State aid.”

Second, “(221) […] a private investor pursuing a structural policy — whether general or sectoral — and guided by prospects of profitability in the long term could not reasonably allow itself, after years of continuous losses, to make a capital contribution which, in economic terms, proves not only costlier than selling the assets, but is, moreover, linked to the sale of the undertaking, which effectively removes any hope of profit, even in the longer term.”

Therefore, “(223) […] in order to determine whether the measure in question constitutes aid, the Commission must ‘assess whether the solution chosen by the State is, both in absolute terms and compared with any other solution, including that of non-intervention, the least costly, which would lead, if that were the case, to the conclusion that the State has acted like a private investor’.”

In other words, there is no State aid when a capital contribution is less costly than liquidation. The state pays less to dispose a company than to close it down.

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The cost of redundancies

France argued that “(225) […] in this day and age, large groups of undertakings cannot disregard the social consequences of their decisions to close sites or wind up subsidiaries. Accordingly, they usually implement social plans which may include measures to retrain staff, help them find new jobs, redundancy payments, and possibly even local development measures, which go beyond the requirements of statutory provisions and collective agreements.”

Indeed, the General Court accepted the principle that the making of redundancy payments may constitute a legitimate and appropriate practice to foster a calm social dialogue and preserve the brand image of a company or group of companies. However, the Court also requested the quantification of the benefits to the company that makes such payments. This is how a private investor would reason.

Because the French authorities i) failed to provide such quantification in the form of “objective and verifiable data”, ii) did not define the extent of their economic activities in relation to SNCM, and iii) did not prove that there was “reasonable probability” of obtaining any indirect material profit by avoiding social unrest, the Commission rejected the French arguments that the French state took into account the impact of possible redundancies on its image as a shareholder. [Paragraphs 228-236]

Asset valuation

The Commission then went on to determine the value of the liquidation of SNCM excluding any additional redundancy payments. A company experiences an “asset shortfall” when the economic value of the actual assets is less than the economic value of the actual debts. In order to determine an asset shortfall in the present case, the Commission verified that the value of SNCM’s assets was insufficient to pay off preferential and non-preferential creditors. Incidentally, the Commission rejected valuation of SNCM on the basis of the present value of its operating cash flows, because this method would appraise SNCM as a going concern, which was inapplicable in this case. It should also be noted here that hefty discounts in the region of 35-45% were taken into consideration when the various assets [mostly ships and buildings] of SNCM were valued. The calculations of the Commission indicated that SNCM’s assets had value of EUR 211.4 million.

Amount of liabilities

Next came the valuation of SNCM’s liabilities. Taken into account were preferential debts, non-preferential debts, social liabilities and collective agreements [excluding additional redundancy payments], the cost of termination of operating contracts concerns and disposal of leased vessels. The calculations of the Commission indicated that SNCM’s liabilities were EUR 334.9 million.

Consequently, the asset shortfall amounted to some EUR 123.5 million. However, the Commission also had to address at this point French arguments that France, as shareholder through CGMF, would have had to bear certain costs in the event of compulsory liquidation of SNCM. The Commission’s assessment of this issue was based on detailed analysis of the obligations of shareholders under French corporate law. Its conclusion was that it was unlikely that France would bear any additional liability as shareholder. Hence, a private investor would not feel compelled to make additional payments to reduce the asset shortfall of EUR 123.5 million.

In a last but futile attempt to change the view of the Commission, France argued that it had to intervene to offset the costs of mismanagement of SNCM. The Commission rejected this rather perverse claim because mismanaged companies do not deserved to be rescued by the state and, primarily, because France was the owner who had previously failed to ensure that SNCM was properly managed. The Commission concluded that a private investor would have favoured the less costly solution, i.e. the liquidation of SNCM. The negative price of EUR 158 million constituted State aid.

Capital contribution by CGMF of EUR 8.75 million

France argued that the recapitalisation occurred concurrently with capital injections by private investors and that the state took a minority stake. Consequently, the Commission had to compare the state’s contribution with that of the private investors, which amounted to EUR 26.25 million. However, that recapitalisation was part of a number of other capital injections. In the overall total amount, the private shareholder contribution was only 10.6%, which the Commission considered as insignificant.

More importantly, the Commission also examined whether the public and private shareholders assumed normal market risk. It explained that “(319) […] as underlined by the General Court in its judgment of 11 September 2012, an analysis of the expected return is not in itself enough to enable the conclusion to be drawn that the investment was made by the State on market conditions, given the fact that the risks are not shared equitably between the public and the private shareholders.”

However, “(320) even if the condition of ‘investments made on equal terms’ (‘pari passu’) is not fulfilled, the measure can still be compliant with the principle of the private investor in a market economy. In such cases, it has to be shown that the State acted in the same way as a prudent private investor in a similar situation, for example by carrying out ex ante analyses of the profitability of the investment. However the French authorities have not provided proof of any such ex ante analysis.”

In this instance too, the Commission concluded that the capital contribution of EUR 8.75 million was State aid.

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Aid to individuals of EUR 38.5 million

In its original decision the Commission agreed with the French authorities that financial support of individuals was not State aid. However, the General Court ruled that “the fact that the direct beneficiaries of the aid to individuals are employees is not sufficient to demonstrate that no aid had been provided to their employer” [paragraph 137 of judgment in case T-565/08, Corsica Ferries v European Commission]. Moreover, the Court indicated “in order to examine whether that aid to individuals constitutes aid […] it is therefore necessary to determine whether SNCM obtains an indirect economic advantage which enables it to avoid having to bear costs which would normally have had to be met out of its own financial resources and therefore prevents market forces from having their normal effect” [paragraph 138].

The aid was granted by France to alleviate the costs of voluntary redundancies. The aid was liable to confer an economic advantage on SNCM by releasing it from the obligation to bear all the costs connected with the potential future departure of certain employees. It was therefore State aid.


The next step for the Commission was to examine the compatibility of the three measures above together with another measure of restructuring aid amounting to EUR 15.81 million under the 2004 restructuring guidelines.

With respect to the criterion of “own contribution”, the Commission found that SNCM funded only 25% of its restructuring costs while, as a large company, the restructuring guidelines require a minimum of 50%.

With respect to the criterion of the “return to long-term viability”, the Commission believed that the restructuring plan could not insufficiently cover all operating expenses.

With respect to the criterion of “avoidance of undue distortion of competition” and of “compensatory measures”, the Commission first explained that the closure of one route could not be regarded as a compensatory measure because it was loss-making and had to be closed at any rate. Then it noted that the disposal of some vessels was offset with the purchase of others.


In view of the fact that the various measures were found to constitute State aid that the aid did not comply with the restructuring guidelines, the Commission ordered France to recover a total of EUR 221.06 million [made up of restructuring aid of EUR 15.81 million, a negative price of EUR 158 million, a capital increase of EUR 8.75 million and aid of EUR 38.5 million in favour of SNCM’s employees].


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

[2] OJ L 357, 12/12/2014. The text of the decision 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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