The Concept of SME, Indirect Control by Public Bodies and New Problems for Public Universities and Research Organisations

The Concept of SME, Indirect Control by Public Bodies and New Problems for Public Universities and Research Organisations - columns 5135499 1920

I am grateful to Peter Staviczky for comments on an earlier draft.


A company that is owned by more than 25% by public bodies is not considered to be an SME, regardless of whether those public bodies actually exercise direct or indirect control.

A public university can be a public body.

Temporary Framework Update:

Number of approved and published covid-19 measures, as of 30 October 2020: 311*

Legal basis: Article 107(2)(b): 32; Article 107(3)(b): 264; Article 107(3)(c): 23

– Average number of measures per Member State: 11

– Median number of measures per Member State: 12

– Mode number of measures per Member State: 8

* Excludes about 120 amendments of previously notified measures

Introduction

With respect to investment projects, small and medium-sized enterprises may receive 20% and 10% more aid, respectively, than large enterprises. This is the so-called SME bonus. Aid-granting authorities examine carefully requests for the SME “bonus” and disputes are not unusual. The Court of Justice, in case C‑516/19, NMI Technologietransfer v EuroNorm, was asked by a German court to interpret the concept of SME and, in particular, Article 3(4) of Annex I of Regulation 651/2014, the General Block Exemption Regulation.[1]

This judgment is important because it interpreted for the first time the reference in the SME definition to “control” of enterprises by “public bodies”.

Although the judgment did not refer explicitly to the question whether the SME definition is inapplicable to cases of ownership by non-undertakings, indirectly it provided an answer. The SME definition is about economic power not about the economic nature of the activities carried out by companies or their owners. The mere fact that a company is owned by a non-undertaking need not automatically lead to the conclusion that, if it has fewer than 250 employees, it is an SME.

However, I will also argue that the judgment has created a new conceptual puzzle when considering that now public universities can be classified as public bodies even though they enjoy extensive decision-making autonomy.

The concept of SME

Annex I of the GBER defines SMEs on the basis of two criteria: Size and autonomy. Size is measured by the number of employees and turnover or balance sheet. Autonomy is established by the absence of partner or linked relationships with other enterprises.

The provisions of Annex I of the GBER can be summarised as follows:

Article 2: SMEs are enterprises with fewer than 250 persons and annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.

A small enterprise employs fewer than 50 persons and has annual turnover and/or annual balance sheet not exceeding EUR 10 million.

Article 3:

1) An autonomous enterprise is neither partner, nor linked enterprise.

2) A partner enterprise owns 25% or more of the capital or voting rights of another enterprise, but it is not linked to it.

Exception: An enterprise is autonomous, even if the 25% threshold is reached or exceeded, for the following investors who are not linked and do not get involved in the management of the enterprise:

(a) venture capital funds

(b) universities or non-profit research centres

(c) institutional investors

(d) autonomous local authorities with an annual budget of less than EUR 10 million and less than 5000 inhabitants.

3) A linked enterprise has any of the following relationships with another:

(a) majority of the shareholders’ or voting rights

(b) has the right to appoint or remove a majority of the members of the management or supervisory body

(c) has the right to exercise a dominant influence over another enterprise through a contract or its memorandum or articles of association.

Enterprises which have one or other of such relationships through a natural person or group of natural persons acting jointly are also considered linked enterprises if they engage in their activity or in part of their activity in the same relevant market or in adjacent markets.

4) With the exception of cases in Art 3(2), an enterprise is not an SME if 25% or more of the capital or voting rights are directly or indirectly controlled, jointly or individually, by one or more public bodies.


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Background to the dispute

NMI Technologietransfer [NMI TT] had initiated legal action against EuroNorm because EuroNorm refused to give NMI TT a grant to finance an R&D project. In this case the funding was limited to SMEs.

NMI TT is a limited liability company, 90% of the capital of which is held by the NMI-Institut. The purpose of NMI TT is to develop know-how, provide consulting services and carry out contract research. In particular, NMI TT aims to put into practice for profit the research results of NMI-Institut.

The NMI-Institut is a foundation serving the public interest with legal personality in Reutlingen (Germany), whose purpose is the promotion of science and research.

The capital of the NMI-Institut is mainly held by private companies, with the city of Reutlingen owning approximately 6%. The Board of Trustees of the NMI-Institut, whose decisions are taken by simple majority, consists of 17 members, including a representative of the Ministry of Finance and Economics of the State of Baden-Württemberg, a representative of the Ministry of Science, Research and Art of that State, the mayor of the city of Reutlingen, the rector and three professors of the University of Tübingen, the president of the Reutlingen Institute of Higher Education and the managing director of the Reutlingen Chamber of Commerce and Industry. That is, nine members represent entities which have the status of public body under German law.

EuroNorm, a project development company, is entrusted by the Federal Ministry of Economics and Energy to manage grants, in accordance with the relevant legislation. In July 2016, EuroNorm received from NMI TT an application for a grant for the financing of an R&D project.

In February 2017, EuroNorm rejected that application on the grounds that NMI TT could not be classified as an SME since 25% or more of its capital or voting rights were directly or indirectly controlled [via the NMI-Institut], jointly or individually, by one or more public bodies. Furthermore, since the NMI-Institut and NMI TT are linked enterprises the exception in Article 3(2) of Annex I of the GBER is not applicable.

Therefore, the Court of Justice had to determine whether the Board of NMI-Institut was controlled by public bodies and whether those bodies could exercise indirect influence on NMI TT.

Concept of autonomy

The Court of Justice, first, explained why SMEs are more favourably treated [because their small size is a handicap] and the purpose of the autonomy criterion or independence test [to prevent aid going to SMEs which are controlled by large enterprises which have more financial resources at their disposal]. [paragraphs 31-34 of the judgment]

Then the Court recalled the relevant provisions of Annex I of the GBER. [paras 36-38] Please the summary of the main points of Annex I above.

Then the Court went on to apply the definition of SMEs to the case at hand.

“(40) In the present case, it is common ground […] that NMI TT […] is an enterprise linked to the NMI-Institut, within the meaning of Article 3(3)(a) of Annex I […], since NMI-Institut holds the majority of voting rights. It follows that NMI TT does not fall within the scope of the exception provided for in the second subparagraph of Article 3(2) of that annex with regard to certain categories of investors.”

“(41) Accordingly, it is necessary only to examine whether, in accordance with the general rule of exclusion laid down in Article 3(4) of Annex I […], an enterprise such as NMI TT may be excluded from classification as an SME, within the meaning of that annex, solely on the ground that it is indirectly controlled by public bodies represented in the enterprise with which it is linked and which exercises direct control over it [i.e. the NMI-Institut].”

The concept of “public body” within the meaning of Article 3(4) of Annex I of the GBER

The Court explained, first, that in the absence of a definition of “public body”, it had to interpret that concept in order that it is applied uniformly in the EU. [paras 44 & 45]

“(46) As regards, first, the wording of Article 3(4) of Annex I […], since neither that provision nor any other provision of that regulation, in particular Article 2 thereof, contains a definition of the concept of ‘public body’, its meaning and scope must be determined in accordance with its usual meaning in everyday language”.

“(47) According to its usual meaning, the concept of ‘public body’ must be understood as referring to the State, regional or local authorities and to bodies established for the specific purpose of meeting needs in the general interest, which have legal personality and are either financed for the most part or controlled directly or indirectly by the State, or by regional or local authorities or by other public bodies.

“(48) It follows from that that Article 3(4) of Annex I to Regulation No 651/2014 is intended to include all entities and authorities falling within the scope of public authorities.”

“(49) Second, as regards the context in which that provision appears, it follows from recital 13 of the 2003 Recommendation, on which the definition of ‘SME’, within the meaning of Annex I […] is based, […] that the exclusion provided for in that provision encompasses, in the interests of legal certainty, the various public entities of a Member State, in order to avoid arbitrary distinctions between them.”

“(51) Third, as regards the objective pursued by Article 3(4) of Annex I […], it should be borne in mind that […] the independence test is intended to reserve favourable measures for SMEs to enterprises which do not have access to resources enabling them to overcome the obstacles linked to their size. Entities and authorities which fall under the purview of public authorities, due to those entities and authorities’ access to various means, in particular economic and financial, irrespective of their nature or organisational arrangements, are likely to enable an enterprise to overcome such obstacles.”

“(52) It follows that the concept of ‘public body’, referred to in that provision, is to be understood as including any entity or authority which falls under the purview of public authorities, including regional or local authorities and bodies established for the specific purpose of meeting needs in the general interest, which have legal personality and which are either financed for the most part or controlled directly or indirectly by the State, by regional or local authorities or by other public bodies.”

At this point, the Court examined a clever argument advanced by NMI TT.

“(54) At the hearing, NMI TT claimed, in that regard, that it is apparent from the ‘User guide to the SME definition’, published by the Commission in 2015, in particular page 19 of that document, that, according to that institution, universities, whatever their status under national law, cannot be regarded as ‘public bodies’ covered by the general rule of exclusion laid down in Article 3(4) of Annex I to Regulation No 651/2014.”

The reply of the Court was that “(56) it must be noted that, on page 19 of that guide, the Commission, contrary to what NMI TT suggests, does not in any way indicate that the universities would in no circumstances be capable of coming within the general rule of exclusion laid down in Article 3(4) of Annex I to Regulation No 651/2014, but merely points out that […] universities, where they fall within the concept of ‘public body’ within the meaning of that provision, are not subject to that rule, provided that they are not linked, within the meaning of Article 3(3) of that annex, to the enterprise concerned, a condition which NMI TT itself accepted at the hearing, […] was not satisfied in the present case.”

Indeed, this what the 2015 Guide says. On page 19, it merely repeats the exception in Article 3(2) of Annex I of the GBER [or of the 2003 Recommendation] that an enterprise is not partner of a university which owns more than 25% of its shares but less than 50% [so that it is not linked]. The mention on page 19 was not intended to clarify Article 3(4).

The Court also clarified the status of the representatives of public bodies in the board of an entity such as NMI-Institut. “(57) It is irrelevant […] that the persons appointed on the proposal of those public bodies serve on a voluntary basis within the enterprise concerned, since it is in their capacity as members of those bodies that they have been proposed and appointed”.

“(58) Consequently, Article 3(4) of Annex I to Regulation No 651/2014 must be interpreted as meaning that the concept of ‘public body’ in that provision is intended to include entities, such as universities and higher education establishments and a chamber of commerce and industry, where those entities are set up specifically to meet needs in the general interest, have legal personality and are either financed for the most part or controlled directly or indirectly by the State, by regional or local authorities or by other public bodies. It is irrelevant, for the purposes of the application of that provision, that the persons appointed on the proposal of those public bodies serve on a voluntary basis within the enterprise concerned, since it is in their capacity as members of those bodies that they have been proposed and appointed.”

Existence of “control” within the meaning of Article 3(4) of Annex I of the GBER

Next, the Court had to define the meaning of control.

For this purpose, “(59) it is necessary to take into consideration the wording of Article 3(4) of Annex I […], as well as the context in which it is written and the objectives pursued by the legislation of which it forms part, in order to determine whether the existence of control, within the meaning of that provision, requires only that public bodies hold jointly, albeit indirectly, at least 25% of the capital or voting rights of the enterprise concerned, in accordance with the terms of the statutes of the enterprise which exercises direct control over it, or whether, moreover, it is necessary to examine whether such bodies are able to influence and coordinate the effective exercise by their representatives of their voting rights or whether the latter actually take account of the interests of such bodies.”

Then the Court made three important observations.

“(60) First, as regards the wording of Article 3(4) […], it should be noted that that provision, in accordance with recital 13 of the 2003 Recommendation, on which […] that annex is based, refers solely to the degree of participation by public bodies in the capital or voting rights of the enterprise concerned, without mentioning, moreover, the actual conduct adopted by those bodies or by their representatives.”

“(61) Second, as regards the context of which that provision forms a part, it should be observed that Article 3 of Annex I […] expressly provides, for the purposes of determining whether an enterprise is linked to another enterprise, that it is necessary to examine whether, in practice, the former actually exercises a decisive influence on the latter.”

“(62) In particular, the second subparagraph of Article 3(3) provides for a presumption of absence of a dominant influence when the investors referred to in the second subparagraph of Article 3(2) do not interfere directly or indirectly in the management of the enterprise concerned, ‘without prejudice to their rights as shareholders’.”

“(63) Conversely, as can be seen from the fourth subparagraph of Article 3(3), that article provides that enterprises may be considered to be linked when, as a result of the role played by a natural person or a group of natural persons acting jointly by coordinating in order to influence the business decisions of the enterprises concerned, they constitute a single economic unit, even though they do not formally have any of the relationships referred to in the first subparagraph of Article 3(3)”.

“(64) By contrast, Article 3(4) does not contain similar provisions in respect of public bodies controlling, jointly or individually, at least 25% of the capital or voting rights of another enterprise.”

“(66) Third, as regards the objective pursued by Article 3(4) […], it should be noted that, in accordance with the independence test on which the concept of, inter alia, ‘SME’ within the meaning of that annex is based, that provision is intended to ensure […] that the enterprise concerned has the capacity to take commercial decisions autonomously.”

“(67) A situation which is characterised by the existence, between different enterprises, of structural links, in terms of shareholdings and voting rights, precludes those enterprises from being considered economically independent of each other, since it results in one firm being in a position, independently of its actual behaviour, to exert a decisive influence on the decision-making of another enterprise”.

“(69) The mere taking account, for the purposes of determining whether an enterprise is eligible for the more favourable rules applicable to SMEs, of the degree of participation by public bodies in the capital or voting rights of that enterprise, without it being necessary to examine, moreover, the conduct adopted in practice by those bodies or their representatives, is clearly such as to facilitate the application by the competent authorities of the general rule of exclusion laid down in Article 3(4)”.

“(70) It is thus apparent from both the wording of that provision and from its context, and the objective pursued by it and by the legislation of which it forms part, that the existence of control, within the meaning of that provision is inferred solely from the degree of participation by public bodies in the capital or voting rights of the enterprise concerned.”

“(71) Consequently, for the purposes of the existence of such control, it is sufficient for such public bodies to hold jointly, albeit indirectly, at least 25% of the capital or voting rights of the enterprise concerned, in accordance with the statutes of the enterprise which exercises direct control over the latter, without it being necessary to examine, moreover, whether such bodies are able to influence and coordinate the effective exercise by their representatives of their voting rights or whether those representatives actually take account of the interests of those bodies.”

“(72) In the present case, although it is common ground that the NMI-Institut holds 88.8% of the voting rights in NMI TT, it is apparent from the order for reference that the Statutes of the NMI-Institut do not govern the question of the exercise of those rights.”

“(73) However, it appears that, in accordance with Articles 2, 7 and 13 of those statutes, the Board of Trustees – all members of which, as it emerged from the discussions held during the hearing before the Court and as was explicitly stated by NMI TT itself, are currently members of the Executive Board of that company – is responsible, first, for defining the principles governing the work of the NMI-Institut, concerning, in particular the exploitation of research results and the implementation of research and development projects, and, second, has a range of advisory and decision-making powers with regard to content and financial planning as well as the appointment, dismissal and discharge of the Executive Board, the Board of Trustees being furthermore empowered to amend the Statutes of the NMI-Institut and to dissolve it.”

“(74) Accordingly, it appears […] that the provisions contained in the Statutes of the NMI-Institut are such as to confer on public bodies, by reason of the presence of their representatives on the Board of Trustees, indirect ownership of more than 25% of the voting rights in NMI TT.”

Conclusions and a logical puzzle

On the basis of the above analysis, the Court of Justice concluded that

“Article 3(4) of Annex I to Regulation No 651/2014 must be interpreted as meaning that it does not preclude national legislation which excludes an enterprise from being regarded as an SME, where the body of the enterprise which holds the main part of its capital, although it is not authorised to ensure its day-to-day management, is composed for the most part of members representing public bodies, within the meaning of that article, so that the latter jointly exercise, by that sole fact, indirect control, within the meaning of that article, over the former enterprise, it being understood that:

– first, the concept of ‘public body’ in that article is intended to include entities such as universities and higher education establishments as well as a chamber of commerce and industry, provided that those entities are created to specifically meet needs in the general interest, have legal personality and are either financed for the most part or controlled directly or indirectly by the State, by regional or local authorities or by other public bodies, it being irrelevant in that respect that the persons appointed on the proposal of those entities serve on a voluntary basis within the enterprise concerned, since it is in their capacity as members of the latter that they have been proposed and appointed, and

– second, for the purposes of the existence of such control, it is sufficient for public bodies to hold jointly, albeit indirectly, at least 25% of the capital or voting rights of the enterprise concerned, in accordance with the terms of the statutes of the enterprise which exercises direct control over it, without it being necessary to examine, moreover, whether those bodies are able to influence and coordinate the effective exercise by their representatives of their voting rights or whether those representatives actually take account of the interests of those bodies.”

New problems

Although this judgment has clarified several issues, it has also created new problems. Three observations are in order.

First, there is a mistake in the text of the judgment as it appears on the website of the Court. Paragraph 75 says that “Article 3(4) […] does not preclude an enterprise from being regarded as an SME”, while paragraph 76 correctly states that “Article 3(4) […] does not preclude national legislation which excludes an enterprise from being regarded as an SME”.

Second, and more importantly, the Court did not spot a logical inconsistency in the SME definition and, consequently, in its judgment. Article 3(2) of the SME definition says that an SME in which a university owns, say, 40%, is not a partner enterprise, i.e. it is autonomous. So if it is an SME, it remains an SME despite the fact that it may be a partner of a large university.

But now after this judgment, Article 3(4) must be understood to mean that if i) that university is public and classified as a public body, ii) it owns more than 25% but less than 50% of the shares [so it is not linked] and iii) given that actual exercise of control over the SME is irrelevant, that SME cannot be regarded as an SME!

I hasten to add that Article 3(4) starts with the words “except in the cases” set out in Article 3(2) which presumably refers to “autonomous local authorities”, a subset of public bodies, otherwise the exception in Article 3(2) does not make sense [an exception must always be smaller than the rule from which it deviates, otherwise there is a logical contradiction].

Third, for universities, in particular, this judgment creates new problems. In most Member States public universities retain a very high degree of autonomy, even if they are funded exclusively or primarily by the state. It is very difficult conceptually to reconcile their decision-making autonomy with the view of the Court that “(48) Article 3(4) of Annex I to Regulation No 651/2014 is intended to include all entities and authorities falling within the scope of public authorities” which implies that such entities carry out public policy.

An autonomous public university, apart from providing free or heavily subsidised education, does not necessarily carry out any other public policy. Therefore, the definition laid down by the Court that public bodies include “(52) bodies established for the specific purpose of meeting needs in the general interest, which have legal personality and which are either financed for the most part […] by the State” is problematic because it ignores the general interest which is a very fluid concept that allows much room for discretion. In fact, in cases concerning compensation for public service obligations, the case law has warned that the designation of a service as being in the “general interest” falls short of the requirement for imposition of precise obligations.


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

http://curia.europa.eu/juris/document/document.jsf?text=&docid=231566&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=4950318


Image by Walter Frehner on Pixabay.

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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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