Investors in banks that failed or were restructured as a result of the financial crisis that broke out in 2008 have tried many times and have used many arguments to support their claims for compensation. None of them has so far succeeded before EU courts to prove that the Commission, or the ECB or the Council or the Eurogroup was responsible for their losses.
On 31 January 2023, investors who had been bailed-in suffered another legal defeat. The Court of Justice ruled, in case C284/21 P, European Commission v Anthony Braesch and Others, that the Commission was not responsible for the burden-sharing arrangements proposed by Italy in order to obtain the Commission’s authorisation of precautionary recapitalisation of Banca Monte dei Paschi di Siena.
This is a rich judgment. It sheds light on several important issues:
The definition of interested parties.
The status of Commission guidelines.
The status of proposals made by Member States in notified aid measures.
The responsibility of the Commission in relations to Member State proposals.
The links between such proposals and the compatibility with the internal market of the aid itself.
The consequences of a national court declaring national implementing measures illegal.
The Commission requested the Court of Justice to set aside the judgment of the General Court of 24 February 2021, in case T-161/18, Braesch and Others v Commission. In that judgment, the General Court rejected the Commission’s plea of the inadmissibility of the action brought Braesch and Others seeking the annulment of Commission decision SA.47677 concerning aid that had been granted to Banca Monte dei Paschi di Siena [BMPS] by Italy.
In November 2013, the Commission approved restructuring aid granted by Italy to BMPS. In June 2015, BMPS repaid the aid in its entirety. In July 2016, the European Banking Authority [EBA] carried out stress tests which revealed that BMPS had a capital shortfall in the adverse scenario. In December 2016, following an unsuccessful attempt to raise private capital, BMPS requested extraordinary public financial support [EPFS] in the form of liquidity support and precautionary recapitalisation.
In June 2017, having first confirmed that BMPS was a solvent institution, the Commission authorised two aid measures: State guarantees amounting to EUR 15 billion covering senior liabilities [measure 1]; precautionary recapitalisation of BMPS in the sum of EUR 5.4 billion [measure 2].
The Commission also found that the aid measures complied with the provisions of Directive 2014/59 on banking recovery and resolution, as they were in line with the exemption allowed by Article 32(4)(d) of Directive 2014/59.
It should be recalled that any request for or the granting of State aid or any other public funding that qualifies as EPFS automatically designates the beneficiary bank as “failing or likely to fail”. In this event, the bank has to be liquidated or resolved. Resolution takes place only if it is in the public interest. This would be the case, for example, when the bank is systemic and its closure would harm financial stability. However, there is an exemption to the “liquidation or resolution” rule when the beneficiary bank is solvent, the EPFS aims to remedy a serious economic disturbance and it is necessary for preventing financial instability.
Braesch and the Others had appealed against the Commission decision authorising the two aid measures. This is because one of the conditions for authorisation of any aid to a financial institution is that shareholders and unsecured bondholders must be bailed-in [i.e. suffer losses] before any State aid is granted. This is the so called “burden sharing” requirement laid down in the 2013 Commission Banking Communication whereby shareholders and unsecured bondholders bear losses before any contribution by tax payers.
During the General Court proceedings, the Commission claimed that that action was inadmissible, but the General Court dismissed that claim because it considered that Braesch and Others had the status of “parties concerned” and “interested parties” within the meaning of Article 108(2) TFEU and Article 1(h) of Regulation 2015/1589, respectively.
For a natural or legal person to be able to bring action against a Commission decision in the field of State aid [i.e. to have legal standing] must first demonstrate that it is a party concerned or an interested party. Competitors are interested parties. Natural persons normally are not. In this case Braesch and Others were investors in a restructured bank. Therefore, the question was whether they qualified as parties concerned or interested parties. The General Court concluded that they did qualify as such.
According to the Commission, they did not. Therefore, the Commission requested the Court of Justice to set aside the judgment of the General Court on the grounds that Braesch and Others were not parties concerned or interested parties.
The Court of Justice, first, recalled and explained, in paragraphs 49-60 of the judgment, the case law on the status of parties concerned and interested parties. However, it also considered that Braesch and Others could challenge the Commission decision only if the Commission was responsible for the burden-sharing arrangements. Therefore, the Court of Justice it turned its attention to the disputed legality of the burden-sharing measures.
Was the Commission responsible for the burden-sharing arrangements?
Braesch and Others did not contest that the measures 1 and 2 constituted State aid. They questioned, instead, whether the burden-sharing measures that effected them were compatible with EU law, in particular, Regulation 806/2014 which established the single resolution mechanism, the right to property laid down in Article 17 of the Charter of Fundamental Rights and several general principles of EU law. The burden-sharing measures at issue provided for the cancelling of certain contracts, called “FRESH”, between BMPS and JP Morgan [JPM] for the purpose of converting BMPS’s subordinated debt into equity.
The Court of Justice began its analysis by pointing out that “(68) by holding, […], that that impact on the interests of BMPS’s subordinated creditors results from the State aid at issue and, therefore, from the decision at issue, on the ground that the burden-sharing measures referred to in that decision form an integral part of the notified aid, in the same way as the restructuring plan and the commitments offered by the Italian authorities, with the result that, by that decision, the Commission rendered those measures binding, the General Court misconstrued the rules of EU law governing the scope of that decision and thereby made an error of law rendering that judgment unlawful.”
“(69) The Court of Justice has indeed held, in essence, that where the notified measure incorporates, upon a proposal from the Member State concerned, commitments to which that State has agreed, those commitments must be held […] to form an integral part of the measure that has been authorised, since they were taken into account by the Commission in its assessment of the compatibility of the State aid at issue with the internal market, with the result that that authorisation is valid only to the extent that those commitments are respected”.
“(70) However, it does not follow that such commitments must be regarded as being imposed as such by the Commission and that any adverse effects they may have on third parties are therefore attributable to the decision adopted by that institution.”
This statement creates a puzzle. The Banking Communication requires burden-sharing. Here are just four examples of the many references to burden-sharing in the Banking Communication:
“(19) before granting restructuring aid to a bank Member States will need to ensure that the bank’s shareholders and junior capital holders arrange for the required contribution”.
“(29) A capital raising plan should contain in particular capital raising measures by the bank and potential burden-sharing measures by the shareholders and subordinated creditors of the bank.”
“(40) aid should only be granted on terms which involve adequate burden-sharing by existing investors”.
“(44) State aid must not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any losses.”
Therefore, if the Commission requires Member States to include burden-sharing arrangements in their State aid measures, why are they not attributable to the Commission?
The Court of Justice went on to note that “(72) by a decision such as the decision at issue, the Commission cannot impose or prohibit any action by the Member State concerned, but is only entitled to approve, by a decision not to raise objections, the planned aid as notified by that Member State, declaring that aid compatible with the internal market. By contrast, where the Commission has doubts as to the compatibility of the notified aid with the internal market, it is required to initiate the formal investigation procedure provided for in Article 108(2) TFEU and referred to in Article 4(4) of Regulation 2015/1589.”
“(73) Thus, in the present case, it must be held that, by the decision at issue, the Commission merely authorised the Italian Republic to implement the State aid at issue while taking note of the factual framework already defined by that Member State in the restructuring plan and the commitments which it notified under Article 108(3) TFEU, in order to dispel any doubt as to the compatibility of that aid with the internal market, for the purposes of Article 107(3)(b) TFEU.”
Here the Court seems to ignore the pre-notification meetings that take place between the Commission and Member States, the adjustment to draft plans as a result of the comments of the Commission in those meetings and the fact that Member States are supposed to design their measures to conform with Commission guidelines. Of course, as we will see below, Member States may deviate from guidelines. But, any such deviation comes at a cost: uncertainty as to the outcome of the Commission assessment, possible formal investigation and much delay. In view of this cost, are Member States really free to deviate? And, if they deviate, would the Commission ever approve State aid to a bank without burden-sharing?
The Court of Justice continued that “(74) it was therefore for the Italian Republic to ensure that it would be able to fulfil the commitments included in the authorisation granted by that decision. In that respect, it was responsible, inter alia, for satisfying itself that those commitments are consistent with its national law and relevant EU law”.
“(77) Therefore, it cannot be considered that the burden-sharing measures notified in the present case by the Italian Republic in the context of the preliminary examination procedure were imposed by the decision at issue itself, since those measures result solely from acts adopted by that Member State.”
Was deviation from the Banking Communication possible?
The Court of Justice did examine the extent to which a Member State could notify different arrangements to the Commission.
It first stated that “(78) nothing prevented that Member State from notifying a restructuring plan and commitments entailing different measures, at the risk that the Commission might be required, in that case, to initiate the formal investigation procedure laid down in Article 108(2) TFEU and referred to in Article 4(4) of Regulation 2015/1589”.
However, the Court did not consider the chances of success of a notification without burden-sharing arrangements. Did the word “nothing” mean that there was no legal obstacle – which was true – or did it reflect an assessment that there were no practical difficulties – which was false?
“(80) It follows that, contrary to what was held by the General Court, the burden-sharing measures referred to in the decision at issue were not imposed or rendered binding by the Commission in that decision, but constitute purely national measures notified by the Italian Republic, under Article 108(3) TFEU, under its own responsibility, which were taken into account by the Commission as a factual element in assessing whether the State aid in question could, in the absence of any doubt in that regard, be declared compatible with the internal market at the conclusion of the preliminary examination stage.”
Then the Court of Justice distinguished between the aid and the burden-sharing arrangements.
“(81) Accordingly, the annulment of the FRESH contracts, which Braesch and Others claim is liable to cause them, as holders of FRESH bonds, substantial economic damage, cannot be regarded as a binding effect of the decision at issue, since it does not result from the implementation of the aid at issue as such. Rather, it results from measures – which are indeed linked de facto, but which are legally distinct – adopted by the Member State that notified that aid to the Commission. The fact that those measures were, inter alia, adopted by that Member State with a view to obtaining from the Commission a decision authorising that aid and that they are the subject of commitments taken into account in such a decision of the Commission is irrelevant in that regard.”
Indeed, they were legally distinct but indispensable for the Commission’s authorisation of the restructuring aid.
Consequences of deviating from the Commission decision
The Court also examined the likely consequences of non-compliance with the authorising decision.
“(84) Any failure by BMPS to comply with the commitments given by the Italian Republic in relation to burden sharing, such as the payment of coupons to holders of financial instruments covered by those commitments, would give rise to misuse of the aid at issue, for the purposes of Article 108(2) TFEU, read in conjunction with Article 1(g) of Regulation 2015/1589. That aid would, in that situation, be used by the beneficiary in contravention of a decision taken pursuant to Article 4(3) of that regulation, within the meaning of Article 1(g) thereof, since the beneficiary would thus be implementing aid measures different from those approved by the Commission in the decision at issue”.
“(86) Moreover, implemented aid which does not correspond to the aid notified and authorised by the Commission in the decision at issue could also be regarded as ‘new aid’, […], which, having been granted in breach of the last sentence of Article 108(3) TFEU, would constitute ‘unlawful aid’, […], with the result that the national courts could also order its recovery”.
The non-relevance of compliance with the Banking Communication
The Court of Justice acknowledged that “(88) the Commission indeed examined, […], whether the aid at issue complied with the provisions of that communication, in order to verify that the amount of that aid was limited to the minimum necessary, to reduce distortions of competition in the internal market and to address moral hazard by ensuring that the shareholders and subordinated creditors of BMPS made an appropriate contribution, in compliance with points 40 to 46 of that communication, to the restructuring costs by means of adequate burden-sharing.”
“(90) By adopting guidelines, […], the Commission imposes a limit on the exercise of the discretion granted to it in that respect by Article 107(3)(b) TFEU and cannot, as a general rule, depart from those guidelines, at the risk of being found to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations”.
“(91) However, it is nevertheless the case that, as the Court has already held, the fact that State aid provides for a burden-sharing measure which meets the criteria set out in the Banking Communication, in particular point 44 thereof, constitutes a condition that is, as a general rule, sufficient ground for the Commission to declare that aid to be compatible with the internal market, but is not strictly necessary to that end”.
The Court here quoted the findings in C526/14, Kotnik and Others, but it is difficult to understand why the Court concluded that burden-sharing was “not strictly necessary” when point 44 of the Banking Communication states that “State aid must not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any losses”. Did the Court mean that Italy could have asked the Commission to assess the aid measure directly on the basis of Article 107(3)(b)? And if it did, would the Commission authorise the aid without demanding that the shareholders and bondholders be bailed in?
“(92) The Member States retain the right to notify the Commission of proposed State aid which does not meet the criteria laid down by that communication and, as set out in point 45 thereof, the Commission may authorise such proposed aid in exceptional circumstances”.
But, it should be noted that point 45 applies only to specific situations. Moreover, during the past decade I believe it has been applied only twice.
The Court went on to point out that “(93) the Commission cannot waive, by the adoption of guidelines, the exercise of the discretion that Article 107(3)(b) TFEU confers on it. The adoption of a communication such as the Banking Communication does not therefore relieve the Commission of its obligation to examine the specific exceptional circumstances relied on by a Member State, in a particular case, for the purpose of requesting the direct application of Article 107(3)(b) TFEU, and to provide reasons for its refusal to grant such a request”.
“(94) It follows that the Banking Communication is not capable of imposing independent obligations on the Member States, but does no more than establish conditions, designed to ensure that State aid granted to the banks in the context of the financial crisis is compatible with the internal market, which the Commission must take into account in the exercise of the wide discretion that it enjoys under Article 107(3)(b) TFEU. The Banking Communication is not therefore binding on the Member States and, in particular, cannot require them to adopt burden-sharing measures”.
“(95) A Member State is not therefore compelled to impose on banks in distress, prior to the grant of any State aid, an obligation to convert subordinated instruments into equity or to effect a write-down of the principal thereof, or an obligation to ensure that those instruments contribute fully to the absorption of losses. In such circumstances, it will not however be possible for the State aid envisaged to be regarded as having been limited to the strict minimum necessary, according to point 15 of the Banking Communication, and the Member State, as well as the banks who are to be the recipients of the State aid envisaged, thus run the risk that a Commission decision declaring that aid incompatible with the internal market will be taken against them”.
Since Member States “run the risk” of having their proposed aid measures prohibited by the Commission, it is puzzling why the Court does not consider the real or actual value of the legal right of Member States to deviate from Commission guidelines.
The legality of Member State proposals and their link to the aid measure
Lastly, the Court of Justice examined the legality of the burden-sharing arrangements proposed by Italy.
“(96) As regards Braesch and Others’ argument concerning the Commission’s obligation to verify that all measures notified by the Italian Republic comply with EU law, it should be borne in mind that, according to settled case-law, the procedure under Article 108 TFEU must never produce a result which is contrary to the specific provisions of the Treaty […] Accordingly, State aid which, as such or by reason of some modalities thereof, contravenes provisions or general principles of EU law cannot be declared compatible with the internal market”.
“(97) Indeed, where the modalities of an aid measure are so indissolubly linked to the object of the aid that it is impossible to evaluate them separately, their effect on the compatibility or incompatibility of the aid viewed as a whole must therefore of necessity be determined in the light of the procedure prescribed in Article 108 TFEU”.
“(98) The central economic activity at the heart of the project which is financed by aid is indeed inseparable from the object of that aid”.
“(99) Modalities, which determine the conditions of eligibility for an aid scheme, are also inseparable from the aid as such and are therefore among the factors which the Commission is required to examine and, as the case may be, to approve, with the result that, if such modalities lead to an infringement of general principles of EU law, a decision adopted by the Commission which authorises such a scheme is, in turn, necessarily rendered unlawful.”
“(100) It follows that, in the present case, the Commission could not declare the State aid notified by the Italian Republic to be compatible with the internal market, pursuant to Article 107(3)(b) TFEU, without first ensuring that that aid, and the recapitalisation of BMPS which it was intended to finance, also did not infringe other relevant provisions or general principles of EU law.”
“(103) However, the Commission was not required to verify whether that burden-sharing decided by the Italian Republic itself infringed the rights which Braesch and Others claim to derive from EU law or national law. Such an infringement, even if it were established, would not arise from the aid as such, its object or its indissociable modalities, but rather, […], from the measures taken by that Member State in order to obtain from the Commission a decision authorising that aid at the conclusion of the preliminary examination stage.”
“(104) If [a] third party [such as Braesch and Others] considers that, as a result of the adoption of such measures, the Member State concerned has infringed EU law, it must challenge the legality of those measures before the national court, which has sole jurisdiction in that regard and which has the power, or even the obligation, if it rules at last instance, to make a reference to the Court of Justice for a preliminary ruling under Article 267 TFEU, if necessary, in order to question it as to the interpretation or validity of the relevant provisions of EU law.”
“(105) In the present case, […], Braesch and Others […] claim to be adversely affected by the burden-sharing measures referred to in the decision at issue, the compliance of which with EU law […] raises, according to them, serious doubts which should have led the Commission to initiate the formal investigation procedure.”
“(106) However, […], those burden-sharing measures are purely national measures which were notified by the Italian Republic, under its own responsibility, and which were thus not imposed by the Commission and are accordingly legally distinct from the aid at issue, the Commission having taken them into account only as a factual element for the purposes of adopting the decision at issue. It is, therefore, […], exclusively for the competent national courts to review the legality of those measures in the light of the relevant national and EU law.”
But can the Commission take into account “only as a factual element” arrangements that may contravene EU law? If they are contrary to EU law, then the notifying Member State cannot implement them with the result that it must deviate from the Commission authorising decision. Therefore, can the Commission approve a measure if the Member State will be prevented from implementing it under the conditions it is authorised?
“(107) In that regard, it should be noted that if a national court, having been called upon to rule on the lawfulness of the burden-sharing measures at issue, were to annul those measures in whole or in part on the ground that they are unlawful, its ruling would not run counter to the decision at issue, since that decision does not impose those measures and did not assess their conformity with EU law.”
“(108) If the referring court were to reach the conclusion, […], that the burden-sharing measures at issue are, in whole or in part, unlawful, it would be for the Italian Republic, if that unlawfulness meant that it was no longer able to fulfil all the commitments undertaken vis-à-vis the Commission by implementing the aid notified in accordance with the authorisation granted by the decision at issue, to notify new measures to the Commission under Article 108(3) TFEU, at the risk of being required, […], to recover the aid already granted on the basis of that decision.”
“(109) It follows that, first, contrary to what Braesch and Others submitted at the hearing before the Court of Justice, they are in no way deprived of the right to an effective judicial remedy guaranteed in the first paragraph of Article 47 of the Charter and, secondly, the General Court was wrong to hold, […], that Braesch and Others could defend their interests only by seeking the annulment of the decision at issue before the EU judicature.”
On the basis of the above reasoning the Court of Justice annulled the judgment of the General Court. Then it proceeded to give itself a final judgment. It found that the Braesch and Others did not have standing as interested parties. They were neither recipients of the aid, nor competitors of the aid recipient. Nor, did the Commission decision distinguished them individually from all other shareholders and bondholders who were also bailed-in. Therefore, the Court dismissed the appeal of Braesch and others at first instance.
The full text of the judgment can be accessed at: