Only EU institutions can provide assurances that aid is granted legally. The amount of State aid in a state guarantee given to a company in difficulty can be equal to the amount of the guaranteed loan. The simultaneity of public and private investments is not enough to ensure that the public investment is at market terms. They must also be comparable.
Member States grant State aid for a variety of reasons some of which are not consonant with the logic of EU State aid rules. For example, State aid is normally not found to be compatible with the internal market when it is badly targeted or when it is disproportional to what it aims to achieve.
Aid measures are badly targeted when they do not remedy a market failure directly or achieve an equity objective. The aid is disproportional when it is not closely linked to costs incurred by the aid recipients.
Two cases are reviewed here which show the fatal mistakes in the design of State aid measures. The first case concerns compensation for the damage caused by natural disasters. The second case concerns guarantees and recapitalisation without any restructuring plan that could turn around the beneficiary.
Case 1: case T-172/16, Centro Clinico Diagnostico e G. B. Morgagni v European Commission
On 26 January 2018, the General Court ruled in case T-172/16, Centro Clinico Diagnostico e G. B. Morgagni v European Commission. Centro Clinico appealed against Commission decision 2016/195 concerning an Italian measure that provided tax relief as a means for compensation for damage suffered from the 2009 earthquake in the region of Abruzzo. The Commission decision was reviewed here on 15 March 2016. [View it here: http://stateaidhub.eu/blogs/stateaiduncovered/post/5601]
Natural disasters occur in all Member States. This is a case of how not to grant aid even though Article 107(2)(b) TFEU does allow aid for the purpose of remedying up to 100% of the effects of a natural disaster. The measure was badly designed.
It appears that the Italian authorities wanted to implement the aid measure with as little bureaucracy and administrative burden as possible for affected companies. Any company that, during a certain reference period, was established in the region that was struck by the earthquake was eligible for reduced taxes and social insurance contributions.
The Commission, however, concluded that the measure did not establish any link between the amount of aid and the damage actually suffered, nor did it make the aid conditional on a direct link between the damage and the earthquake.
Therefore the aid was incompatible with the internal market even though according to Article 107(2)(b) aid to remedy the effects of a natural disaster is in principle compatible with the internal market. The presumed compatibility of the aid depends on fulfilment of the conditions of Article 107(2)(b).
Principle of legitimate expectations
The first substantive plea of Centro Clinico Diagnostico alleged infringement of the principle of legitimate expectations because it received aid in full compliance of the provisions of the relevant Italian law and because it took the Commission seven years after the law had been implemented to react. The Commission had found about the existence of that law as a result from a query it had received from an Italian court that was adjudicating a dispute related to the aid in question.
The General Court rejected the claim of the Centro Clinico Diagnostico that it could hold legitimate expectations about the legality of the aid because of the delay of the Commission’s action. The Court observed that the aid measure had not been notified to the Commission and that the Commission became aware of it only after a request for information. The Commission could not be criticised for having acted with delay [paragraphs 88-90 of the judgment].
The Court also rejected the view that Centro Clinico Diagnostico could hold legitimate expectations because of the assurances given to it by national authorities. Only the Commission could provide such assurances [paragraph 91].
Principle of equal treatment
With its second plea, Centro Clinico Diagnostico claimed that the Commission infringed the principle of equal treatment in relation to other beneficiaries of the aid. The Court rejected this claim too because Centro Clinico Diagnostico was not in a position to provide proof of the damage it allegedly suffered. The Court did not consider relevant the argument that it was absolutely impossible for Centro Clinico Diagnostico to provide the required proof.
Since the Court rejected all the pleas of the applicant the appeal was dismissed.
Case 2: T-423/14, Larko v European Commission
On 1 February 2018, the General Court ruled in case T-423/14, Larko v Commission. Larko appealed against Commission decision 2014/539 which had ordered Greece to recover from Larko aid that was deemed to be incompatible with the internal market.
Larko was a large mining company that was owned by the state. In 2012, the Greek government began the process of privatising the company. Greece notified the privatisation plan to the Commission and asked it to confirm that the eventual buyer would not receive any State aid. Greece sought to obtain legal certainty that the privatisation process was free of State aid because Larko had been the beneficiary of several state measures. Indeed, after a formal investigation, the Commission concluded that Larko had received State aid that was incompatible with the internal market.
It is worth noting that the Commission, in a separate decision, concluded that the eventual buyer of Larko’s assets would not receive any State aid because the assets of the company would be sold through a competitive process and because there was no continuity between the activities of Larko and those of the new owner.
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Larko’s first plea was that the Commission failed to state the precise reasoning of its decision.
With respect to state guarantees that had been granted to Larko, the General Court observed that the Commission had explained that the 2008 Communication on Guarantees was not applicable because Larko was in financial difficulties. The guarantee premia did not reflect the risk of default for secured loans [paragraph 29 of the judgment]. Because of its troubles, the amount of aid included in the guarantees was deemed to be equal to the total amount of the loans. Under those conditions, no market operator would have been willing to offer any guarantee to Larko.
With respect to a capital injection, the Court noted that the Commission had considered that it did not conform with the private investor test since no restructuring plan had been drawn up before the investment was made, despite the fact that Larko was a company in difficulty [paragraph 30].
Private investor test
Larko alleged that the Commission did not apply properly the market economy investor principle [MEIP]. The Court first recalled that where it appears that the MEIP may be applicable, the Commission is obliged to request the Member State concerned to provide it with all relevant information that can enable it to verify whether the MEIP is applicable. However, if a Member State invokes the MEIP, than it bears the burden of proof. [Paragraphs 57-58]
Then, the General Court went on to examine the situation of Larko at the time it received the public investment. It agreed with the Commission that the company was in difficulty, that it had lost its share capital, its liquidity was very low, its turnover had declined and that it experienced operating losses.
The Court found that the Greek authorities had not assessed the future prospects of Larko before they committed their investment. That was not consonant with the behaviour of a prudent investor. [Paragraphs 85-90]
With regard to the public guarantees, the Court noted that a risk-taking investor would normally want to be rewarded with an adequate premium. It agreed with the view of the Commission that the rate of 1% or 2% that was charged for the state guarantees did not adequately reflect the riskiness of Larko. [Paragraphs 89-92]
Interestingly, the Court also faulted the Commission for not having established a reference guarantee premium on the financial markets, or a market price for a similar unsecured loan, or a risk rating for Larko. Nonetheless, the Court also considered that in view of the dire situation of Larko, these omissions of the Commission did not invalidate its conclusion that the state guarantees contained State aid. [Paragraphs 94-96]
The Court rejected Larko’s argument that it had obtained a similar guarantee from a bank. The bank was state owned and its decisions did not necessarily reflect market conditions. It also rejected the argument that public guarantees had been granted to other undertakings at comparable premium rates. This behaviour was not comparable to that of a private investor. [Paragraphs 100-101]
With regard to a capital injection, the General Court noted that there was no prior restructuring plan and no business plan demonstrating that Larko could return to long-term profitability, despite the fact that Larko was in financial difficulty. [Paragraphs 109-111]
In its assessment of the capital injection, the Court also considered Larko’s argument that there was a concomitant or simultaneous private participation by the National Bank of Greece. The Court first recalled that the concomitance or simultaneity of public and private investments alone cannot, even in the presence of significant private investment, be sufficient proof that there is no aid within the meaning of Article 107 (1) TFEU, without taking into account other relevant facts or law [at this point the following case is cited: Corsica Ferries France v Commission, T-565/08, paragraph 122]. [Paragraph 119]
The Corsica Ferries judgment, at paragraph 117, in turn cites the judgment in case T-296/97, Alitalia v Commission. Paragraph 81 of the Alitalia judgment states:
“A capital contribution from public funds must therefore be regarded as satisfying the private investor test and not constituting State aid if, inter alia, it was made at the same time as a significant capital contribution on the part of a private investor made in comparable circumstances”. [Emphasis added]
In other words, public and private investments must be simultaneous, in economically meaningful amounts and under the same terms. In some cases of simultaneous investment of public and private capital there arises a State aid problem because the private investor is already owner of the company that receives the capital injection. It is willing to accept a lower rate of return on the new investment in order to save its previous investment. It is for this reason that simultaneity is not enough to ensure that the behaviour of the private investor establishes an objective benchmark of market terms. What happened in Larko’s case, however, was exactly the opposite. Both the state and the National Bank of Greece were shareholders, although the National Bank of Greece had a minority holding.
The Court observed in paragraph 120 of its judgment that before the capital injection the National Bank of Greece had written off the value of its shareholding in Larko. It was not in a comparable situation as the state which had a majority shareholding.
Although the Court was right that legally the Greek state and the bank were not in a comparable situation, it is not obvious how this difference affected the economic case in favour or against the investment. For example, if the bank was not trying to save its previous investment, it must have agreed to put fresh money in Larko only if it thought it would make a return that would be high enough to compensate it for the extra risk it assumed. Since the past investment had been written off, the bank must have been acting as a new investor and its behaviour must have been similar to that of a genuine market investor. The Court did not examine how the fact that the past investment had been written off could have affected the decision of the National Bank of Greece.
Existence of advantage
One of the arguments of Larko was that the benefit it received from one of the public guarantees was set off by the taxes it was able to pay. Larko had failed to pay on time the taxes it owed because of its lack of liquidity. When one of the guarantees improved its liquidity, it also paid some of the taxes that were in arrears.
The Court rejected that argument because a measure cannot escape being classified as State aid when the beneficiary of the aid is subject to a specific charge which is distinct and unrelated to the aid measure. [Paragraph 142]
Larko claimed that the aid it had received was compensation for damage caused by exceptional occurrences. The General Court recalled that aid is compatible with the internal market on the basis of Article 107(2)(b) TFEU when damage is caused directly by natural disasters or exceptional occurrences. There must be a link between the damage and the disaster or occurrences and the amount of aid may not exceed the amount of the damage [paragraph 156]. The Court went on to reject Larko’s claim on the grounds that the aid in the guarantees and capital injection was not linked to any damage that had been suffered by Larko. [Paragraph 158]
Serious economic disturbance
Then Larko argued that it had too suffered a disadvantage from the economic crisis that had afflicted Greece and that the aid it received was compatible with Article 107(3)(b) TFEU and in particular with the Commission 2011 Temporary Framework. The Court rejected this argument as well. Larko, by being a company in difficulty, did not qualify for aid under the Temporary Framework. Moreover, the guarantees did not meet the criteria that were laid down either in the 2008 Notice on Guarantees, nor in the Temporary Framework.
In both cases reviewed in this article, the aid was intended to confer a gratuitous benefit without imposing any obligations on the beneficiaries. It was operating aid that could be exempted only exceptionally under certain conditions that obviously did not apply to the two cases.
 The full text of the judgment, in French and Italian, can be accessed at:
 The full text of the judgment in several languages other than English can be accessed at: