European State Aid Law in a Nutshell

State aid law, an important part of EU competition law and a growing issue in the EU, can pose significant risks to companies in the EU, as reflected in state aid statistics published by the European Commission (Commission). In 2008, the 27 Member States granted state aid amounting to €279.6 billion (including €212.2 billion for measures in the context of the economic crisis). In the same period, the Commission adopted 530 decisions in state aid proceedings—16 of them ordering the recovery of state aid amounting to a total of approximately €913 million. This article provides an overview of state aid law and guidance to lawyers advising both recipients and challengers of state aid.

Member States Can Harm Competition

In the EU common market, the actions of Member States (who might have an interest in protecting domestic undertakings or otherwise influencing competition between undertakings for economic or other reasons) may distort competition. Therefore, the European Community in 1957 incorporated a simple rule in the EU Treaties: the granting of “state aid” by Member States to companies is prohibited, unless it is explicitly authorized by the Treaty itself or by the Commission in the circumstances provided for in the Treaty. Such authorizations are available, for example, under certain conditions for aid in favor of deprived regions or in favor of the development of certain economic activities or areas.

What Qualifies as State Aid Subject to Regulation?

The notion of “state aid” goes far beyond the classical concept of direct subsidies or payments by states to undertakings. It covers “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods.” State aid can be granted by public authorities or by public undertakings, i.e., undertakings controlled by public authorities by majority of shares or voting rights. The “aid” may be a direct payment, but also any other benefit granted to an undertaking, e.g., a tax exemption or benefit, a capital injection, a loan, a guarantee, the conclusion of a favorable contract or any other benefit granted without an equivalent service in return to be rendered by the undertaking (e.g., the sale of public assets, including the privatization of companies, the sale of real estate, etc.).

State aid is permitted only in strictly limited circumstances or where specifically authorized by the Commission. Unauthorized aid may be recovered from the beneficiary company, with interest, on the order of the Commission. Competitors of companies that have received state aid can sue the grantor of the aid in national courts and seek recovery of the aid from the beneficiary company, the prevention of further aid and the recovery of damages. Companies must consider state aid rules not only when receiving any kind of allowance or subsidy from a Member State or when doing business with any public authority or undertaking, but also when evaluating acquisition of, or investment in, a company because the value of the target company could be significantly affected by the risk of recovery of state aid.

To assess whether a benefit without an equivalent service in return has been granted, the Commission and the European Courts regularly apply the so-called “private investor test.” The decisive question is whether a private investor who does not take into account considerations such as social or regional policy would have acted in the same way in similar circumstances. If the answer is “no,” the benefit is likely to constitute state aid.

The Extraterritorial Reach of EU State Aid Law

EU state aid rules are only applicable to aid granted by EU Member States. A further requirement for their applicability is that the measure affects trade between the Member States. These requirements do not mean, however, that the state aid rules apply only to purely intra-EU cases. Trade between Member States may also be affected if the aid is granted to an undertaking or for activities outside the EU. If the beneficiary is in competition with undertakings within the EU and the aid strengthens the position of the beneficiary compared with its competitors, EU state aid law applies.

Consequences of Unlawful State Aid

The Commission is the state aid “watchdog” in the EU. It is exclusively authorized to assess whether state aid is compatible with the common market and may therefore be authorized (except in the rare cases of exceptions authorized by the Treaty itself). No state aid may be granted without prior authorization by the Commission.

If the Commission has evidence that state aid was improperly granted, it opens a formal investigation against the Member State granting the aid and gives the Member State, the recipient and other interested parties (in particular the competitors of the recipient) an opportunity to present their views on the case. If the evidence is confirmed and the aid cannot be authorized, the Commission orders the Member State to recover the state aid with interest from the beneficiary.

The consequences of an infringement of the EU state aid rules are not limited to the Commission procedure: the European Court of Justice deems the state aid rules to be directly applicable,” i.e., individual companies can rely on them in the national courts of the Member States. Competitors of an undertaking that received illegal state aid can take the grantor to court and request the recovery of the aid, the prevention of the payment of further aid and the payment of damages. Competitors need not await a prior Commission decision ordering recovery.

When Should Undertakings Consider the EU State Aid Rules?

Companies should consider the state aid rules before seeking the granting of an allowance or some other kind of subsidy from a Member State. In other situations where they do business with public authorities or undertakings, private undertakings should also be aware of the state aid rules and question whether the authority/public undertaking is acting as a private investor would under similar circumstances.

State aid compliance should also be considered in the case of the acquisition of, or an investment in, another undertaking. The value of the target could be considerably affected by potential risks of a recovery of state aid. Such consideration is especially important because, if the Commission orders the recovery of state aid, the beneficiary cannot generally assert as a defense that it assumed the aid was authorized or that notification was not required.

State aid law can also provide an opportunity for undertakings to take action against distortions of competition caused by Member States subsidizing their competitors: undertakings can bring a complaint to the Commission requesting the opening of a formal investigation and/or can sue the grantor of the state aid in national courts, seeking recovery of the aid and possibly the payment of damages.

Recent State Aid Cases

A prominent current example of state aid involving U.S. companies is General Motors, which as part of its restructuring is seeking €2.7 billion of subsidies from the countries where it operates factories. Germany is willing to provide the majority of this amount. However, the Member of the Commission in charge of Competition expressed considerable doubts about such aid. Currently, the affected Member States and the Commission are in negotiations about the conditions under which aid to General Motors and/or its affiliates can be authorized.

In numerous cases, Member States have tried to subsidize their domestic airlines. The Commission has authorized rescuing and restructuring aid only under strict conditions and in some cases has ordered the recovery of the state aid. Currently, the Commission is investigating the financing of various regional airports. Additionally, the establishment of a production site in an underdeveloped region can raise issues. Many incentives offered by public authorities contain elements of state aid, e.g., the provision of building sites at reduced cost, the provision of infrastructure, financing of qualification measures for employees, etc.

Lastly, EU state aid law played an important part in the measures of Member States to overcome the recent financial and economic crisis. Virtually all measures taken to rescue individual banks, to strengthen the whole financial sector or to encourage domestic demand, as well as the granting of credit required notification to the Commission. In this context, the Commission acted swiftly: Some rescue programs in the fall of 2008 were authorized in the course of a weekend.

Conclusion

State aid rules create some risks when dealing with public authorities or undertakings, but also provide opportunities to combat distortions of competition. Lawyers advising companies where state aid may be an issue should be familiar with the regulations so they can properly advise their clients both when they are seeking state aid and when they might be in a position to challenge the grant of state aid to a competitor.