EU & Competition

How State Aid Rules May Affect Privatisation Efforts of Member States

Slovenia is currently envisaging a new wave of privatisations. The looming sales are associated with political pressure centring on certain non-economic conditions to be imposed on the eventual acquirers. Such conditions may collide with EU state aid rules. The privatisation process must thus be structured carefully to avoid objections from the European Commission.

Privatisations generally trigger significant public attention. The implicated undertaking is often a national champion and the pride of the national economy, which is why a plan to sell such company is – as a rule – met by fears of the public over the transfer of national know-how abroad, a drop in the national employment rate, and a loss of domestic investments.

In light of this, governments may be under political pressure to impose non-economic conditions on the eventual buyer that allay such fears, or to at least find a buyer that is in the “national interest”. By doing so governments face the risk of overlooking that their ambitions may fall foul of the foremost principle of EU state aid rules: member states’ behaviour in a privatisation must comply with the Market Economy Vendor Principle (MEVP). To avoid state aid, the member state must pursue the sole objective to sell the company for the highest possible price and without imposing conditions that could depress the price.1 Should a higher purchase price be forgone in return for non-economic considerations, state aid rules might be breached.

This is not only a problem for the buyer (who, if a state aid-infringement is established, may be requested to subsequently increase its payments to the market price level) but possibly also for the privatisation as such. To restore the situation without aid, the buyer might opt to rescind the purchase agreement (ie, step back from the transaction) rather than paying more for the company than it considers appropriate.2 Given that privatisations often occur when the state-owned company is in financial difficulties, such a development may significantly harm the viability of the firm.

For those reasons, awareness of state aid rules is pivotal to prevent delays in the process or even an unwinding of the transaction. In particular, privatisation agencies must be aware that (potential) state aid measures must be notified to the European Commission and can only be implemented upon prior approval (standstill obligation).

EU state aid regime

Art 107 TFEU declares that aid is incompatible with the internal market if it:

  • is granted by a member state or through state resources in any form whatsoever;
  • favours certain undertakings or the production of certain goods;
  • thereby distorts or threatens to distort competition; and
  • affects trade between member states.

Intervention by the state or through state resources

For a measure to be caught by the state aid prohibition, it must be carried out to the detriment of state resources and either by the state or public/private body designated or established by the state. The notion of state resources also covers the resources of public undertakings, meaning undertakings wholly owned or controlled by a public authority or a body at any level of government.3

Selective advantage – purchase price below market price

In light of the MEVP, a privatisation is tantamount to state aid if the purchase price is below the market price. To provide for some legal certainty the European Commission has created a safe harbour within which a sales process is to be considered not to give rise to state aid concerns. This is the case if the privatisation is carried out by (i) a share sale on the stock exchange or (ii) a tender that is open to all interested parties, transparent, and unconditional. In the case of a tender, the bidders must be given enough time and information for a proper evaluation, and the company must be sold to the highest bidder.

In all other cases the Commission believes that state aid cannot be ruled out and that the privatisation should be notified to the European Commission for approval. This is particularly the case if the member states impose certain non-economic conditions in the SPA on the buyer, such as commitments that the location of headquarters/production plants, the number of employees, the level of investment in R&D, and other parameters be maintained by the buyer. These might depress the purchase price and enable the target company to ensure a certain level of investments, employment, and/or production it would not have been able to maintain absent such commitment.

However, conditions that are common in M&A privatisations can be imposed, as may be conditions that are legally required.

Not abiding by the textbook = automatic obligation to notify?

A delicate question of late is what to do if a member state does not act within the safe harbour created by the European Commission. In particular, privatisations carried out pursuant to an independent evaluation of the target company but without a public tender (ie, to a buyer selected by the government) are not following one of the two Commission textbook principles. At the same time, they generally do not entail state aid as it can be assumed that the sale took place under market conditions.

The current practice of the European Commission is to interpret the safe harbour rather narrowly and if a member state opts against a tender procedure, it is advised to make a fail-safe notification.

This is questionable as it means a de facto expansion of the standstill obligation to any process that deviates from the safe harbour, even when there are no implications of state aid. Clearly, the European Commission should not prevent member states from implementing measures without prior approval that manifestly give no rise to state aid concerns. Despite this criticism, to avoid investigations post-closing of a privatisation, risk averse governments are well advised to submit fail safe notifications of any privatisation outside the above safe harbour.

Non-transparent and discriminatory tenders, as well as non-economic considerations that would not be acceptable to a private market economy vendor, and that result in a lower purchase price in a privatisation process, are in the European Commission’s view tantamount to state aid.

Commission staff working document (2012): Guidance paper on state aid-compliant financing, restructuring and privatisation of State-owned enterprises.
This is an issue extensively discussed in the Bank Burgenland case, following the decision of the ECJ of 24.10.2013 C-214/12P.
In addition, the measure must be “imputable” to the state. In privatisations, this requirement is usually met, as the privatisation will require government approval.