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State aid law: European Commission amends COVID-19 Temporary Framework to faciltate recapitalisation aid and subsordinated debt awards

15 May 2020
In a move which is likely to facilitate multiple European government bail outs of airlines, sports, leisure and hospitality companies and possibly even carmakers and others under the most acute pressure from the COVID-19 crisis, the European Commission has further amended its State aid Temporary Framework to allow for recapitalisation aid and subordinated debt instruments.  

The new rules contain limitations on dividends and acquisitions by businesses who benefit from recapitalisation aid and include a requirement for conditions relating to climate change and the digital agenda to be reported to the European Commission.  While the UK remains in the Brexit transition period (currently due to expire on 31 December 2020), these rules apply to it as well.

On Friday 8 May 2020, the Commission announced a second amendment to the Temporary Framework, following a consultation. This latest amendment is made with the aim of supporting economic recovery from the pandemic lockdown, in particular, by allowing State funded equity and part-equity (hybrid) investments into large businesses facing difficulties because of the crisis, but which were fundamentally sound as at 31 December 2019. 

This significant development will be welcomed by struggling businesses in the sectors most severely affected by COVID-19, including the aviation industry and those in sports, leisure and hospitality. However, companies that receive capital support in this fashion will be subject to a wide variety of controls and governance conditions in order to limit distortion upon the Single Market. 

The Temporary Framework

The original Temporary Framework was adopted by the Commission on 19 March 2020 and created a basis for governments to create State schemes allowing five different types of State support, including the €800,000 limited amounts of aid option. 

The Temporary Framework was first extended on 3 April 2020 adding additional flexibility to support COVID-19 related R&D&I, testing centres and factories to manufacture Coronavirus related devices, equipment and treatments. The European Commission has since published an amended notification template for use under the Temporary Framework, covering elements contained in the 3 April amendment to the Framework.  

The UK's State aid umbrella scheme was approved on 6 April 2020, allowing the UK's Public Sector bodies to make use of six of the State aid options within the Temporary Framework, which most notably allows aid of up to €800k per undertaking to help them through the difficult period.  Notably however undertakings that were already in difficulty as at 31 December 2019 should not be eligible.  The Commission is anxious that the COVID-19 emergency should not be used as a cover to prop up businesses that were failing anyway, only those that are fundamentally sound but for the current crisis.

Recapitalisation aid

The emergency measures, such as lockdown, that Governments across the European Union have had to put in place to manage the COVID-19 outbreak have had a significant impact upon many companies' ability to produce goods or supply services, and have led to a significant decrease in demand. In certain cases, the resulting losses has triggered a decrease of the companies' equity and negatively impacted their ability to borrow on the markets. The most recent amendment to the Temporary Framework has been designed to address this and reduce the risk to the EU economy as a whole, thereby helping the economy bounce back from the pandemic. 

More specifically, the amendment envisages governments providing public support in the form of equity or part-equity "hybrid" capital instruments to severely affected non-financial companies, provided that it is the most appropriate means of support and subject to clear conditions.

The amended Temporary Framework will be in place until the end of December 2020. For recapitalisation measures only, the Framework has been extended until the end of June 2021, recognising solvency issues may materialise at a later stage as this crisis evolves. 


The European Commission notes that, since national public interventions such as the recapitalisation of some companies can be highly distortive for competition in the EU single market, these should remain measures of last-resort. 

In order to prevent such interventions from distorting competition in the EU single market in the long term, the Temporary Framework amendment sets out a number of safeguarding conditions for granting such awards of State aid, as well as for the behaviour of the companies benefiting from the public funding.  These cover both their activity in the market and their governance following the award. These include:

1. Conditions on the necessity, appropriateness and size of the intervention:

Recapitalisation aid should be a measure of last-resort with no other solution available; 

It must be in the common interest to intervene, for example to avoid social hardship or market failure; and

Recapitalisation aid must not exceed the minimum needed to ensure the viability of the beneficiary and should not go beyond restoring the beneficiary's capital structure to before the COVID-19 outbreak (ie. as at 31 December 2019).

2. Conditions on remuneration: 

The State must be sufficiently remunerated for the risks it assumes and the remuneration mechanism should incentivise the beneficiary to buy back the State's capital injections swiftly.

3. Conditions on developing an exit strategy:

Beneficiaries and Member States must develop an exit strategy, in particular where large companies have received recapitalisation aid exceeding 25% of equity. 

The exit strategy must include:

o a plan on the use of funds;

o a repayment schedule; and 

o a plan on the steps taken to abide by the repayment schedule. 

If the exit of the State is in doubt after six years since the aid to publicly listed companies, or up to seven years for other companies, a restructuring plan for the beneficiary must be notified to the Commission.

4. Conditions on governance:

Beneficiaries will be subject to bans on dividends and share buybacks. 

Until at least 75% of the recapitalisation is redeemed, a strict limitation of the remuneration of their management (including a bonus payment ban) is applied.

5. Conditions on cross-subsidisation and acquisitions: 

Beneficiaries cannot use recapitalisation aid to support the economic activities of integrated companies that were in difficulty prior to 31 Dec 2019.

Until at least 75% of the recapitalisation is redeemed, large companies are in principle banned from acquiring a stake of more than 10% in competitors or other operators in the same line of business

Companies that were already in difficulty on 31 December 2019 remain ineligible for aid under the Temporary Framework.

Public transparency and reporting

Member states have certain obligations to publish details on recapitalisation aid provided:

1. If recapitalisation aid is granted to beneficiaries as part of a scheme, Member States must publish details upon:

the identity of the companies that have received aid; and

the amount within three months of the recapitalisation. 

2. Large enterprises shall report upon how the aid received supports their activities in line with EU objectives and national obligations linked to the green and digital transformation. 

Notifying schemes

Member states can notify recapitalisation schemes (ie. a general plan and set of principles from which to apply such measures in their territory) or individual aid measures. When approving a scheme, the Commission will request the separate notification of aid to any company where the State investment is above €250 million for individual assessment.

In designing such schemes, the Commission has encouraged Member States to align with policy objectives such as the green transition and digital transformation of their economies or the prevention of fraud, tax evasion or aggressive tax avoidance. 

Alternative "no aid" support measures available

The possibility for recapitalisation aid under the amended Temporary Framework complements the existing ability for Member States to purchase shares of companies at market price or pari passu with private shareholders (ie. in proportion and on equal terms), which in principle falls outside the scope of EU State aid control. 

Similarly, if Member States decide to purchase newly issued shares and/or provide undertakings with other types of equity support or hybrid capital instruments on clearly market terms, i.e. under conditions complying with the so-called Market Economy Operator Principle (MEOP), this also does not constitute State aid and may be done at any time without any need to consult the European Commission or obtain a permission.  It is very important in such circumstances however that all parties involved take careful steps to be able to evidence market behaviour, so that a MEOP reliance may be considered secure. 

Subordinated debt

The most recent amendment to the Temporary Framework also elaborates on the possibility of aid in the form of subsidised interest rates on loans, to include subordinated debt on favourable terms. This concerns debt instruments that are subordinated to ordinary senior creditors in case of insolvency proceedings, and complements the options available under the existing Temporary Framework such as granting debt with senior ranking to companies in need.

Subordinated debt is deemed a less distortive instrument than equity or hybrid capital given that it cannot be converted into equity when the company is a going concern.  However, aid in form of subordinated debt must fulfil the respective conditions under section 3.3 of the Temporary Framework, which concerns subsidised loans. Beyond those ceilings set out for subsidised loans, all conditions for subordinated debt measures should follow the rules for recapitalisation measures set out above.

Concluding remarks

Many large enterprises such as airlines, airports and large scale hospitality operators and possibly even car makers will welcome this relaxation of the rules, which offers significant potential for assistance to be provided to those most affected by the COVID-19 outbreak. However, what will matter most in practice to all such companies aspiring for help is to have a government willing in principle to provide the support. In the event governments adopt schemes to allow help in this way on a widespread basis it will be vital to ensure critical guidance for the circumstances in which support will be encouraged.  Given finite budgets and the potential scale involved, governments will be highly cautious of doing anything to create any presumptions of entitlement to government intervention on large scales. 

Assuming willing government backing can be found, awarding aid safely on this basis requires a very detailed understanding of the technical legal requirements attached to the aid and creating a strong audit trail to demonstrate these have been followed.  We are on hand to provide support to ensure awards of State aid meet the relevant rules. 

DWF Law LLP has the largest State aid law team in UK private practice as is able to draw upon market leading experts in our UK, Brussels and other international offices.  Our experience in this area includes working within the European Commission, Central Government, Local Government and with private sector bodies receiving funds. Therefore, we are on hand if it would be useful to discuss the issues raised in this Article or any other element of State aid law.  

Further Reading