The EU’s State aid rules to include more flexibility because of the coronavirus pandemic: Member States can recapitalise companies
The European Commission allows public recapitalisation with State aid included. The aim is to improve companies' access to credit on the markets. Strict conditions have been set for the use of public funds in recapitalisation of companies in order to avoid distortion of competition in the EU’s internal market.
On 8 May 2020, the European Commission decided on more flexibility in State aid rules. The new flexibilities are a means of responding to a situation where crisis measures implemented by the States in response to the coronavirus pandemic have had a significant impact on the ability of companies to produce goods or services. The equity of many companies has been reduced and their access to market-based financing has diminished.
In addition to recapitalisation, Member States will in future be able to support companies impacted by financial difficulties as a result of the corona pandemic by offering them subordinated debt at favourable terms. This concerns debt instruments that are subordinated to ordinary senior creditors in case of insolvency proceedings.
Strict conditions prevent distortion of competition in the internal market
The use of public funds in the recapitalisation of companies can have significant adverse effects on competition in the internal market. The Commission has, therefore, set certain conditions for the granting of aid:
- Recapitalisation aid should only be used as a last resort.
- The aid measures must be in the public interest.
- State aid must be limited to enabling the company to become viable. It can only be used to restore the capital structure that the company had prior to the coronavirus pandemic.
The Commission has also laid down clear conditions for matters such as the manner in which recapitalisation is to be carried out, the remuneration to be paid to the State, and the period within which the State must exit the company it has recapitalised.
The Commission's communication also contains specific regulations pertaining to corporate governance. Thus, for example, aid recipients are subject to bans on dividends and share buybacks, and on paying bonuses to the company management until the State has exited. The aim is to incentivise beneficiaries and their owners to buy out the shares acquired by the State as soon as the economic situation allows it.
Use of public funds for recapitalisation allowed until the end of June 2021
The Commission's new guidelines are a continuation to the flexibilities implemented by the Commission on 19.03.2020 and 03.04.2020 to the State aid rules. In the past, the Commission relaxed State aid rules, in particular to secure the liquidity of companies and their access to finance and to facilitate the allocation of aid to research and development of products associated with the coronavirus pandemic, investments, and to save jobs.
The flexibilities previously implemented by the Commission regarding State aid rules will remain in place until the end of 2020. Changes related to recapitalisation remain in effect until the end of June 2021, because liquidity problems may arise only as the crisis worsens.
The Commission has made it known that that it is constantly assessing the situation in order to determine whether further measures are needed whereby Member States can support their economies and assist companies to bounce back once the crisis is over. To date, the Commission has approved an estimated €1.9 trillion in State aid to support the EU economy.
To-date, as regards Finland, the Commission has approved a Temporary Framework for corona pandemic related State aid measures and a support programme, whereby Finnvera is in a position to grant guarantees and loans to enterprises facing economic difficulties due to the crisis caused by the corona virus pandemic to be used as both working capital and for investments.
Commercial counsellor Olli Hyvärinen, Finland’s Ministry of Economic Affairs and Employment, ph. +358 29 504 7026
Special adviser Johanna Rihto-Kekkonen, Finland's Ministry of Economic Affairs and Employment, ph. +358 295 047 121