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On 1 August, new guidelines came into force for Member States to use in assessing whether support measures to rescue and restructure firms in difficulty are compatible with State aid rules. The revised guidelines (the Guidelines) have replaced the previous 2004 guidelines.  They will be applied to any new aid schemes notified to the Commission from 1 August.  Member States also need to bring their existing aid schemes into line the new Guidelines within six months, by 1 February 2015.

Background : The Commission takes the view that State aid granted by Member States to companies in distress has high potential to distort competition in the single market as it keeps alive companies that would otherwise have exited the market. Exit of less efficient businesses allows their more efficient competitors to grow and returns assets to the market.  By interfering with this process, rescue and restructuring aid may significantly slow economic growth.  The Commission however also recognises that certain forms of aid can assist otherwise healthy businesses to restructure themselves in a way that ensures their long-term viability.  It also recognises that aid may be needed to address short term liquidity problems, particularly for SMEs.  The Guidelines therefore reflect the Commission’s policy that State aid should only be permitted where all other market options have been exhausted and where it is necessary to achieve a well-defined objective of common interest. According to the Guidelines, State aid is only allowed under conditions that mitigate its potential harmful effects and promote effectiveness in public spending.

Review of 2004 Guidelines : The review of the 2004 guidelines is a key element of the State Aid Modernisation (SAM) programme. One of the main aims of SAM is to ensure that State aid rules support the provision of “good aid” that promotes economic growth and objectives of common interest, in particular by simplifying the requirements that apply to that type of aid.  Since the previous guidelines were adopted in 2004, the Commission has gained nearly ten years' experience in dealing with rescue and restructuring cases, including perhaps the greatest challenge it has yet faced in this area: the support granted to rescue and restructure banks (which are not subject to these guidelines but to other, specific rules applying to the financial sector).  That experience has shown that, although the basic principles of the guidelines are still sound, they could be improved in a number of ways to ensure that aid is better targeted where it is needed most and that it is given in the least distortive form possible.

What has not changed from the previous guidelines?

Some of the key principles remain unchanged from the 2004 guidelines:

• “Rescue aid” may be granted to companies in financial difficulty for a temporary six-month period. Rescue aid takes the form of loan guarantees or loans and its purpose is to keep the company afloat for the time needed to work out a restructuring or liquidation plan.
• Beyond six months, the aid must either be reimbursed or it must be notified to the Commission for it to be approved as “restructuring aid”. For a restructuring plan to be approved as compatible with the State aid rules, it must ensure that the long-term viability of a company is restored without additional State support, that the distortions of competition resulting from the State’s support are addressed by specific measures, and that the company contributes towards the costs of the restructuring.
• Restructuring aid may only be granted once for a maximum of 10 years in order to prevent companies that are not viable being kept alive artificially through public support.

 What are the main changes?

• New rules allowing temporary restructuring support for SMEs – these rules are designed to simplify the granting of state funding for restructuring while also reducing distortions of competition by favouring less distortive measures (e.g. loans and guarantees) over structural aid (e.g. direct grants or capital injections). Support to SMEs can be granted for a maximum period of 18 months on the basis of a simplified restructuring plan. The new rules are intended to enable Member States to help SMEs address liquidity problems, which is particularly important in the current economic context.
• Better filters in assessing compatibility of restructuring aid – in demonstrating that the aid achieves an objective of common interest, Member States will now have to demonstrate that the restructuring aid is needed to prevent hardship (e.g. in areas of high unemployment) and that the granting of the aid will make a difference in that respect (e.g. to reduce the scale of job losses). These new filters aim to ensure that State aid is used where it is really needed.
• New rules requiring investors to pay a fair share of the costs of a company’s restructuring – these rules are based on the concept of “burden sharing” and they ensure that investors, particularly shareholders, are responsible for covering incurred losses before any aid is granted by the State. The rules also ensure that the State will receive a fair return on its investment if the restructuring plan succeeds. The objective behind these rules is to ensure that aid is used to maintain viable economic activity and jobs, and not simply to bail out investors.

Scope : The Guidelines will apply to aid for all undertakings in difficulty, except those operating in the coal or steel sector and those covered by specific rules for financial institutions. An undertaking is considered to be “in difficulty” when, without intervention by the State, it will almost certainly be condemned to going out of business in the short or medium term. A company in its first three years of operations is not eligible for aid under the Guidelines. A company belonging to or being taken over by a larger business group is also not normally eligible for aid under the Guidelines.

Application : The Commission will apply the Guidelines from 1 August 2014 until 31 December 2020. Notifications registered by the Commission prior to 1 August 2014 will be examined in light of the previous guidelines. The Commission will examine the compatibility of any rescue or restructuring aid granted without its authorisation on the basis of the Guidelines if some or all of the aid is granted after their publication in the Official Journal (31 July 2014). In all other cases, it will conduct the examination on the basis of the guidelines which applied at the time the aid was granted.  Member States will also need to bring their existing aid schemes into line with the new guidelines over a transitional period to 1 February 2015.

A summary of the content of the Guidelines can be found in the Commission’s press release. If you would like to know more about the new Guidelines, please do not hesitate to get in touch with one of the partners named below, or your usual CMS contact.