State aid | European Commission amends Temporary Framework for a third time to include aid for micro and small companies

The European Commission has amended the Temporary framework for State aid for a third time, with the changes as of 29 June 2020 aimed at further supporting the Member State's economies during the Covid-19 outbreak.

There are a number of exceptions that allow governments to support businesses affected by the coronavirus crisis – as explained in our previous Insight – and the European Commission has provided guidance on the application of some of these exceptions in its Temporary Framework.

In its first amendment, the Commission extended the scope of the Temporary Framework to various aid measures to support research and development efforts related to Covid-19 relevant products as well as testing and upscaling infrastructure for such products and their production. While the Commission's second amendment extended the scope of the Temporary Framework to recapitalisation measures and to aid in the form of subordinated debt, the third amendment extends it to all micro and small companies (companies with less than 50 employees and less than EUR 10 million of annual turnover and/or annual balance sheet total), including innovative start-ups.

Eligibility conditions for micro and small companies

Under the previous rules, companies that were in difficulty on 31 December 2019 could not benefit from aid under the Temporary Framework. However, with the third amendment, this restriction has been lifted for all micro and small companies. Even if such companies were in difficulty on 31 December 2019, they may now benefit from the following aid under the Temporary Framework:

• temporary limited amounts of aid;
• aid in the form of guarantees and loans;
• aid in the form of subsidised interest rates for loans;
• aid for Covid-19 relevant research and development;
• investment aid for testing and upscaling infrastructures;
• investment aid for the production of Covid-19 relevant products; and
• recapitalisation measures.

The only conditions introduced by the third amendment for micro and small enterprises to benefit from aid are that the beneficiary company: was not undergoing collective insolvency procedures; did not receive rescue aid (which has not been repaid); and did not receive restructuring aid (and still be subject to the restructuring plan).

All micro and small companies that had existed for less than three years on 31 December 2019 could already benefit from the aid of the Temporary Framework, as they could not qualify as undertakings in difficulty on that date (unless under exceptional cases of insolvency or rescue and restructuring aid). This has not changed after the third amendment.

Other modifications

Amongst other technical changes, the third amendment introduces a number of modifications to existing conditions on level playing field, recapitalisation measures, specifically concerning governance and undue distortions of competition.

Level playing field

The third amendment introduces the condition that any aid should not be conditional on the relocation of a production activity of the beneficiary from another country within the European Economic Area to the EU Member State granting the aid.

Recapitalisation Measures

The third amendment provides that if a State is an existing or new shareholder in a company and fulfils certain conditions, certain deviations from the existing rules under the Temporary Framework will apply.

The conditions are that:

• private investors significantly contribute to the capital increase (at least 30% of the newly injected equity);
• the State's injection is subject to the same conditions as the private investors, if the State is a new shareholder; if it is an existing shareholder then the State's injection should be subject to the same conditions as the private investors as well as pro rata to its existing shareholding (or below); and
• the State's new injection constitutes State aid (give that such 'pari passu' investments by private investors often rule out the existence of State aid);

Where those conditions are satisfied, the deviations are as follows:

• Acquisition ban and cap on management's remuneration limited to three years

According to the existing rules, unless and until at least 75% of the recapitalisation measures had been redeemed, aid beneficiaries were subject to restrictions on acquisitions and remuneration. In particular, aid beneficiaries were subject to certain restrictions in acquiring more than a 10% stake in competing businesses or in upstream or downstream operators. Aid beneficiaries were also restricted in the remuneration of their management.

Under the third amendment, these restrictions cease to apply after three years, provided that the conditions above are fulfilled.

• Dividend ban is softened

Under the existing rules, dividend payments are prohibited as long as the recapitalisation measures have not been fully redeemed by the aid beneficiary. The third amendment softens this rule, provided that the conditions above are fulfilled, as follows:

• the dividend ban is lifted for the holders of new shares (which are the shares issued as part of the Covid-19 equity injection);
• for the holders of existing shares (the shares already existing before the Covid-19 equity injection), the dividend ban is lifted if the holders of the existing shares are diluted altogether to an interest of less than 10% in the company;
• if the State is an existing shareholder, and if the existing shares are not altogether diluted to a share in the company below 10%, the dividend ban for existing shares applies for only three years;
• in any case, before any dividends are distributed to the shareholders, the hybrid capital and subordinated debt instruments held by the State must be repaid.
• Ability to raise capital similar to private companies where the State is an existing shareholder

Under the current rules, where there is a capital injection by the State, the recapitalisation measures would include a "step-up" mechanism (or an equivalent alternative) in order to incentivise the beneficiary to buy back the State capital injections. Such "step-up" mechanism entails the increase of the remuneration of the State (minimum 10% for each of the steps), which can take the form, for example, of additional shares being granted to the State. The "step-up" mechanism will be activated if after four years from the equity injection the State has not sold at least 40% of its equity participation (step 1); and/or if after six years after the equity injection the State has not sold in full its equity participation (step 2).

With the third amendment, if the conditions above are fulfilled, this requirement has been lifted and the Commission will no longer have to attach specific conditions to the State's exit.