July 12, 2020

Brussels encourages private sector participation in company bailouts

The changes also extend the scope of public aid allowed in an extraordinary way as a result of the pandemic so that Member States can give aid to micro-companies and startups even though they were already in trouble before December 31, 2019, something that does not allow for other companies.

Both measures are part of the third amendment to the Temporary State Aid Framework that Brussels has formally approved after launching a consultation with the Member States on this matter on June 12.

In this case, the Community Executive has once again relaxed European rules on public aid to encourage the private sector to participate, together with governments, in the recapitalization of companies affected by the Covid-19 pandemic.

In a previous amendment, Brussels has already allowed governments to enter the capital of firms that have suffered severely from the impact of restrictions adopted to contain the spread of the virus. Now, the European Executive is proposing changes that will allow state-owned companies to attract financing from the private sector.

In particular, if a Member State grants aid for the recapitalization of a company, but private investors also contribute “significantly” with at least 30% of the new capital, the acquisition prohibition and the limitation of executive compensation is reduced to three years.

In addition, the prohibition on distributing dividends for new and old shareholders would be lifted if the participation of the latter is reduced to less than 10% of the company’s capital stock.

The other amendment will allow European governments to channel public aid to micro-businesses and startups, even though they were already in economic difficulties before December 31 of last year. Only the fact that they are in bankruptcy or have already benefited from a restructuring plan would prevent them from receiving State aid.

The Commission defends this favorable treatment – the rest of the companies cannot avail themselves of public aid if they were in financial trouble as early as 2019 – because small firms do not have as many cross-border operations and are therefore “less likely” than the state support that receive distorted competition from the single market.

On the contrary, Brussels stresses that the liquidity needs of micro and small companies in the EU, together with their difficulties in obtaining financing, could lead to the bankruptcy of many of them, causing “serious problems” for the entire European economy.


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