Important reminder to the public sector - ECJ reconfirms applicability of state aid rules to transactions between state-owned undertakings

Judgment of 18 May 2017, Fondul Proprietatae, C-150/16, EU:C:2017:388

The case concerned two Romanian un-dertakings engaged in the production of electricity, Eletrocentrale (ELC) and Oltenia (OLT). ELC was wholly-owned, OLT majority-owned, by the Romanian State. The remaining shares in OLT were owned by Fondul, a private investment fund. ELC was (apparently) in financial difficulties and unable to repay a loan which had been granted to it by OLT. ELC therefore offered to OLT the transfer of one of its power plants in lieu of repayment, which OLT accepted by resolution of its sha-reholders meeting, i.e., with the votes of the majority shareholder, the Romanian State. Fondul, the outvoted minority sha¬reholder, claimed that the power plant was unprofitable and that its transfer in lieu of repayment of the loan only benefited ELC which, free from the burden of the loan and the power plant, did not have to file for insolvency and exit the market. Based on these submissions, Fondul requested a national court to declare the resolution of OLT’s shareholders meeting invalid. The national court stayed proceedings and asked the European Court of Justice (ECJ) for preliminary ruling, pursuant to Article 267 Treaty on the Functioning of the European Union (TFEU), as to whether and under which conditions the contested resolution constituted State aid within the meaning of Article 107(1) TFEU which was subject to the notification and standstill obligation in Article 108(3) TFEU.

In its judgment, the ECJ reiterated that, in order for the resolution to constitute State aid within the meaning of Article 107(1) TFEU, it must be attributable to the State, confer a selective economic advantage on an undertaking which is financed from State resources and be liable to distort competition and to affect trade between Member States. The ECJ concluded that, if all of these conditions were met and the resolution therefore qualified as State aid, it should have been implemented only if and once having been notified to and approved by the European Commission (COM), in accordance with Article 108(3) TFEU.

The Fondul judgment (re)confirms that the prohibition of State aid in Article 107(1) TFEU also applies to transactions between State-owned undertakings. This finding already results from the following two considerations: First, as required by the ownership neutrality principle in Article 345 TFEU, Article 107(1) TFEU applies irrespectively of whether the recipient undertaking is in public or private ownership. Second, the requirement that, in order for there to be State aid, the advantage conferred on the recipient undertaking must be granted through State resources, is also met if the advantage is not financed from the State budget but from other resources controlled by the State, such as the resources of State-owned or otherwise State-controlled undertakings (public undertakings).

A Member State may therefore grant State aid within the meaning of Article 107(1) TFEU to a public undertaking through another public undertaking. Consequently, any transaction – concerning, for example, the purchase, sale or transfer of goods or the provision of services, capital or financing – between public undertakings – including, in principle, group-internal transactions between parent and subsidiary or between subsidiaries of the same parent – may involve State aid within the meaning of Article 107(1) TFEU.

Even though these findings already follow from the abovementioned principles and from previous judgments, in particular from the landmark ruling in the Stardust Marine case (1), their reconfirmation in the Fondul judgment is nevertheless very important. As State aid-related judgments and decisions concerning transactions between public undertakings are rare, there is sometimes a lesser awareness, on the part of public undertakings, of possible State aid-related implications of their mutual commercial relationships. Such awareness is, however, crucial, given the possible consequences of an infringement of the State aid rules.

The granting of State aid in violation of Article 108(3) TFEU, i.e., without prior COM approval (2), renders the underlying legal acts (in the case of transactions: the underlying contract(s)) invalid ex tunc and obliges national courts, upon application by an interested party (for example, a competitor), to draw all consequences from the invalidity and to order the State to recover the aid (including interest) from the recipient undertaking (3). If, for example, in the Fondul case, the transfer of the power plant in lieu of repayment of the loan involved State aid for ELC, the resolution of OLT’s shareholders meeting, and thus the transfer of the plant and the extinguishment of ELC’s debt, might be null and void. In such a case, ELC might be insolvent, and might have already been insolvent at the time of the resolution (given its apparent financial difficulties), as a result of which OLT might have to (partly or fully) write off the claim for repayment of the loan. Such a scenario might also lead to consequences for the directors of the insolvent aid recipient. Under the insolvency laws of some jurisdictions, it is a criminal offence for directors of a company considered insolvent by law not to file for insolvency, and directors are personally liable for payments by the company from the moment it is considered insolvent.

In light of the above, the Fondul judgment is a reminder of the importance for public undertakings to verify compliance with State aid rules also in respect of transactions with other public undertakings. This requires, first and foremost, an analysis as to whether the transaction concerned involves State aid, which is not the case, for example, if the decision of the public undertaking to enter into the transaction is not attributable to (i.e., not influenced by) the State (but a pure management decision) or if a private operator in a similar situation to that of the State would have entered into the transaction on essentially the same terms and conditions (private market operator principle) (4). This analysis is more complex in the case of transactions between public undertakings than in the case of transactions between public and private undertakings, because transactions between public undertakings may involve State aid for either party. In the Fondul case, the transfer of the power plant in lieu of repayment of the loan may theoretically constitute State aid in favour of OLT, instead of State aid in favour of ELC, for example if the value of the power plant significantly exceeded the loan amount.

Competitors of public undertakings, on the other hand, may be motivated by the Fondul judgment to monitor the market also for any undue benefits granted to their public competitors from entities of the same group or from other public undertakings, as Fondul reconfirmed that they can avail themselves of the “sharp sword” of Article 108(3) TFEU also in this context.

Any transaction – concerning, for example, the purchase, sale or transfer of goods or the provision of services, capital or financing – between public undertakings – including, in principle, group-internal transactions between parent and subsidiary or between subsidiaries of the same parent – may involve State aid within the meaning of Article 107(1) TFEU. Transactions between public undertakings may involve State aid for either party.

A violation of Article 108(3) TFEU renders the transaction agreements invalid ex tunc and obliges national courts, upon application by a competitor, to draw all consequences from the invalidity and to order the State to recover the aid (including interest) from the recipient undertaking. In certain circumstances, the invalidity of the transaction agreements may lead to insolvency of the recipient undertaking and, in such a case, to criminal and civil liability of its directors.

The Fondul judgment is a reminder to public undertakings of the importance to verify compliance with State aid rules also in respect of transactions with other public undertakings and a reconfirmation to competitors of public undertakings of the availability of the s“harp sword” of Article 108(3) TFEU also in this context.

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(1) Judgement of 16 May 2002, France v Commission (Stardust Marine), Case C-482/99, EU:C:2002:294.

(2) I.e., where the aid has not been individually approved by the Commission and does not fulfil the requirements of any of the general exemptions from Article 108(3) TFEU, such as de minimis regulations or block-exemption regulations.

(3) Judgement of 12 February 2008, CELF and ministre de la Culture and de la Communication, Case C-199/06, EU:C:2008:79.

(4) If the presence of State aid cannot be excluded, it is necessary to assess in a second step whether the aid is subject to the notification and standstill obligation in Article 108(3) TFEU.