State aid issues | In Principle

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State aid issues

Under Art. 107(1) of the Treaty on the Functioning of the European Union, any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is incompatible with the internal market.

As a rule, state aid must be presented to the European Commission for approval, unless it falls within the range of de minimis aid or the derogation set forth in the Commission’s Block Exemption Regulation. When state aid is granted unlawfully, negatively impacting the internal market, the member state is obliged to recover the aid from the beneficiary.

According to case law from the Court of Justice of the European Union, only state aid approved by the Commission creates a justified expectation on the part of beneficiaries, and a reasonable undertaking should examine whether aid was granted to it lawfully.

An undertaking that has received state aid is required to use it in compliance with the rules set forth in national law, EU law and the funding agreements with the institutions providing the aid. Violation of these conditions for use of state aid may result in an obligation to refund the aid.

Because state aid may be subject to recovery, together with interest, in M&A transactions it is necessary in each case to examine the existence of state aid on the part of the undertakings involved in the transaction and the effect that the transaction may have on the conditions for use of any state aid received by the parties.

Preliminary examination

The examination of the existence of state aid and the related risk most often boils down to an analysis of the conditions set forth in funding agreements. But it should be borne in mind that state aid can also occur in connection with relief or reductions in public charges (e.g. state aid for restructuring).

State aid may also result from regulations conditioning advantages on the location of the undertaking (e.g. in special economic zones, or prohibiting relocation), the size of the undertaking (e.g. SMEs), the business profile (e.g. services performed in the general economic interest) or for example on establishing and maintaining certain corporate governance rules (e.g. fruit and vegetable producer organisations).

An undertaking may also be the beneficiary of impermissible state aid. Then there is a high risk that an obligation to refund the state aid could be passed on to the legal successors (in share deals) or the acquirers of the assets (in asset deals).

Funding agreement

The examination of the conditions for award of state aid most often involves an analysis of the funding agreement between the institution providing the funding and the beneficiary. The application for funding is also subject to analysis.

Such agreements provide for rules and conditions and aims related to realisation of the project in question, defining the rights and obligations of the parties and the rules for cooperation between the beneficiary and the funding institution.

Analysis of funding agreements requires particular attention to the risks for the parties to the transaction. As a rule, frank cooperation with the institution providing the funding can help avoid consequences connected with withdrawal of the funding in whole or part or termination of the funding agreement for breach of obligations connected with realisation of the project financed with public funds, resulting from the transaction.

Funding agreements in projects financed out of European funds

In connection with Poland’s absorption of EU funds pursuant to the EU’s cohesion policy, national and regional operational programmes provide funding for businesses carrying out projects consistent with the goals of these programmes.

The expenditure of EU funds should ensure lasting improvements in the economies of the member states. For this reason, funding agreement in projects financed out of EU funds impose obligations connected with the project durability period, continuing for several years after completion of the project.

The definition of project durability is set forth in Council Regulation 1083/2006 (EC) for projects carried out under the 2007–2013 financial perspective and Regulation 1303/2013 (EU) for projects in the 2014–2020 financial perspective.

First and foremost, it must be borne in mind that cessation of productive activity or a change in the ownership of an element of infrastructure (whether in a share deal or an asset deal) may constitute an infringement of project durability, requiring repayment of the funding.

In the case of entities that have obtained financing out of EU funds, in the case of either a share deal or an asset deal, during the project durability period particular care is required to maintain the character, purposes and conditions of the project and to ensure that the shares or assets are sold at market prices.

These requirements impose special obligations to reach the appropriate understanding with the institutions providing the state aid and to make a detailed and transparent valuation of the subject of the transaction.