EU Commission publishes third amendment to its Temporary Framework for state aid in relation to the COVID-19 crisis

The EU Commission has published a third amendment to its 19 March 2020 guidance document on state aid in reaction to the COVID-19 outbreak (see our blog post). 

The Temporary Framework was first amended on 3 April 2020 (see our blog post) and was amended further on 8 May 2020 (see our blog post).

This latest amendment to the Temporary Framework allows loss-making small businesses to receive EU state aid support and aims to incentivise private investors to take part in more recapitalisation measures.

What are the new state aid measures that the Commission will consider compatible?

The third amendment provides additional support to micro and small companies, including start-ups.

The Temporary Framework so far allowed only targeted support to otherwise viable companies that had got into financial difficulty as a result of the COVID-19 outbreak and were not already in difficulty before 31 December 2019.

The amendment introduces a carve out to this rule and allows State aid to all micro and small undertakings, even if they were already in financial difficulty on 31 December 2019.

The aid is available to such undertakings, provided that they are not subject to a collective insolvency procedure under national law and that they have not received rescue aid (which has not been repaid) or restructuring aid (and are still subject to a restructuring plan).

Given their limited size and limited involvement in cross-border transactions, the Commission considers that state aid to micro and small undertakings is less likely to distort competition in the internal market and affect intra-EU trade than state aid to medium-sized and large companies.

The relaxation of this test is expected to allow many micro and small undertakings, especially start-up businesses, who had previously been excluded from applying for funding, to benefit from aid under the Temporary Framework. These businesses are often loss-making enterprises, in their high-growth phase, and have been particularly impacted by the COVID-19 crisis.

The Commission further emphasised that all small and medium-sized enterprises that were in existence for less than three years on 31 December 2019 could already benefit from the aid measures as set out in the Temporary Framework. This is provided they are not in insolvency proceedings or have received rescue aid that has not been repaid or are subject to a restructuring plan under state aid rules.

What other incentives are introduced in the amended Temporary Framework?

The amendment provides incentives for private investors to participate in COVID-19-related recapitalisation measures, together with the state.

The amendment allows undertakings with an existing state shareholding to raise capital in the same manner as private enterprises, while still maintaining the necessary safeguards to preserve effective competition in the single market.

Further, the amendment encourages capital injections with significant private participation, in order to minimise state aid and the risk of competition distortion. In particular, if the state grants recapitalisation aid, but private investors have contributed significantly (at least 30 per cent of the new equity injected), then the acquisition ban and the cap on management remuneration are limited to three years.

Further, the dividend ban is lifted for the holders of the new shares as well as for existing shares, provided that the holders of those existing shares are altogether diluted to below 10 per cent in the company.

These amendments aim to increase the incentives for companies to seek contributions from the market as well as member states, to meet their capital needs.

No condition to relocate the production activity of the beneficiary

The amendment also clarifies that potential state aid under the Temporary Framework should not be conditional on the relocation of a production activity or of another activity of the beneficiary from another country within the EEA to the territory of the member state granting the aid, since this would be particularly harmful for the internal market.

For further insights on navigating the impact of COVID-19, visit our coronavirus alert hub.