Unlawful State aid to SAS? Commission now opens in-depth investigation

Decision of the General Court in case T-238/21 of 10 May 2023

The COVID Temporary Framework

Responding to the outbreak of COVID 19, the Commission issued a communication introducing a temporary framework for how it would deal with State aid granted to undertakings that have been particularly hit by the pandemic. The framework allowed for a wider-than-usual granting of State aid, but on condition that a number of requirements were met. 

One such requirement was that if the aid consisted of the Member State performing a recapitalization of the company, acquiring shares in the company, then that Member State must exit the company as soon as possible once the company had regained financial stability. For example, it was a requirement that any such recapitalization included a step-up mechanism or similar arrangement to make sure the company would have an incentive to buy back the Member States’ shares, e.g. by stipulating a gradual increase of the Member State’s return on investment after a few years. 

The General Court's judgment

The General Court found that in the case of the hybrid notes there was a mechanism in place to gradually increase the rate of interest, thus incentivising SAS to redeem those notes sooner rather than later. And although no exact time of redemption had been stipulated, the General Court was satisfied that this gradual increase of the rate of interest – coupled with the added possibility of compound interest – did constitute sufficient incentive for SAS to buy back the State capital injections.

The equity instrument, however, featured no such step-up mechanism, yet the Commission had found that its connection with the hybrid notes and the significant discount at which the shares would be subscribed qualified as sufficient motivation for SAS. The General Court did not agree with this finding, noting that there was no gradual step-up to provide any subsequent incentive to buy back the State capital injections and that the measure had had an immediate effect on the legal positions of SAS and the other shareholders. The Commission, consequently, had been unentitled to approve the aid measure.

In conclusion, the General Court held that while the aid in the form of hybrid notes was lawful in and of itself, the two instruments were so tightly interconnected and part of the overall measure that the General Court was unable to annul only that part of the decision which concerned the equity instrument. The General Court therefore annulled the Commission’s decision in full.

Commission opens in-depth investigation

In light of the General Court’s judgment, the Commission, on 4 July 2023, elected to reconsider its assessment of the Danish and Swedish recapitalisation measure in favour of SAS and will now undertake a more in-depth investigation of it. The Commission aims at adopting a final decision on the matter in the coming months. The opening of an in-depth investigation gives Denmark and Sweden, as well as interested third parties, the opportunity to submit comments.

The Commission has stated that at this stage it takes the preliminary view that the recapitalisation measure is in line with Article 107(3)(b) TFEU and the conditions set out in the COVID Temporary Framework, with the exception of the absence of a step-up mechanism (or an alternative mechanism with the same effect as a step-up mechanism). 

Our comments 

The COVID-19 pandemic necessitated the introduction of special exemption rules to ensure that businesses – and, by extension, the economy – would be affected as little as possible and to allow for the necessary flexibility. Still, as this judgment by the General Court – and the Commission's subsequent reopening of the case – shows, Member States are not free to adopt whichever measure they see fit; they must respect the framework that has been established and must, for example, ensure equal treatment and avoid the distortion of competition to the benefit of selected companies.

The point is further illustrated by a similar General Court judgment concerning Lufthansa, the German airline operator, which was granted State aid in the amount of EUR 6 million in connection with the COVID-19 pandemic. In that judgment, the General Court held that the Commission had approved the aid despite the fact that the possibility of alternative funding, e.g. through capital markets, had not been sufficiently explored. Given that the exploration of the possibility of alternative funding is a fundamental condition for the granting of State aid, the General Court found that the aid had been granted unlawfully.

Read the Commission's press release of 4 July 2023

Read the General Court’s judgment of 10 May 2023 against SAS

Read the General Court’s judgment of 10 May 2023 against Lufthansa