Tag Archives: Restructuring

State aid for rescuing and restructuring firms in difficulty

State aid for rescuing and restructuring firms in difficulty

Outline of the Community (European Union) legislation about State aid for rescuing and restructuring firms in difficulty

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Organisation and financing of the fisheries sector

State aid for rescuing and restructuring firms in difficulty

Document or Iniciative

Communication from the Commission – Community guidelines on state aid for rescuing and restructuring firms in difficulty [Official Journal C 244 of 1.10.2004].

Summary

The guidelines clarify the Commission’s approach in cases where the public authorities grant financial support to firms in difficulty *. Under the general principle of the prohibition of state aid (Article 87(1) of the Treaty establishing the European Community), aid granted to firms in difficulty must not be allowed to become the rule. The exit of inefficient firms is a normal part of the operation of the market and, while rescuing and restructuring aid may keep in existence firms in difficulty, this is generally at the expense of their competitors.

Financial contribution from the beneficiary firm to the restructuring

The guidelines are based on the principle whereby, in any restructuring operation, the beneficiary is required to finance a substantial proportion of its restructuring costs.

Depending on the size of the beneficiary, thresholds determine its contribution to the overall cost of restructuring: at least 50 % for large firms, 40 % for medium-sized firms and 25 % for small firms. The guidelines are, therefore, concerned especially with large firms operating throughout the European Union. Such firms generally have large market shares and the state aid granted to them has a more appreciable impact on competition and trade.

The beneficiary’s contribution has a twofold purpose: it will demonstrate that the markets (owners, creditors) believe in the feasibility of the return to viability within a reasonable period of time, and it ensures that the aid is limited to the minimum required to restore viability while limiting distortion of competition.

A substantial contribution from the beneficiary to the restructuring was previously required under the 1999 guidelines. The 2004 guidelines reaffirm with greater clarity the principle that the contribution must be real and free of aid.

“One time, last time” principle

The guidelines also stipulate a uniform period of ten years during which the beneficiary of the aid may not receive any additional rescue or restructuring aid. This “one time, last time” principle is designed to prevent repeated granting of rescue or restructuring aid that keeps firms artificially in business. An important exception to this rule is where restructuring aid follows the granting of rescue aid as part of a single restructuring operation.

Definition of rescue and restructuring aid

The guidelines extend the concept of rescue aid so as to allow the beneficiary to take urgent measures, even of a structural nature. Firms in difficulty may already need to take certain urgent structural measures to halt or reduce down a worsening of their financial situation during the rescue phase.

Under the 1999 guidelines, no restructuring measure financed through state aid could be undertaken during the rescue phase. Admittedly, rescue and restructuring involve the interplay of different mechanisms but are often two phases of the same operation. Such a strict distinction between rescue and restructuring has thus given rise to difficulties.

Accordingly, rescue aid is by nature temporary and reversible. Its objective is to allow time to analyse the circumstances which gave rise to the difficulties and to develop an appropriate plan to remedy those difficulties. Restructuring will be based on a practical plan for restoring a firm’s long-term viability. Any aid granted following the adoption and implementation of a restructuring or liquidation plan for which aid has been requested will be considered as restructuring aid.

GENERAL CONDITIONS FOR AUTHORISING AID

Common rules apply to rescue aid and restructuring aid:

  • the firm must qualify as a firm in difficulty within the meaning of the guidelines;
  • a recently established firm may not receive rescue and restructuring aid for the first three years of its existence.

In order to be approved, rescue aid must:

  • be in the form of loan guarantees or loans granted at an interest rate comparable to those for loans to healthy firms;
  • be reimbursed within a period of not more than six months after disbursement of the first instalment;
  • be warranted on the grounds of serious social difficulties;
  • have no unduly adverse spillover effects on other Member States;
  • be accompanied, on notification, by an undertaking given by the Member State concerned to communicate to the Commission within six months a restructuring plan, a liquidation plan or proof that the loan has been reimbursed in full and/or that the guarantee has been terminated;
  • be restricted to the amount needed to keep the firm in business for the period during which the aid is authorised;
  • respect the “one time, last time” principle.

Restructuring aid raises particular competition concerns. The general principle is to allow restructuring aid to be granted only in circumstances in which any distortions of competition will be offset by the benefits flowing from the firm’s survival. Authorisation will be granted only if strict conditions are met:

  • a restructuring plan must be implemented that restores the firm’s long-term viability within a reasonable timescale;
  • compensatory measures must be taken to prevent or to minimise the risks of distortion of competition (divestment of assets, reductions in capacity or market presence, etc.);
  • the aid must be limited to the strict minimum and the rules on the beneficiary’s contribution must be complied with;
  • specific conditions may be attached by the Commission to the authorisation of aid;
  • the restructuring plan must be implemented in full;
  • the Commission must be in a position to make sure that the restructuring plan is being implemented properly, through regular reports communicated by the Member State concerned.

The conditions for authorising restructuring aid are, however, less strict where the aid is granted to small firms since it affects competition less than aid for medium-sized and large firms.

SCOPE

The guidelines are based on Article 87(2) and (3) of the Treaty establishing the European Community, which stipulates that aid falling within the scope of Article 87(1) may be regarded as being compatible with the common market.

They apply to firms in difficulty in all sectors, including agriculture, fisheries and aquaculture, subject to certain conditions. The coal and steel sectors are, however, excluded from the scope of the guidelines.

DATE OF APPLICATION AND DURATION

The Commission will apply the new guidelines with effect from 10 October 2004. Only state aid notified after that date will be subject to them as they do not have retrospective effect.

Key terms used in the act
  • Firm in difficulty: a firm is regarded as being in difficulty where it is unable, whether through its own resources or with the funds it is able to obtain from its owner/shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business in the short or medium term.

Related Acts

Communication from the Commission – Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis [Official Journal C16/3 of 22.1.2009].
This Communication aims to introduce a temporary State aid system in order to cope with the failures resulting from the economic and financial crisis that began in October 2008. The temporary additional measures provided for meet two principal objectives:

  • to unblock bank lending to companies;
  • to encourage companies to continue investing in the future, in particular in sustainable growth.

To achieve these objectives, Member States may, under certain conditions and until the end of 2010, provide in particular:

  • maximum flat-rate aid of EUR 500 000 per company during the first two years, to help companies overcome the current difficulties;
  • State guarantees for loans accompanied by a premium reduction;
  • subsidised loans, in particular for the production of green products (meeting environmental protection standards early or going beyond such standards);
  • aid in the form of risk capital, which may be up to EUR 2.5 million per SME and per year (instead of the current EUR 1.5 million) provided that at least 30 % (instead of the current 50 %) of the investment costs are met by private investors.

Communication from the Commission on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis [Official Journal C 270/02 of 25.10.2008].
This Communication clarifies the application of State aid rules to emergency measures aimed to offset losses due to the October 2008 financial crisis.

Public intervention should be decided at national level within a coordinated framework and on the basis of a certain number of European Union common principles. Two types of financial institution receiving aid are distinguished with consequences for restructuring when State aid has been received:

  • financial institutions which are fundamentally healthy and whose difficulties of access to liquidity is exclusively a result of general market conditions;
  • financial institutions with endogenous problems due to their business mode or business practices and whose weaknesses have been exposed and exacerbated by the crisis in the financial markets.

The Communication covers two main types of measure taken with regard to these institutions:

  • guarantees covering financial institutions’ debts. These include in particular general guarantees protecting retail deposits and liabilities, some types of interbank deposits and short and medium-term debt instruments. The duration and amount of these guarantees must be limited to the minimum necessary and the guarantees must include appropriate mechanisms to minimise undue distortions of competition;
  • the recapitalisation of financial institutions. Public funds are provided in order to strengthen the capital base of the institutions directly. This injection of capital must be limited to the strict minimum, so as not to encourage the financial institution to engage in other activities or in an aggressive commercial strategy.

Member States may also accompany this aid and restructuring with the provisions of public funds, in particular from the central bank.

This summary is for information only. It is not designed to interpret or replace the reference document, which remains the only binding legal text.

Restructuring and employment: the role of the European Union in anticipating and accompanying restructuring in order to develop employment

Restructuring and employment: the role of the European Union in anticipating and accompanying restructuring in order to develop employment

Outline of the Community (European Union) legislation about Restructuring and employment: the role of the European Union in anticipating and accompanying restructuring in order to develop employment

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Employment and social policy > Job creation measures

Restructuring and employment: the role of the European Union in anticipating and accompanying restructuring in order to develop employment

Document or Iniciative

Communication from the Commission of 31 March 2005, Restructuring and employment – anticipating and accompanying restructuring in order to develop employment: the role of the European Union.

Summary

This communication is fully in line with the updated Lisbon Strategy which, in addition to higher and more sustainable growth, focuses on job creation. It proposes measures to respond to the social and economic cost of the restructuring of European enterprises.

THE CURRENT CHALLENGES

It is estimated that, every year, 10% of European enterprises are set up and destroyed. In the light of this, the European Union has long been applying policies and instruments to accompany these developments, in particular in the iron and steel, shipbuilding and textiles sectors. These measures do not relate solely to sectors in difficulty. They may also involve the establishment of strategies for many other sectors.

At enterprise level, restructuring is the permanent reshaping of the fabric of production by several factors:

  • the development of the European Single Market and globalisation have allowed competitiveness to be improved and new, high quality jobs to be created;
  • technological innovation generates new applications which, in turn, lead to more creative, higher-quality jobs;
  • developments in the regulatory framework and significant changes in consumer demand (ageing population and environmental issues) lead to changes in products and labour markets.

From the workers’ point of view, restructuring often puts a large number of people out of work at the same time; often the least qualified and most vulnerable are affected first. Moreover, restructuring is having a major impact in certain European countries that are still in transition.
It is therefore important to help people who have been made unemployed to quickly find new jobs of an equivalent quality and to provide responses for the entire territory of the European Union by anticipating change through proximity to regions and their populations (identification of potential comparative advantages).

THE ROLE OF THE EUROPEAN UNION

Although most of the social and economic challenges thrown up by restructuring are matters for the national authorities, the European Union can intervene through:

  • policies which contribute to anticipating and accompanying restructuring (employment policy, financial support instruments, industrial and company policy and rural development policy);
  • the identification of sectoral trends and intervention instruments;
  • recognising the role that the social partners can play in the phase preceding anticipation, and which characterises the change.

COMMUNITY POLICIES IN ACTION

Reform of the financial instruments and the role of the structural funds

The draft new European Social Fund (ESF) regulations reaffirm the latter’s role in funding measures to anticipate and manage restructuring by improving the adaptability of workers and enterprises, investing in human resources and lifelong learning and establishing employment pacts at national, local and regional level.

The European Regional Development Fund will also play a major role, thanks to investment in research and development, dissemination of innovation and the creation of infrastructures.
8. In the area of rural development, the Agriculture and Rural Development Fund should allow sectoral policies (in agriculture, industry, services) and territorial policies (regional, rural, urban, local) to complement each other in order to optimise the impact on employment.

Moreover, the Commission recommends that a contingency reserve for unforeseen events be created within the structural funds and proposes the creation of a growth adjustment fund of one billion euros per year.

Finally, other programmes can contribute to managing change more effectively, for example the research framework programme, the education and training programmes and the integrated lifelong learning programme.

Industrial policy

As part of the implementation of the revamped industrial policy, as set out in the Communication of April 2004, the Commission proposes improving the regulatory framework applicable to companies and supporting innovation and competitiveness. A new communication on the sectoral dimension of industrial policy is to be drafted in 2005. This communication will set out how the Commission intends to monitor more closely the sectors that are at risk.

The Commission is proposing the launch of joint technological initiatives, such as the action plan for ecotechnologies to fund programmes for the development of social products and services, the aim being to create a competitive advantage that will open up new markets and create new jobs.

Competition policy

The Commission is focusing on the strict application of the competition rules, including in the area of state aid, as well as monitoring mergers. It is proposing:

  • a reform of the state aid monitoring policy, encouraging Member States to award aid in sectors contributing most to growth and jobs;
  • a new regulation on mergers in order to facilitate industrial restructuring.

Other policies and instruments

14 .In order to better anticipate and accompany restructuring, the Commission wishes to:

  • improve protection of intellectual property and step up the fight against forgery, and continue to act to ensure that the Doha Round of negotiations on global free trade is a positive factor for development;
  • revise the European Employment Strategy during 2005, in order to focus on the priorities for anticipating and managing restructuring;
  • step up the role of the European Monitoring Centre on Change which will be called on to develop tools for the quantitative and qualitative analysis and monitoring of restructuring;
  • increase the convergence of and synergy between policies by way of an internal task force involving the relevant Commission departments and involving regular dialogue with the European Parliament and the Council.

CONSULTATION OF THE SOCIAL PARTNERS

This Communication launches the second phase of consultation of the European social partners on company restructuring and European works councils. The Commission will be analysing the results of this consultation before the 2006 Tripartite Social Summit.

Two other initiatives are planned:

  • publication of a new communication on the social responsibility of enterprises, showcasing positive initiatives taken by enterprises in the event of restructuring;
  • the creation of a Restructuring Forum, the mission of which will be to monitor trends and promote link-up between the various initiatives.

CHANGING THE REGULATORY FRAMEWORK

This communication recalls the modernisation and simplification measures already provided for in the Lisbon programme of action and recommends the following initiatives:

  • a new Green Paper on labour law development which will analyse the role of labour law in effective transitions;
  • a new proposal for a directive on improving the portability of supplementary pension rights, so as to facilitate the mobility of workers within the Community.
Key statistics
  • Between 1977 and 2002, Europe created 30 million jobs, with an increase of more than 44 million in services and a loss of at least 7 million in industry and 7.5 million in agriculture.
  • Each year, 10% of European enterprises are created and destroyed.
  • Between 5 000 and 15 000 jobs are created and destroyed every day on average in each of the Member States.
  • Employment in the services sector has risen in the past 20 years, employing two out of three people in 2003.
  • Employment in business services has increased by 25% over the last five years.