On 8 May 2020, the European Commission (“Commission”) adopted a second amendment (the “New Amendment”) to the Temporary Framework for State aid measures to support the economy during the COVID-19 outbreak (the “Temporary Framework”) (see our previous post on the Temporary Framework here and on the first amendment here). The New Amendment sets out the conditions under which Member States may provide equity and/or hybrid capital (“Recapitalisation Measures”) as well as subordinated debt to non-financial undertakings that face serious economic difficulties as a result of the COVID-19 outbreak.

In the preamble to the New Amendment, the Commission emphasises that designing aid measures in a way that meets the EU’s policy objectives related to the green and digital transformation of Member States’ economies will allow for a more sustainable long-term growth, and promote the transformation to the agreed EU objective of climate neutrality by 2050. The Commission will also require that large undertakings recipient of Recapitalisation Measures report on how the aid received supports their activities in line with EU objectives on green and digital transformation.

In addition, the Commission reminds Member States which intend to take stakes in strategic companies, that they can also make full use of other existing tools to prevent capital flows from non-EU countries that could undermine EU’s security or public order, including but not limited to the FDI Screening Regulation.

Types of Recapitalisation Measures Covered by the New Amendment

Member States can provide any combination of recapitalisation instruments including equity instruments (e.g., issuance of new common shares or preferred shares) and / or instruments with an equity component (“hybrid capital instruments”). These Recapitalisation Measures must be granted before 30 June 2021 to fall under the New Amendment.

Amount of Recapitalisation

The New Amendment only applies to Recapitalisation Measures which were not already covered by Section 3.1 of the Temporary Framework. To ensure that the aid is proportionate, Recapitalisation Measures should not exceed the minimum needed to ensure the viability of the beneficiary and, in any event, not go beyond restoring its capital structure to the level predating the COVID-19 outbreak, i.e., the situation on 31 December 2019.

Eligibility and Entry Conditions

To be eligible for aid, the beneficiary should meet the following conditions:

  1. Without State intervention it would go out of business or would face serious difficulties to maintain its operations;
  2. Its failure would be detrimental to the common interest as it would lead to significant loss of employment, the exit of an innovative or systemically important company, the risk of disruption to an important service, or similar situations duly substantiated by the Member State concerned;
  3. It has exhausted the possibilities to find financing on the markets and the horizontal measures existing in the Member State concerned to cover liquidity needs are insufficient to ensure its viability; and
  4. It is not an undertaking that was already in difficulty on 31 December 2019, within the meaning of the General Block Exemption Regulation.

Remuneration of the State

The State must receive appropriate remuneration for its investment and the recapitalisation should be redeemed when the economy stabilises.

Remuneration of Equity Instruments

With regard to equity increases, the price of the shares acquired by the State should not exceed the average share price of the beneficiary over the 15 days preceding the request for the capital injection, if the beneficiary is publicly listed. If the beneficiary is privately held, an estimate of its market value should be performed by an independent expert or by other proportionate means.

A step-up mechanism increasing the remuneration of the State should also be put in place, in order to incentivise private shareholders to buy back the State’s participation. The step-up mechanism can take the form of additional shares or other appropriate mechanism and should consist of two steps:

  1. If the State has not sold at least 40% of its equity participation resulting from the Recapitalisation Measures after four years, its remuneration should be increased by at least 10%, e.g., if the State still holds 40% of shares, its participation should be increased to 44%;
  2. If the State has not sold in full its equity participation resulting from the Recapitalisation Measures after six years, its remuneration should be increased again by at least 10%, e.g., if the State still holds 44% of shares, its participation should be increased to 48%.

Alternative step-up mechanisms may also be designed, provided that they have the same incentive effects and impact on the State’s remuneration. Further, if the beneficiary is not a publicly listed company, each of the two steps may be implemented one year later, i.e., respectively five years and seven years after granting of the Recapitalisation Measures.

In addition, the beneficiary should at any time have the possibility to buy-back the State’s shares at a price which should be the higher amount of (i) the nominal investment by the State increased by the annual interest remuneration set out in paragraph 63 of the New Amendment; or (ii) the market price at the moment of the buy-back. Alternatively, the State may also sell its shares to other purchasers than the beneficiary provided that this is done on market terms.

Remuneration of Hybrid Capital Instruments

With regard to hybrid capital measures, the New Amendment provides that the State’s remuneration should adequately factor in: (i) the characteristics of the instrument chosen, including its level of subordination, risk and all modalities of payment; (ii) built-in incentives for exit (such as step-up and redemption clauses); and (iii) an appropriate benchmark interest rate.

Until the hybrid capital instruments are converted into equity, their minimum remuneration should be at least equal to the base rate (1 year IBOR or equivalent as published by the Commission), plus the premium set out in paragraph 66. In addition, a minimum discount rate of 5% on the Theoretical Ex-Rights Price (“TERP”) should applied at conversion.

After conversion into equity, a step-up mechanism increasing the State’s remuneration should be put in place, in order to incentivise private shareholders to buy back the State’s participation. In particular, if the State has not sold in full its equity participation resulting from the Recapitalisation Measures after 2 years, its remuneration should be increased again by at least 10%.

Prevention of Distortions to Competition

In order to limit distortions of competition and ensure good governance, the New Amendment requires that the beneficiary commits not to:

  1. Advertise the Recapitalisation Measures for commercial purposes;
  2. Acquire a stake of 10% or more in competitors or undertakings operating at another level of the same supply chain, before at least 75% of the Recapitalisation Measures have been redeemed, unless such acquisition is necessary to maintain the beneficiary’s viability;
  3. Cross-subsidize other economic activities that were in economic difficulties before 31 December 2019;
  4. Make dividend payments, non-mandatory coupon payments or buy-back shares, other than in relation to the State, before the Recapitalisation Measures have been fully redeemed;
  5. Increase the remuneration of the members of the management beyond the fixed part of their remuneration on 31 December 2019, before at least 75% of the Recapitalisation Measures have been redeemed.

Additional commitments will also be imposed if the beneficiary has significant market power and the amount of the Recapitalisation Measure is above EUR 250 million.

Exit Strategy

Finally, if the Recapitalisation Measures represent more than 25% of the beneficiary’s equity at the moment of intervention and the beneficiary is not an SME, it should present a credible exit strategy laying out:

  1. A plan for the continuation of the its activities and the use of the State’s funds, including a repayment schedule for the remuneration and redemption of the State’s investment; as well as
  2. The measures that the beneficiary and the State will take to abide that schedule.

The exit strategy should be submitted to the Member State within 12 months of the State’s intervention, unless the State’s participation is reduced below 25% within that period, in which case no exit strategy has to be submitted. The beneficiary will also have to publish every 12 months information on the use of the aid received, including how the aid supports the company’s activities in line with EU and national obligations linked to the green and digital transformation.

The State will have to report annually to the Commission on the implementation of the exit strategy and the beneficiary’s commitments. Further, if the State’s participation resulting from the Recapitalisation Measures has not been reduced below 15% within six years of the State’s intervention, a restructuring plan complying with the Rescue and Restructuring Guidelines must be prepared and notified to the Commission. This period is extended to seven years if the beneficiary is not a publicly listed company.

Subordinated Debt

In addition to Recapitalisation Measures, the New Amendment also extends the Temporary Framework to public financing in the form of subordinated debt, i.e., debt that is subordinated to ordinary creditors in insolvency proceedings. As subordinated debt cannot be automatically converted into equity when the company is a going concern, it is less distortive than hybrid capital and equity measures. Aid in the form of subordinated debt is therefore subject to the less stringent conditions of the Temporary Framework applying to loans (Section 3.3). However, because aid in the form of subordinated debt increases the ability of companies to take on senior debt in a manner similar to capital support, the New Amendment imposes higher remuneration and further limitation on the amount loaned. If Member States want to provide subordinated debt in amounts exceeding these thresholds, all conditions for Recapitalisation Measures will apply.


The Covington State aid team will continue to monitor the situation and update you on any new developments.

You can also stay up-to-date with the Covington Competition blog, where we are providing regular updates on the competition law/antitrust implications – both procedural and substantive – of the COVID-19 crisis in the US and the EU.

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Photo of Johan Ysewyn Johan Ysewyn

Johan Ysewyn is widely respected as a highly skilled European competition lawyer, advising on complex competition issues, including on merger control, anti-cartel enforcement, monopolisation cases and other conduct investigations. He acts as Co-Head of the firm’s Global Competition group and as Managing Partner…

Johan Ysewyn is widely respected as a highly skilled European competition lawyer, advising on complex competition issues, including on merger control, anti-cartel enforcement, monopolisation cases and other conduct investigations. He acts as Co-Head of the firm’s Global Competition group and as Managing Partner of the Brussels office.

Clients turn to Johan when they need cutting-edge competition and regulatory advice. He has been advising some of the world’s leading companies for over 30 years on their most complex competition issues. Johan is “an exceptional lawyer who is solution-oriented, has a remarkable ability to rapidly understand our business and has excellent reactivity.” (Chambers Global) Johan “attracts considerable praise for his reliable practice, as well as his great energy and insight into cartel proceedings.” (Who’s Who Legal)

Johan represents clients from around the world in dealings with competition authorities as well as in court litigation. He has in-depth knowledge of regulatory procedures and best practices as well as longstanding relationships with key regulators, in particular at the European Commission. He has also an active advisory practice covering a range of areas of interest to corporates, including the interplay between ESG goals and competition law, the impact of competition law enforcement on digital markets and broad strategic compliance issues.

Johan’s experience spans many industry sectors, with recent experience in telecoms and information technology, media, healthcare, consumer goods, retail, energy and transport. He has advised on several of the most major merger investigations in recent years. In addition, he has represented clients in many conduct investigations.

Johan’s practice also has a strong focus on global and European cartel investigations. He has acted for the immunity applicants in the bitumen and marine hose cartels, and acted for defendants in alleged cartels in financial services, consumer goods, pharmaceuticals, chemicals, consumer electronics and price benchmarking in the oil sector. He has acted for the European Payments Council in the first European Commission investigation into standardisation agreements in the e-payments sector. Johan has written and lectured extensively on international cartel and leniency-related issues. He co-authors the loose-leaf European Cartel Digest and lectures on cartel law and economics at the Brussels School of Competition.

Johan is also one of the leading experts on EU State aid issues, working both for beneficiaries and governments. He has advised a number of leading banks and governments, as well as represented major European airlines. From the cases that can be publicly disclosed, he has been involved in the Fortis, KBC, Dexia, Arco, Citadele, airBaltic and Riga Airport State aid cases.