On the 27 January 2022, in ‘SIA’ Zinatnes parks ‘v Finanau ministrija’, the Court of Justice of the European Union (the ”CJEU”) delivered a ruling which clarified the concepts of ‘undertaking in difficulty’ and ‘subscribed share capital’ in the context of state aid and the Commission Regulation (EU) No 651/2014, the General Block Exemption Regulation (the ”GBER”).
As a point of departure, state aid is any economic advantage which is provided by a Member State or through State resources to a trader or company, which favors the same to the detriment of its competitors. Although in principle state aid is illegal and incompatible with the Internal Market, several derogations exist to this general rule which serve to render state aid as compatible. One of such derogations is the GBER which lists categories of state aid which fall out of scope of the notification requirements to the European Commission and are deemed to be compatible with the internal market automatically.
Not all undertakings that apply for state aid benefit from the derogations under the GBER. Recital 14 of the GBER holds that where an undertaking is deemed to be an ‘undertaking in difficulty’, it shall fall outside of scope of the GBER and any state aid that is intended to be granted to an undertaking in difficulty must be assessed under the 2004 Community guidelines on state aid for rescuing and restructuring firms in difficulty.
The GBER sets out alternative criteria which if satisfied by an undertaking, would render it to be classified as an ‘undertaking in difficulty’. One of such criteria is Article (18) (2) (a) of the GBER which states that an ‘undertaking in difficulty’ can take the form below:
” In the case of a limited liability company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its subscribed share capital has disappeared as a result of accumulated losses … ”
The preliminary ruling in question dates to January 2019, where the Latvian Central Finance and Procurement Agency (the ”Agency”) issued an open call for the financing of projects to receive aid under the ‘Growth and Employment Program’ (the ”Program”), a project which was partially financed under the European Regional Development Fund. One of the companies that applied for funding under this program was SIA Zinatnes parks (the ”Applicant”), a limited liability company registered in Latvia. Together with its application, the Applicant submitted a resolution passed by a general meeting by its members on 20 April 2019, which altered the Applicant’s Articles of Association to increase its issued share capital by means of a new contribution of shares plus share premium, from a specific member, to be paid within a specified period.
The Agency rejected the Applicant’s application, on the basis that the Applicant was an ‘undertaking in difficulty’ within the concept of the GBER, given that the financial report that was presented to the Agency showed that more than half of the Applicant’s subscribed share capital had disappeared because of accumulated losses. The Applicant appealed this decision in the District Administrative Court of Latvia (the ”Referring Court”) stating that at the time that it applied for funding it was not an ‘undertaking in difficulty’, given the fact that the shareholders had resolved to increase the issued share capital.
Was the Applicant an ‘undertaking in difficulty’ given that the increase in share capital was yet to be registered with the Latvian Commercial Register? Or was the fact that the shareholders had resolved to increase the share capital enough for the Applicant to fall outside of the scope of Article 2 (18) (a)? Faced with this question, the Referring Court observed that under Article 202 (3) of the Latvian Commercial Code an increase in share capital is only effective once it is registered with the Latvian Commercial Registrar. Unclear on the way forward, the Referring Court asked the CJEU to clarify several issues.
This article will focus solely on the first question that the Referring Court put forward. The Referring Court asked whether Article 2 (18) (a) of Regulation No 651/2014 is to be interpreted as meaning that, in order to determine whether a company is’ in difficulty ‘within the meaning of that provision, the expression’ subscribed share capital ‘must be understood as referring only to contributions disclosed in accordance with the rules laid down by the national legislation of the Member State in which the company is incorporated, or whether it is to be considered as an autonomous and independent matter under EU law .
The CJEU noted that under the GBER, the concept of ‘subscribed share capital’ is not defined nor is any reference made to a Member State’s national laws when it comes to defining it. From settled case law, the CJEU held that it is a settled principle that where no express reference to the law of Member States is made for the purpose of determining the meaning and scope, that provision must normally be given an autonomous interpretation throughout the entire European Union.
The CJEU further held that the expression ‘share capital’ refers to the value of the contributions which the members or shareholders of a company have made available or have undertaken to make available to that company in return for being issued with shares. Therefore, the expression ‘subscribed capital’ in the context of Article 2 (18) (a) of the GBER must be interpreted to mean that it is referring to all the contributions which current, or future members or shareholders, have already made available or have irrevocably undertaken to make.
In reaching this conclusion, the CJEU considered the wording of the provision as well as its context and the rationale that the legislator sought to achieve in introducing it. Particularly, the CJEU held that the reason why an undertaking in difficulty cannot benefit from the state aid granted under the GBER is to avoid the risk of having this aid used to restructure the undertaking instead of using the aid received as originally intended. The European Commission’s Communication concerning the Guidelines on State Aid for rescuing and restructuring non-financial undertaking in difficulties, holds that an undertaking is considered to be in difficulty in a situation where without intervention by the State, it will almost certainly be the case that the undertaking will be condemned to go out of business in the short or medium term. Therefore, Recital 14 of the GBER must be interpreted as seeking to assess the ability of the company in question to maintain its activity in the short or medium term.
Based on this, the CJEU held that to establish whether an undertaking is to be classified as an ‘undertaking in difficulty’ within the context of the GBER, account must be taken of all the contributions that members have irrevocably undertaken to make, regardless of whether they have been paid up or not. Even those contributions which members have irrevocably undertaken to make have not yet been fully paid, they too must be taken into account to assess whether the undertaking is one which is likely to go bankrupt in the short or medium term. The legislator did not intend for undertakings such as the Applicant to fall out of scope of state aid granted under GBER simply because of a formality under national law rules.
The CJEU observed how in the present case, a general meeting of the Applicant has resolved that an increase in its share capital was made by a specified member who was being issued a number of shares in his favor. Here the CJEU held that it is for the Referring Court under the provisions of its own national laws to determine whether the fact that a general meeting has resolved that a specific member has bound himself to make specified contributions to the company in consideration for shares, demonstrates the existence of an irrevocable commitment on the part of that member.
In conclusion, the CJEU held that Article 2 (18) (a) of the GBER must be interpreted to mean that the expression ‘subscribed share capital’ when assessing the concept of an ‘undertaking in difficulty’ must be understood as referring to all contributions which current or future members or shareholders of a company have made or have irrevocably undertaken to make. It is then national law which determines the conditions that must be complied with for a commitment to make a contribution to be regarded as irrevocable.
This article was first published in the Malta Independent.
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