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Temporary relaxation of state aid rules could lead to shift in EU policy
The Covid-19 crisis has come at a time when the EU was already putting in place rules that bring foreign takeovers under tighter control
22 Apr 2020 | Michael Marray

EUROPEAN Union rules on state aid to private sector companies have essentially been suspended until December. National governments are stepping up with financial packages to rescue their economies, and analysts question whether this will be a temporary phenomenon, or mark a permanent shift in the EU economic model.

France in particular is comfortable with a bigger role for the government in directing industrial policy, and the coronavirus crisis is likely to give added momentum to its interventionist tendencies.

The focus is on two main areas. First, government support to domestic companies that run into difficulties, and second, blocking foreign takeovers - most notably involving Chinese buyers.

A recent report from law firm Watson Farley & Williams (WFW) notes that the Covid-19 crisis has come at a time when the EU was already putting in place rules that bring foreign takeovers under tighter control.

The Foreign Direct Investment Screening Regulation takes effect from October 11. This regulation provides a framework for EU member states to screen foreign direct investments into the EU, on the grounds of security or public order, and for member states to cooperate with each other and with the EU Commission. The existence of an EU framework is designed to reduce to a minimum the inconsistencies that may arise in different member states' own regulation.

The EU will supervise how member states apply their laws. It may issue opinions to member states, where a proposed foreign direct investment is likely to affect projects or programmes of EU interest. These programmes include Galileo, EGNOS, Copernicus, Horizon 2020, Trans-European Networks for Transport, Energy and Telecommunications, European Defence Industrial Development Programme, and Permanent Structured Cooperation (PESCO).

WFW looks at how French and German law is being amended to take specific account of the regulation.

In a section titled “France-return of the State”, it notes that already last year, prior to the coronavirus crisis, three important texts significantly modified the foreign investment regime in France. These are the PACTE law of May 22 2019 and two regulatory texts from December 2019.

“In an environment dominated by the return to State sovereignty and the need to protect industrial assets of national interest, French investment regulations have recently changed, while regarding the Covid-19 crisis, the French government recently announced that it would provide strong financial support to French industry, including through nationalizations, against the risk of external predation,” WFW writes.

The new laws are part of a significant change in the French system for controlling foreign investors, initiated by a decree passed in May 2017. Prior to this decree, an administrative declaration was required for any foreign investment transaction on French territory, to determine whether the transaction required administrative authorization. Now, the procedure is reversed. The principle is that of requiring authorization prior to foreign investment made in a list of sectors described as sensitive.

This list was extended in December 2019, to include new sectors such as space activities, digital media, food safety and critical technologies including energy storage and quantum technologies.

The French FDI rules introduce the concept of chain of control, which enables the French authorities to trace the ownership of an entity governed by foreign law, a natural or legal person of foreign nationality or of French nationality, but domiciled outside French territory, back quite a long way. They can thus thwart corporate arrangements aimed at “Europeanizing” or “nationalizing” a foreign investment by setting up cascades of companies established in other European Union countries or on French territory.

Germany has also been toughening its laws. On April 8 the federal government submitted a draft change to the Foreign Trade Act, through which the rules on examining investments will be significantly tightened. The new rules will have to be considered in transactions involving direct or indirect acquisitions by non-EU based acquirers. This will likely be made law soon, alongside changes to the Foreign Trade Regulation.

In examining investments, German investment control law differentiates between sector-specific (in particular for the defence sector) and non-sector specific. The non-sector-specific investment control rules will be considerably widened.

These rules are likely to be tested in the coming months. With many companies across the EU going into administration, foreign buyers are looking to acquire assets at bargain prices. Politicians in both the UK and Germany have already identified Chinese investors as being at the forefront.

Meanwhile, within the EU itself, many decades of work on limiting state aid to companies has been put into reverse by the coronavirus crisis.

The State aid Temporary Framework to support the economy in the context of the Covid-19 outbreak, based on an article of the Treaty on the Functioning of the European Union, recognizes that the entire EU economy is experiencing a serious disturbance. To remedy that, the Temporary Framework provides for five types of aid:

(i) Direct grants, selective tax advantages and advance payments: member states will be able to set up schemes to grant up to 800,000 euros (US$866,524) to a company to address its urgent liquidity needs.

(ii)  State guarantees for loans taken by companies from banks: member states will be able to provide state guarantees to ensure banks keep providing loans to the customers who need them.

(iii) Subsidized public loans to companies: member states will be able to grant loans with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs.

(iv) Safeguards for banks that channel state aid to the real economy: some member states plan to build on banks' existing lending capacities, and use them as a channel for support to businesses – in particular to small and medium-sized companies. The Framework makes clear that such aid is considered as direct aid to the banks' customers, not to the banks themselves, and gives guidance on how to ensure minimal distortion of competition between banks.

(v) Short-term export credit insurance: The Framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks, thereby enabling short-term export credit

The Temporary Framework will be in place until the end of December 2020. With a view to ensuring legal certainty, the Commission will assess before that date if it needs to be extended.

It is not just the small and medium sized enterprises (SME) sector that is getting assistance. Last week sportswear manufacturer Adidas signed up for a government suported 3 billion-euro syndicated loan, with 2.4 billion euros provided by state owned development bank Kreditanstalt fur Wiederaufbau.

Adidas said that the 15 month loan facility is “at customary market conditions.” The loan is tied to a number of restrictions, including the suspension of dividend payments. In addition, the company’s executive board halted its share buyback programme and said it would forgo bonus payments for the year 2020. It intends to repay any used portion of the loan, including interest and fees, as quickly as possible. 

Freshfields Bruckhaus Deringer advised the commercial banking consortium which is providing 600 million euros, comprising UniCredit, Bank of America, Citibank, Deutsche Bank, HSBC, Mizuho Bank and Standard Chartered Bank. Hengeler Mueller advised Adidas.

Anglo German tourism giant TUI also recently signed a state aid bridge loan for 1.8 billion euros. The facility has been provided by KfW, and added to TUI's current revolving credit facility (credit line). 

TUI Group is the world’s leading integrated tourism group, and noted in a statement that it is a healthy company that was economically successful before the crisis. The current financial year 2020 had started off with extremely strong bookings.

“The German government has acted quickly to support jobs and companies during these exceptional times,” comments TUI CEO Fritz Joussen. “We are now preparing intensively for when our operations can resume after the Coronavirus crisis and firmly believe, people will continue to want to travel and explore other countries and cultures in the future.”

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