What just happened?
Lufthansa has accepted the €9billion bailout deal, as the latest EU’s approval on State aid after those to major European airlines such as Air France and SAS Scandinavian.[1] Meanwhile, Ryanair CEO O'Leary has filed complaints to the EU about these discriminatory government support against competition rules.[2]
What does it mean?
Bailouts of European airlines are only some examples of State aids amounted to €1.9trillion approved by the EU since the Covid-19 pandemic.[3] In addition to Germany’ support to Lufthansa, France has also provided a €8billion package to support the French carmakers including Renault.[4] During normal times, State aid is strictly controlled through notification and clearance regime by the European Commission considering the potential distortion to market competition. Responding to the pandemic, the EU has declared its “full flexibility” under the Temporary Framework in applying the rules to support the States’ economy.[5] As the gate is now opened, more bailouts for large corporates are expected. While it is widely agreed that the damage to economy caused by Covid-19 is unprecedently and hence urgent assistance is needed, the easing approach to State aid has raised concerns about the erosion of the level playing field under the European single market principle in long term.
How does this affect the legal industry?
The increasing ease of access to State aid has significant implications especially in the corporate law context. Practically, State aid can be obtained through different means including government loans, guarantees and recapitalisation of equity.[6] As Brexit is currently under a transition period until end of 2020 (unclear if it will be extended), the UK is still bound to the EU’s State aid regime.
When corporates are experiencing financial difficulties, there are more alternatives to resolution. Corporate insolvency and restructuring practices may look into rescue plans available from government before going down the administration route. Despite the State aid rules are temporarily eased, there are certain new essential criteria to meet. Insolvency practitioners have to assess the business thoroughly under the Temporary Framework, for example, to demonstrate that the business would not be able to sustain without the State’s intervention which may cause serious social hardship.[7]
One form of State aids is that corporates may obtain funding from financial institutions backed by government guarantees. The public guarantees will serve as the incentives for commercial banks to grant new loans which they would not normally be willing to bear the credit risk under the current climate. To the Banking and Finance practice, there will be more opportunities in financing arrangement in exceptional size.
On the other hand, bailouts via recapitalisation involve Corporate Finance lawyers for issuance of new shares to raise new funds for the business.[8] It is worth noting that the Temporary Framework requires exit mechanisms in place for the State to redeem the capital, therefore, special clauses such as pay-back clause may be included in these transactions.
Although some criticised that these State aids are contradicting the market competition objective of the EU[9], the Temporary Framework does require certain governance to prevent distortion of competition. Competition lawyers have to evaluate the impact on the market of the transaction, both during and post-pandemic, under the new rulings for the Commission’s approval.
Written by Cleo Ho
Assessing firms:
#BakerMcKenzie #Bird&Bird #HerbertSmithFreehills #HoganLovells #Linklaters #SlaughterandMay #Allen&Overy #Latham&Watkins #CliffordChance # Ashurst #Simmons&Simmons #DavisPolk&Wardwell #FreshfieldsBruckhausDeringer #GibsonDunn&Crutcher #Skadden #AkinGump #Kirkland&Ellis #White&Case
References:
[1] Jack Ewing, ‘Lufthansa to Receive $10 Billion Bailout’, (The New York Times, 25 May 2020) and Michael Acton, ‘EU airlines' Covid-19 bailouts will come with strings attached’ <https://mlexmarketinsight.com/insights-center/editors-picks/area-of-expertise/antitrust/eu-airlines-covid-19-bailouts-will-come-with-strings-attached> Accessed 2 June 2020
[2] Saim Saeed, ‘Ryanair goes to war against coronavirus bailouts, CEO Michael O’Leary denounces ‘nakedly political, corrupt decisions’ by the Commission to approve bailouts’ <https://www.politico.eu/article/ryanair-goes-to-war-against-coronavirus-bailouts/> Accessed 2 June 2020
[3] ‘State aid in Europe, A €2trn loophole’ (The Economist, 28 May 2020)
[4] Ibid.
[5] Paula Riedel, Thomas Wilson, Shane Cranley (Kirkland & Ellis), ‘EU State Aid and COVID-19’ <http://competitionlawblog.kluwercompetitionlaw.com/2020/03/24/eu-state-aid-and-covid-19/?doing_wp_cron=1591135058.1075000762939453125000>, Assessed 2 June 2020
[6] Morten Nissen, Jose Rivas (Bird & Bird LLP), ‘State aid & the COVID-19 pandemic - obtaining State aid for mitigating the financial impact of the pandemic’, (Lexology, 18 March 2020)
[7] Allen & Overy, ‘Covid–19 coronavirus and the EU State aid response’, 9 April 2020
[8] Allen & Overy, ‘Covid-19 coronavirus – State aid Temporary Framework extended to recapitalisations and subordinated loans’, 29 May 2020
[9] ‘Ryanair Condemns €9 Billion State Aid To Lufthansa’ < https://corporate.ryanair.com/news/ryanair-condemns-e9-billion-state-aid-to-lufthansa/> Assessed 2 June 2020
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.