Clouds in the horizon of Spanish airport operator privatisation?

According to recent press reports (for instance, Reuters or CincoDias), the Spanish government is seeking to privatise 50%+ of the capital of AENA, the Spanish airport operator. This process of privatisation and the strategy apparently devised by the government raise some issues of compatibility with EU Law that, in my view, might be highly relevant--particularly after the recent CJEU Judgment in Essent, where the application of free movement of capital to privatisation processes has been re-energised.

 

According to the most complete account of the government's strategy, up to 60% of AENA's capital would be privatised. A first package of around 30% would be divided between 3 to 5 'core (institutional) investors' and the other 30% would be floated in the (Madrid?) stock exchange.

 

The worrying part of the privatisation strategy lies, in my view, on the conditions of selection and participation of the 'core (institutional) investors'. These would be chosen on the basis of a restricted (tender) procedure, whereby they would be assigned 5-10% capital packages on the basis of the price offered and their commitments to both hold the investment at that level and not to increase it above 10% for the longest possible time period.

 

 

Therefore, the main selection criteria (other than price) will revolve around a 'voluntary' refusal to exercise investment freedom (both in terms of acquiring additional shares and divesting the ones acquired in the privatisation process). This clearly rings a bell of similarity with the Essent case, where an absolute prohibition to dispose of the shares (ie an absolute prohibition on privatisation) was subjected to a proportionality analysis.

 

The Spanish government's intention behind this privatisation strategy is to retain a sort of 'joint' control over AENA despite reducing its shareholding to 40% of the capital, and it (seems to) expect the selected 'core (institutional) investors' to remain faithful and to support the government's airport management strategy. In my view, there seems to be no clear public interest justifying such a strategy, as airport management can (easily) be regulated and there are clear indications of successful privatisation in other EU countries (pertinently enough, the privatisation of the London Luton airport, precisely managed by AENA).

 

Further, even if such a public interest could be fleshed out by the Spanish government, the (contractual) restrictions on the disposition of the investments (or their enlargement) by the 'core (institutional) investors' will now need to be subjected to a proportionality test under the Essent line of authority. In my view, the Spanish government's strategy is unlikely to pass legal muster. Only time will tell if the CJEU will have an opportunity to rule on this one.

Neutrality of ownership is not unconditional: CJEU sets red lines for privatisation prohibitions (C-105/12 to C-107/12)

In its Judgment of 22 October 2013 in Joined Cases C-105/12 to C-107/12 Essent and Others, the Court of Justice of the EU has explored the boundaries of Article 345 TFEU--which has, so far, remained (and still is) an obscure provision of the Treaties [see B Akkermans & E Ramaekers, 'Article 345 TFEU (ex Article 295 EC), Its Meanings and Interpretations' (2010) European Law Journal 16(3): 292-314].

 

In Essent, the CJEU was concerned with the compatibility with EU law of an absolute privatisation ban. More specifically, it had to analyse a Dutch rule whereby shares in companies that operate distribution networks of electricity and gas can be transferred only within the circle of public authorities, ie cannot be privatised (for a comment, see here).

 

Advocate General Jaaskinen had considered the absolute ban on privatisation compatible with both Article 345 TFEU and Article 63 TFEU on free movement of capital (see his Opinion, not available in English, here). The CJEU has reached the same conclusions.

 

In my view, one of the most interesting legal points of the Essent Judgment is that Article 345 TFEU does not write Member States a blank check when they regulate their property systems or, put othewise, that the principle of neutrality of ownership enshrined in that provision is not unconditional.

 

Hence, the reasoning of the CJEU should be seen as an exercise to draw some red lines that Member States cannot overstep when designing their property systems and that, fundamentally, boil down to full compliance with the rules on free movement of capital.

29 Article 345 TFEU is an expression of the principle of the neutrality of the Treaties in relation to the rules in Member States governing the system of property ownership.
30 In that regard, it is apparent from the Court’s case-law that the Treaties do not preclude, as a general rule, either the nationalisation of undertakings (see, to that effect, Case 6/64 Costa [1964] ECR 585, at 598) or their privatisation (see, to that effect, Case C‑244/11 Commission v Greece [2012] ECR I‑0000, paragraph 17).
31 It follows that Member States may legitimately pursue an objective of establishing or maintaining a body of rules relating to the public ownership of certain undertakings.
32 […] the prohibition of privatisation, within the meaning of the national legislation at issue in the main proceedings, allows, in essence, the transfer of shares held in a distribution system operator only to the authorities and to legal persons owned, directly or indirectly, by those authorities, since any transfer which has the result that the shares become the property of persons other than such authorities and legal persons is prohibited.
33 It follows that the prohibition of privatisation precludes ownership by any private individual of shares in an electricity or gas distribution system operator active in the Netherlands. Its objective is therefore to maintain a body of rules relating to public ownership in respect of those operators.
34 Such a prohibition falls within the scope of Article 345 TFEU. […]36 However, Article 345 TFEU does not mean that rules governing the system of property ownership current in the Member States are not subject to the fundamental rules of the FEU Treaty, which rules include, inter alia, the prohibition of discrimination, freedom of establishment and the free movement of capital (see, to that effect, Case 182/83 Fearon [1984] ECR 3677, paragraph 7; Case C‑302/97 Konle [1999] ECR I‑3099, paragraph 38; Case C‑452/01 Ospelt and Schlössle Weissenberg [2003] ECR I‑9743, paragraph 24; Case C‑171/08 Commission v Portugal [2010] ECR I‑6817, paragraph 64; Case C‑271/09 Commission v Poland [2011] ECR I‑0000, paragraph 44; and Commission v Greece, paragraph 16).
37 Consequently, the fact that the Kingdom of the Netherlands has established, in the sector of electricity or gas distribution system operators active in its territory, a body of rules relating to public ownership covered by Article 345 TFEU does not mean that that Member State is free to disregard, in that sector, the rules relating to the free movement of capital (see, by analogy, Commission v Poland, paragraph 44 and the case‑law cited).
38 Accordingly, the prohibition of privatisation falls within the scope of Article 63 TFEU and must be examined in the light of that article […] (C-105/12 ti C-107/12 at paras 29-38, emphasis added).

This finding of the CJEU effectively subjects the principle of neutrality of ownership to a proportionality test and, generally, seems to restrict its scope--actually, it seems to me that the Essent Judgment makes Article 345 TFEU less than neutral in that it imposes a justification burden on the ownership systems designed at Member State level.

This may be an opening door for a stricter control of ownership rules in the Member States and, once more, for an implicit redistribution of competences between the EU and the Member States [see the interesting discussion by F Losada Fraga et al, 'Property and European Integration: Dimensions of Article 345 TFEU' (2012) Helsinki Legal Studies Research Paper No. 17]. However, more clarification will be necessary, particularly in cases where the public interest justifications for restrictions of (private) ownership are less clear cut than in the Essent case and that, consequently, will be likely to result in an effective restriction of domestic rules on (public) ownership.

CJEU puts a stop to the 'kidnapping' of investors in public undertakings: a broader reading of C-244/11

In its Judgment of 8 November 2012 in case C-244/11 Commission v Greece, the CJEU assessed the compatibility with EU Law of a Greek scheme that required prior authorization for the acquisition of voting rights representing 20% or more of the share capital in certain strategic public limited companies in the utilities sectors which operate national infrastructure networks within a monopoly context. 

Most remarkably, the supervision scheme included a provision for ex post control in regard to the adoption of certain decisions. More specifically, under Article 11 of Law 3631/2008 on the creation of a national fund for social cohesion:

The decisions of those strategic undertakings relating to the [following (?)] subjects shall be subject to authorization by the Minister for Finance for purposes of general interest:

(a) dissolution of the undertaking, its placing in liquidation and the designation of liquidators;

(b) restructuring the abovementioned undertakings: conversion, merger with another company, merger with the creation of a new public limited company, break-up in any form whatsoever or break-up of one or more divisions liable to place in jeopardy the supply of services in the sectors of strategic importance;

(c) transfer, transformation or conversion, disposal, supply as a guarantee, as well as transformation or alteration of the allocation of strategic elements of the assets of the abovementioned undertakings and of the basic networks and infrastructure necessary for the economic and social life of the country as well as its security.

The CJEU assessed the compatibility of such ex post veto scheme controlling the adoption of certain (strategic) decisions of those public limited companies (whose shares are quoted on the stock exchange and may be purchased freely on the market) under the Treaty provisions on the free movement of capital and the freedom of establishment and (not surprisingly) found that it was not compatible with EU Law.

According to the CJEU, 

80 As regards […] the arrangements for ex post control of certain decisions taken by the strategic public limited companies at issue, such as provided for in Article 11(3) of Law 3631/2008, the Hellenic Republic maintains that it must be accepted, as it is similar to the scheme at issue in Case C-503/99 Commission v Belgium, in respect of which the Court held that it was justified by the objective of guaranteeing the security of energy supply in the event of a crisis.

81 The Court has held that it results from paragraphs 49 to 52 of the Judgment in Case C-503/99 Commission v Belgium that the national scheme at issue was characterized by the fact that it specifically listed the strategic assets concerned and the management decisions which could be challenged in any given case. Finally, the intervention by the administrative authorities was strictly limited to cases in which the objectives of the energy policy were jeopardized  Any decision taken in that context had to be supported by a formal statement of reasons and was subject to an effective review by the courts (Judgment in Case C‑463/00 Commission v Spain, paragraph 78). 

82 However, following the example of the schemes examined by the Court in its Judgments in Case C-463/00 Commission v Spain and in Case C‑326/07 Italy v Commission, the scheme at issue in the present case, even it if it is of an ex post nature and is therefore less restrictive than an ex ante scheme, cannot be justified in the light of the criteria stemming from the Judgment in Case C-503/99 Commission v Belgium. 

83 First, as for the decisions listed in Article 11(3)(a) and (b) of Law 3631/2008, the Court has already held that such decisions do not constitute, contrary to the decisions which formed the background to Case C-503/99 Commission v Belgium (paragraph 50), specific management decisions but decisions fundamental to the life of an undertaking (Judgment in Case C-463/00 Commission v Spain, paragraph 79). 

84 Next, the specification in Article 11(3)(b) and (c), according to which it applies to decisions in so far as they are ‘capable of jeopardizing the supply of services in sectors of strategic importance’ or they concern the ‘allocation of strategic elements of the assets of the abovementioned undertakings and of the basic networks and infrastructure necessary for the economic and social life of the country as well as its security’, may hardly be considered to be a specific list of the strategic assets concerned. 

85 Finally, even if, as the Hellenic Republic claims, Article 11(3) of Law 3631/2008 must be understood as meaning that the right to object which it provides may be exercised only to guarantee the continuity of services supplied and the operation of networks, the fact remains that, with no details of the actual circumstances in which the right to object may be exercised, the investors are not able to know when it may be applicable. 

86 Accordingly, as the Commission maintains, the circumstances in which the right to object may be exercised are potentially numerous, undetermined and indeterminable and leave the national authorities too much discretion. 

87 Consequently, it must be stated that […] the Hellenic Republic has failed to fulfill its obligations under Article 43 EC on the freedom of establishment. (CJEU in C-244/11, at paras 80 to 87, emphasis added).

In my view, this new Judgment clearly indicates that the CJEU is ready to prevent any type of ex post intervention by Member States in the adoption of decisions that can be seen as fundamental to the life of an undertaking, and that any intervention schemes based on public interests need to be predefined, specific enough and amenable to effective judicial review.

This should be taken into consideration in the redesign of regulatory schemes in some Member States (such as Spain, where some ex post intervention competences are planned to be transferred back to the sectorial Ministry and out of the current independent regulators' hands), since most generic ex post decisions may fall short of meeting the stringent criteria set by the CJEU in C-244/11 Commission v Greece. 

This would should also generate trust on the side of investors in 'strategic' companies (generally in the utilities sector) and may contribute to keep their ability to undertake long term investments (in infrastructure, R&D, etc) without fearing undue governmental intervention. In general, preservation of investors' freedom in these sectors seems to be the clear bet made by the CJEU, and this shall prevent a new wave of public intervention (which could easily result from the structural reforms that the economic crisis is triggering).