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).

Good news: ECJ pushes for an antiformalistic extension of the 'market economy private investor test'

In its recent Judgment of 5 June 2012 in case C-124/10 P Commission and EFTA Surveillance Authority vs Electricite de France (EDF) and others, the European Court of Justice (in Grand Chamber) has endorsed the General Court in a significant push for an extended and antiformalistic use of the 'market economy private investor principle' in State aid control procedures.

The case clearly supports the use of the 'market economy investor' test as the general standard for the material appraisal of State aid measures, regardless of the instruments used by public authorities to grant support to undertakings (be it by exercising 'pure' public powers, such as taxation, or otherwise) and contributes to the development of more homogeneous substantive standards in this area of EU Competition Law.

The case arose from the failure of the European Commission to appraise a tax-related measure granted by France to EDF under the 'market economy private investor test'. The Commission had refused to do so on the formal grounds that

(96) [...] the private investor principle can be applied only in the context of the pursuit of an economic activity, not in the context of the exercise of regulatory powers. A public authority cannot use as an argument any economic benefits it could derive as the owner of an enterprise in order to justify aid granted in a discretionary manner by virtue of the prerogatives it enjoys as the tax authority in relation to the same enterprise.

(97) While a Member State may act as a shareholder in addition to exercising its powers as a public authority, it must not combine its role as a State wielding public power with that of a shareholder. Allowing Member States to use their prerogatives as public authorities for the benefit of their investments in enterprises operating in markets that are open to competition would render the Community rules on State aid completely ineffective." (Decision 2005/145/EC of 16 December 2003 on the State aid granted by France to EDF).

Basically, the Commission opposed the possibility to conduct a global appraisal of the conversion into capital of a tax claim by the State under the 'market economy private investor test' on the basis that a private investor could never hold a tax claim against an undertaking, but only a civil or commercial claim. Therefore, the Commission contended that tax measures that directly imply a capital injection (because the taxes not levied are added to the net assets of the beneficiary company) cannot be analysed as a whole and, if appropriate, be allowed as a single transaction. But that, rather, Member States should exact taxes from undertakings in regular form, and then inject the same amount of capital as State aid (in a double circulation of capital, rather than a set-off or compensation), if they wanted to benefit from an appraisal of such capital injections under the 'market economy private investor test'.

This argument seemed extremely formalistic and, even if there could be transparency and oversight issues involved (as the Commission indicated in the appeal, but which can be remedied by less intrusive and formalistic means), the General Court dismissed the Commission's argument by clarifying that

"[...]  the purpose of the private investor test is to establish whether, despite the fact that the State has at its disposal means which are not available to the private investor, the private investor would, in the same circumstances, have taken a comparable investment decision. It follows that neither the nature of the claim, nor the fact that a private investor cannot hold a tax claim, is of any relevance." (ECJ C-124/10 P, at para. 37, emphasis added).

The ECJ dismissed the opinion of AG Mazák [who supported the Commission on the basis that it was right "to take a principled line in the contested decision, insofar as there should be a visible separation of the role of the State qua public authority from the role of the State qua shareholder"; Opinion, at para. 96], and finally endorsed the GC finding that:

"(92) [...] in view of the objectives underlying [Article 107(1) TFEU] and the private investor test, an economic advantage must – even where it has been granted through fiscal means – be assessed inter alia in the light of the private investor test, if, on conclusion of the global assessment that may be required, it appears that, notwithstanding the fact that the means used were instruments of State power, the Member State concerned conferred that advantage in its capacity as shareholder of the undertaking belonging to it.

(93) It follows that [...] the obligation [...] to verify whether capital was provided by the State in circumstances which correspond to normal market conditions exists regardless of the way in which that capital was provided by the State [...]" (ECJ C-124/10 P, emphasis added).

Moreover, and as a matter of general principle, the ECJ ruled that:

"[...] contrary to the assertions made by the Commission and the EFTA Surveillance Authority, the private investor test is not an exception which applies only if a Member State so requests, in situations characterised by all the constituent elements of State aid incompatible with the common market, as laid down in [Article 107(1) TFEU] . [...] where it is applicable, that test is among the factors which the Commission is required to take into account for the purposes of establishing the existence of such aid."  (ECJ C-124/10 P, at para. 103, emphasis added)

Even if, in this case, the Judgment is in favour of the State granting aid (in less than a fully transparent manner), it is indeed a very interesting development of EU State aid law, since it can contribute to subject to more economic criteria the granting of aid through measures falling within the core sphere of 'public powers'--which, otherwise would have remained substantially shielded from economic considerations.

In my view, this Judgment is to be welcome, and it would be interesting to see this criterion extended to other areas of EU Economic Law and, particularly, public procurement, where the control the (disguised) granting of State aid is crying for further developments of the 'market economy private [buyer] test' (as I have recently stressed in 'Public Procurement and State Aid: Reopening the Debate?', available at http://ssrn.com/abstract=2037768).