European Commission to Allow State Recapitalization of Firms Hit by COVID-19

May 13, 2020

The European Commission has revised its Temporary Framework for State Aid to support the economy during the coronavirus (COVID-19) pandemic to allow capital injections by EU member states into nonfinancial firms affected by the pandemic.

To support the economy in the current COVID-19 pandemic, the European Commission on March 19 adopted a Temporary Framework for State Aid (Temporary Framework), which specifies the measures of financial support EU member states can provide to companies in line with EU state aid rules, in order to ensure their liquidity and access to finance. The Commission amended the Temporary Framework on April 3, enabling EU member states to grant investment aid in order to accelerate research, testing, and production of COVID-19 relevant products, and operating aid in order to ease the liquidity constraints facing firms in regions particularly affected by the pandemic.

On May 8 the Commission adopted a further amendment identifying two additional temporary state aid measures, including public support in the forms of recapitalization and subordinated loans, that the Commission considers compatible under Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU) in the light of the COVID-19 pandemic. These new measures aim at ensuring that the disruption of the economy does not result in the unnecessary exit from the market of undertakings that were viable before the pandemic.

State recapitalization measures are associated with a higher risk of distorting competition; they are therefore likely to be subjected to more intense scrutiny by the Commission compared to other aid measures under the Temporary Framework. Firms interested in aid of this form should verify independently that they are eligible for it. A robust eligibility analysis can help firms map and mitigate any potential state aid risks, engage more effectively with the relevant member state, and expedite the state aid review by the Commission (where required).

Recapitalization Aid

Under the May 8 amendment, recapitalization aid can be provided only to nonfinancial firms where all of the following conditions are satisfied:

  • There is no other realistic option to ensure the continued viability of the firm in question, e.g., absent the recapitalization the firm will struggle to remain afloat.
  • The injection of capital must be limited to the minimum required to ensure the firm remains viable, and in any event it must not go beyond restoring the firm’s capital structure prior to the COVID-19 pandemic.
  • Recapitalization ought to be in the common interest, e.g., it should be provided where it helps avoid the significant loss of employment, the exit of an innovative or systemically important firm, or the risk of disruption to an important service.
  • The firm in question was not already “in difficulty” on December 31, 2019. There is a specific set of rules and case law relative to the assessment of whether a firm is “in difficulty” for state aid purposes. For instance, portfolio companies of private equity or venture capital firms where more than half of their subscribed share capital has disappeared as a result of accumulated losses could be considered as firms “in difficulty” and may thus be ineligible for state recapitalization. (Note, however, that “difficulty” is typically assessed at the level of the relevant undertaking/corporate group, not on an individual company basis. Firms interested in state recapitalization should therefore seek legal advice as to whether they or their subsidiaries and portfolio companies are firms in difficulty for state aid purposes.)

Recapitalization under the Temporary Framework can be provided through the issuance of fresh equity (e.g., new common shares) and/or debt financing instruments with a potential equity component (hybrid capital), such as profit participation rights, silent participations, and convertible secured or unsecured bonds. Recapitalization aid comes with stringent conditions and ongoing restrictions to ensure the member state’s “appropriate” remuneration, its swift exit from the firm in question, and the avoidance of potential distortions of competition:

  • The May 8 amendment includes specific rules relative to the calculation of the member state’s remuneration for injecting capital into the firm in question. With respect to listed firms, the capital injection must be done at a price that does not exceed the average share price over the 15 days preceding the request for the capital injection. The Commission recommends independent valuations for nonlisted companies.
  • The member state and the firm in question must jointly develop a strategy for the member state’s exit from the firm. If exit cannot occur within a specified period (six years for public companies, seven for private), the firm will likely need to enter into restructuring.
  • Until the member state has exited, the firm will be subject to bans on dividends and share buybacks. Restrictions on the remuneration of management, including a ban on bonus payments, will also apply.
  • Firms cannot use recapitalization aid to subsidize economic activities of integrated companies that were in economic difficulty prior to December 31, 2019.
  • Recipients of recapitalization aid may not “engage in aggressive commercial expansion financed by State aid” or “take excessive risks.” They will also be precluded from acquiring stakes of 10% or more in competing firms or firms that engage in the same line of business. In exceptional circumstances, recipients of recapitalization aid may be able to acquire larger stakes in operators upstream or downstream in their area of operation, only if the acquisition is necessary to maintain their viability, subject to prior approval by the Commission.

Member states can put in place a recapitalization scheme or individual aid measures subject to prior notification and clearance by the Commission. When approving a scheme, the Commission will request the separate notification of aid to a company above the threshold of €250 million (approx. $270 million) for individual assessment.

Subordinated Loans

The May 8 amendment also introduces the possibility for member states to provide subordinated loans to firms at favourable terms. This concerns debt instruments that are subordinated to ordinary senior creditors in case of insolvency proceedings, and complements the toolbox available to member states under the existing Temporary Framework, including to grant debt with senior ranking to firms in need.

Subordinated debt cannot be converted into equity while the company is a going concern and the member state assumes less risk. However, since such debt increases the ability of companies to take on senior debt in a manner similar to capital support, aid in the form of subordinated debt includes higher remuneration and a further limitation as to the amount compared to senior debt under the Temporary Framework. If member states wish to provide subordinated debt in amounts exceeding the thresholds specified in the Temporary Framework, as amended, all conditions for recapitalization measures set out above will apply.


Proposed recapitalization measures are expected to be subjected to more intense scrutiny by the Commission relative to other measures under the Temporary Framework. This is because recapitalizations, unlike temporary liquidity measures, tend to have a lasting impact on the financial position of the relevant firm and can therefore give rise to significant distortions of competition.

Accordingly, where the proposed recapitalization requires an individual notification to and authorization by the Commission, the applicant firm should expect a vigorous and potentially longer prenotification and state aid review process. Member states and firms in need of fresh capital will be expected to prepare a robust notification explaining why they consider that the proposed recapitalization is necessary and appropriate in the circumstances, and showing that the capital sought is limited to the minimum necessary for preserving the firm’s viability. Critically, the applicant firm should be in a position to demonstrate that it has explored—and exhausted—all other financing options, including other, less distortive, state aid measures, such as subordinated loans.

Firms should remain vigilant as to state aid risk even where their proposed recapitalization does not require a prior notification to and clearance by the Commission (e.g., where a member state injects less than €250 million (approx. $270 million) into a firm pursuant to a scheme that has been preapproved by the Commission). In such circumstances, firms should verify independently that the recapitalization is in line with EU state aid rules including the Temporary Framework, as amended.

Under EU state aid rules, a potential confirmation by an EU member state that a given financial support measure is free of state aid, or that it constitutes permissible state aid (e.g., on the basis that it complies with the conditions of a national recapitalization scheme), does not absolve the recipient company of any potential liability under EU state aid rules.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. Find resources on how to cope with the post-pandemic reality on our NOW. NORMAL. NEXT. page and our COVID-19 page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts, and download our biweekly COVID-19 Legal Issue Compendium.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Frances Murphy
Omar Shah
Joanna Christoforou
Kate Habershon
Leonidas Theodosiou

Izzet Sinan
Christina Renner

Michael Masling