Sale of Public Bodies’ Assets from a State Aid Perspective

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During Autumn, the European Commission has imposed State aid control measures under EU state aid rules against a Member State, concerning potential State aid related to the sale of public bodies’ assets. This time, Germany is under State aid review after the Commission recently opened a formal investigation process into the sale of the state-owned Nürburgring racetrack complex in the German state of Rhineland-Palatinate.

The owners of the Nürburgring racetrack complex were public companies whose assets were sold to a private operator (Capricorn) in a tender process in 2012 following insolvency. In 2013, a German motor racing association lodged a state aid complaint to the Commission on the grounds that the tender process for the racetrack complex was not open, transparent, non-discriminatory and unconditional, as required by the EU state aid rules on the sale of public bodies’ assets.

Although the Commission had previously found that the tender process for the racetrack complex was in accordance with State aid rules, in its 2021 judgment (C-647/19 P), the Court of Justice found that there were reasonable doubts about the compatibility of the tender process with State aid rules as raised by the applicant. Following this judgment, the Commission announced on 12th of September the opening of a formal investigation process. The recent investigation process again underlines the responsibility of public bodies to comply with State aid rules on the sale of public assets – a recap of the main rules is therefore in order.

The State aid aspects of the sales process

EU state aid rules apply when public money is channelled in one form or another to the economic activities of companies and when the resulting economic advantage is selective, distorts competition and affects trade between Member States. The “Comission Notice of the State aid rules 2016/C 262/01)” provides clarification on the definition of State aid, based on the case law of the Court of Justice and the Commission’s decision-making practice.

State aid rules must also be taken into account in transactions by public undertakings, as the financial advantage associated with transactions by public undertakings may, in certain circumstances, be considered to be granted by the State. According to the Notice on the notion of State aid, the relationship between the State and public undertakings is inevitably close, so there is a real risk that State aid is granted through measures taken by public undertakings in a way that is not in line with State aid rules. On the other hand, the mere fact that the measure is taken by a public undertaking is not per se sufficient to consider it imputable to the State. The Notice contains a list of indicators that may be used to establish the existence of a State measure. The list identifies as possible indicators, inter alia, the instructions given by the State institutions to the public undertaking and the guidance given by the public authorities on the management of the public undertaking.

According to the market economy operator principle followed in the application of State aid rules, transactions carried out by public bodies do not confer an economic advantage and therefore do not constitute State aid, provided that they are carried out under normal market conditions. The Notice on the notion of State aid contains evaluation methods and procedures to ensure the market conformity of public bodies’ measures in different situations, including sale of public assets. The primary way to ensure the market conformity of a sale of public assets is through a competitive, transparent, non-discriminatory and unconditional tender process.

The tender process must be as open as possible so that all interested and qualified bidders can participate in the process. The tender must be sufficiently publicised to ensure that all potential tenderers are informed. The level of disclosure depends on the characteristics of the assets being sold. The sale of assets which, due to  their high value or other characteristics, may be of interest to bidders operating on a European or international scale, must be publicised in a manner that is likely to attract such bidders. Where there is only one bid in a tender process, the process will normally not be considered sufficient to ensure a market price , unless either (i) the process includes particularly strong safeguards to ensure real and effective competition and it is not obvious that only one operator can realistically make a credible bid, or (ii) the authorities take additional steps to ensure that the result reflects the market price.

The tender process is  unconditional if the potential buyer  is generally free to acquire the assets and use them for its own purposes, irrespective of whether the buyer carries out a particular type of business activity. If there is a condition that the buyer is to assume special obligations for the benefit of the public authorities or in the general public interest, which a private seller would not have demanded — other than those arising from general domestic law or a decision of the planning authorities —, the tender cannot be considered unconditional.

The Notice on the notion of State aid further states that when public bodies sell assets, the only relevant criterion for selecting the buyer should be the highest price, also taking into account the requested contractual arrangements, for example the vendor’s sales guarantee or other post-sale commitments. Only credible and binding offers should be considered.

Use of financial advisers

Independent external financial advisers are typically used to evaluate the assets, establish the minimum selling price, and to plan the tender process for transactions involving public bodies’ assets. In such cases, it can be reasonably assumed that the sale price of the assets resulting from the tender process and the valuation conducted by financial advisors reflects market price as required by the State aid rules. Unfortunately, this is not always the case, as the Commission’s State aid decision (2020/1814) 28.6.2019 on the sale of Helsingin Bussiliikenne Oy demonstrates.

In the said decision regarding Helsingin Bussiliikenne Oy, the Commission was critical of the tender process organised by the public seller’s financial advisors and the technical details of the valuation methods of the assets  sold. According to the Commission, a sales process, whereby the seller distributed the investment memorandum to potential buyers of its own choice, cannot be compared to a tender process initiated by public announcement, since the respondents to such a call for tenders are selected unofficially, making it highly unlikely that certain potential buyers who would be willing to pay a higher price will be contacted. In the Commission’s assessment, the sales process was akin to a subjective market survey process that was not sufficiently open in its degree of publicity. The Commission further considered that the valuation memorandum prepared by the seller’s financial advisors contained errors which distorted the estimated market value of the assets sold, inter alia, because the business scenarios on which the valuation was based were overly pessimistic.

The Commission’s decision has since been annulled by judgment of the Court of Justice of 29 July 2024 (C‑697/22 P), because the Commission breached an essential procedural requirement in the formal investigation process leading to the decision. It should be noted, however, that this procedural breach was unrelated to the Commission’s assessment of the alleged shortcomings in the tender process carried out by the sellers’s financial advisers and in the methods used to evaluate the assets sold. Thus, the Commission’s decision on Helsingin Bussiliikenne Oy, together with the State aid case concerning the sale of the Nürburgring referred to above, remains a cautionary example of the State aid risks that may arise from the sale of public bodies’ assets if not enough attention is paid to the State aid law constraints of the tender process.

 

Our experts follow closely the developments of State aid rules and related case-law, and we would be happy to discuss the relevant issues further. We offer support and solutions to public sector operators in a challenging environment, in partnership with the private sector where appropriate. We act as a strategic partner for ministries, municipalities, welfare regions and publicly owned companies. We understand the legal constraints of operating in the public sector, from the rules on State aid, Public Procurement and government openness to competition law matters. We help safeguard public interests and anticipate risks in publicly funded projects.

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