European Commission Approves First COVID-19 State Aid Scheme Within 24 Hours: Germany Announces Measures to Assist German Businesses

To help our clients navigate the coronavirus (COVID-19) crisis, Arnold & Porter has established a Coronavirus Task Force covering a wide range of issues and challenges. Subscribe to our "Coronavirus (COVID-19)" mailing list to receive our latest client Advisories and register for upcoming webinars.

Introduction

On March 13, 2020, the European Commission approved and cleared the first European State Aid scheme operated by Denmark to compensate organisers of events for loss or damage caused by cancellations of large public events due to the coronavirus (COVID-19) pandemic. This was the first State Aid measure notified by an EU Member State to the Commission in relation to the COVID-19.

In response to the outbreak of the coronavirus pandemic, the German government recently announced various measures to help German small, medium and large business, be it because of national outbreak control measures, travel restrictions or supply chain disruptions, with an unlimited amount of liquidity support provided via Germany's state-owned bank, KfW.

EU State Aid and COVID-19

Generally, a Member State has the obligation to notify any specific State aid or a State aid measure (for various beneficiaries) before putting it into effect (Art. 108(3) TFEU). Such a State aid scheme shall only enter into force after approval by the Commission.

The first State aid scheme in response to the COVID-19 crisis was now notified by Denmark and cleared by the Commission within 24 hours after receiving the notification. Usually such a decision takes weeks, months or even longer. Quick State aid decisions like that, within 24 or 48 hours, have been seen in the financial crisis as well, and the Commission is prepared to act quickly now. The Commission approved the Danish scheme and stated that it was to compensate organisers of events with either (1) more than 1,000 participants, or (2) targeted at designated risk groups, such as the elderly or vulnerable people, irrespective of the number of participants, which had to be cancelled or postponed due to the COVID-19 outbreak. Under this Danish aid scheme, operators would be entitled to be compensated by Denmark for the losses suffered because of the cancellation or postponement of events, for which, for example, tickets were already sold.

COVID-19 Crisis as a Natural Disaster or Exceptional Occurrence

The legal basis for the Commission's decision was Art. 107(2)(b) TFEU. This rule provides that "aid to make good the damage caused by natural disasters or exceptional occurrences" are automatically "compatible with the internal market". In contrast to most other forms of State aid which require approval, a limited number of State aid is automatically lawful and this is one of them.

Neither the TFEU, nor other Union legislation contains a precise definition of the notion of "exceptional occurrence". Since they constitute exceptions to the general prohibition of State aid within the internal market (Art. 107(1) TFEU), the Commission and the courts have consistently held that the notions of "natural disaster" and "exceptional occurrence" referred to in Art. 107(2)(b) TFEU must be interpreted restrictively. In view of the reasons explained in the decision, the COVID-19 crisis qualifies as an exceptional occurrence as it was not foreseeable, as it clearly distinguishes itself from ordinary events by its character and by its effects on the affected undertakings and the economy in general and therefore lays outside of the normal functioning of the market. Therefore, COVID-19 can be considered as an exceptional occurrence within the meaning of Art. 107(2)(b) TFEU. As a result, interventions by the Member States to compensate for the damages linked to the COVID-19 outbreak are justified.

However, this decision does not mean that Member States have complete freedom—any aid provided by a Member State must be fully compatible with the EU State aid rules. In order to be compatible with Art. 107(2)(b) TFEU, State aid must be proportional to the damage caused by the exceptional occurrence. It must not result in overcompensation of damage, and it should only make good the damage caused by the exceptional occurrence, and there must be no over-compensation of beneficiaries.

State Aid Available in Germany

On March 13, 2020, the German government announced various measures to help German small, medium and large businesses. In a first step, existing liquidity assistance programmes shall be expanded to make it easier for companies to access cheap loans. This scheme shall mobilise a large volume of liquidity-enhancing loans from commercial banks. To this end, the German government established instruments complementing loans offered by private banks will be extended and made available to a greater number of companies:

• Conditions for the KfW-Unternehmerkredit (business loan for existing companies) and the ERP-Gründerkredit-Universell (start-up loan for companies that are less than five years old) will be loosened by raising the level of risk assumptions (indemnity) for operating loans and extending these instruments to large enterprises with a turnover of up to €2 billion (previously, the limit was €500 million). Higher risk assumptions of up to 80% for operating loans of up to €200 million will increase banks' willingness to extend credit.
• In the case of the KfW-Kredit für Wachstum (loan for growth), the programme aimed at larger companies, the current turnover threshold of €2 billion will be raised to €5 billion. In the future, these loans will take the form of syndicated loans and will not be restricted to projects in one particular field (in the past, only innovation and digitalisation projects were eligible). Risk assumption will be increased to up to 70% (from 50%). This will improve larger companies' in Germany access to syndicated loans.
• For large companies with a turnover of more than €5 billion, support will continue to be provided on a case-by-case basis.

For German Guarantee Banks (Bürgschaftsbanken), the guarantee limit will be doubled, to €2.5 million. The German Bund will increase its risk share in guarantee banks by 10% to make it easier to shoulder risks. The upper limit of 35% of operating resources in guarantee banks' total exposure will be increased to 50%. To accelerate liquidity provision, the Bund is giving guarantee banks the freedom to make guarantee decisions up to €250,000 independently and within a period of three days.

The large guarantee programme (parallel guarantees from the Bund and the Länder), which was previously limited to companies in structurally weak German regions, will be opened up to companies in other regions, as well. In this programme, the Bund covers operating loans and investments with a surety requirement upwards of €50 million and a guarantee rate of up to 80%.

All these measures are covered by existing EU State aid rules already.

• The German government will now launch additional special KfW programmes for companies that have temporarily got into serious financial difficulties because of the COVID-19 crisis and therefore do not have easy access to existing support programmes. This will be achieved by increasing the KfW's risk tolerance in a way that is appropriate given the crisis. Risk assumptions for investment funds (indemnity) will be improved significantly and will total up to 80% in the case of operating resources and up to 90% in the case of investments. In addition, consortium structures will be offered for these companies.

These special programmes are now being submitted to the European Commission, and approval is expected shortly.

Outlook

European Commission President Ursula von der Leyen already said, that in light of the coronavirus crisis, she will ensure that EU State aid rules are applied in a flexible way. The EU and Eurogroup finance ministers will advocate the necessary flexibility on the part of the European Commission. Ursula von der Leyen assured European business and citizens that the Commission is working to "make sure that State aid can flow to companies that need it".

In a further statement, Executive Vice President of the Commission Margrethe Vestager set out the Commission's strategy for tackling the interplay between the State aid rules and Member States' need to react quickly to the COVID-19 crisis. Margrethe Vestager recognised that Governments may need to give State aid on a much larger scale, and that EU State Aid rules allow for wide-ranging support in EU Member States that are facing a serious disturbance to their economies.

On March 17, 2020, the European Commission proposed to the Member States the adoption of a Temporary Framework allowing for inter alia (1) schemes enabling direct grants (or tax advantages) up to €500,000 to a company, (2) subsidised State guarantees on bank loans, and (3) public and private loans with subsidised interest rates. The Temporary Framework is supposed to be in place very shortly.

The German government will put its state-owned bank, KfW, in a position to fund these programmes by making the necessary guarantee volumes available. The German federal budget includes a guarantee framework of approximately €460 billion. If necessary, this can be increased by up to €93 billion on short notice.

Companies hit by the COVID-19 crisis may approach their respective house banks or governments in order to rely on support in line with the above guidance. We assume even more restrictive measures to contain the virus are likely to continue to be in place for some time and may be intensified. The proposals mentioned above may not be sufficient and a more substantive package could be required to adequately address the consequences.

For more information on these topics, please contact the author or any member of Arnold & Porter's Coronavirus Task Force.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.