Introduction
The prohibition of State aid in Article 107(1) TFEU applies both to direct and indirect beneficiaries. The direct beneficiary is the formal recipient of the aid. However, the formal recipient may only act as an intermediary through which aid flows to third parties or may in fact be required by the aid measure to pass on some or most benefits to designated third parties. The Commission must consider whether any undertaking benefits indirectly from a State aid measure and must assess the compatibility of the aid for both the direct and the indirect beneficiaries. The determination of whether an aid measure also confers an advantage to undertakings other than the formal recipient is especially important in the case of group of companies.
On 20 December 2023, the General Court delivered two judgments annulling two Commission separate decisions because the Commission failed to examine thoroughly the links between related companies. Ryanair and Air Malta sought the annulment of those Commission decisions that had authorised State aid to Air France in the context of the measures that France had adopted to combat the negative effects of covid-19. At issue in the first case, T-216/21, Ryanair & Malta Air v European Commission,1 was a state guarantee for a bank loan and a subordinated state loan. The second case, T-494/21, Ryanair & Malta Air v European Commission, concerned recapitalisation of Air France.2
This article focuses on the first case which is against Commission decision on measure SA.57082, but also reviews the main points of the second case which is against Commission decision on measure SA.59913.
State guarantee & state loan [SA.57082]
Air France is part of the Air France-KLM group which is fully owned by the Air France-KLM holding. France and the Netherlands own 14% each of the capital of the latter. KLM is also fully owned by the Air France-KLM holding.
In May 2020, the Commission authorised a French measure to grant a state guarantee covering 90% of a loan of EUR 4 billion by a consortium of banks and a shareholder loan of up to EUR 3 billion. The measures was approved on the basis of Temporary Framework of March 2020.
The Commission considered that the beneficiaries were Air France and the subsidiaries controlled by that company. Neither the Air France-KLM holding, nor its other subsidiaries, including KLM and the companies controlled by that company, were considered to be beneficiaries of that measure.
It should be noted at this stage that the Air France-KLM group also benefitted from other State aid. For example, in July 2020, the Commission authorised aid granted by the Netherlands also in the form of a state guarantee and a state loan to KLM [SA.57116].
In April 2021, the Commission authorised a recapitalisation of Air France and of the Air France-KLM holding company totalling EUR 4 billion in the form of a capital increase of up to EUR 1 billion and a conversion of the earlier shareholder loan into equity participation [SA.59913].
However, in May 2021, the General Court annulled Commission decision on measure SA.57116 [T-643/20, Ryanair v European Commission]. The reason was that the Commission had not justified why it considered that the only beneficiary was KLM and not other companies in the group.
In response, the Commission issued a corrigendum in July 2021 correcting the decision that was found defective by the General Court. In particular, it explained more thoroughly and on the basis of additional evidence why it considered that Air France was the sole beneficiary of the aid.
That is, in the present case, Ryanair and Air Malta challenged the Commission decision of May 2020 on Air France, which was adopted before the judgment of the General Court of May 2021, largely on the same grounds as they did with respect to the decision on KLM.
Who were the beneficiaries?
Ryanair and Air Malta submitted that the Commission erred in law and made a manifest error of assessment in finding that the beneficiary of the measure at issue was only Air France. They claimed that the Air France-KLM holding company and KLM were also indirect beneficiaries.
The General Court noted that the issue at hand was the determination of the beneficiary of an aid measure in the context of a group of companies.
Then, it explained that “(60) several separate legal entities may be considered to form one economic unit for the purposes of the application of the rules on State aid. In that field, the
question whether several legally separate entities form an economic unit arises, in particular, where the beneficiary of the aid needs to be identified”.
“(61) Among the factors taken into account by the case-law in order to determine the presence or absence of an economic unit in the field of State aid are, inter alia: the undertaking concerned being part of a group of companies which is directly or indirectly controlled by one of those companies, the pursuit of identical or parallel economic activities, and the companies concerned having no economic autonomy …, the formation of a single group controlled by one entity, despite the constitution of new companies each having a separate legal personality …, the possibility, for an entity having a controlling shareholding in another company, to exercise functions relating to control, direction and financial support in relation to that company which go beyond the simple placing of capital by an investor, and the existence of organic, functional and economic links between that entity and that company …, and the existence of relevant contractual clauses”.
“(62) Furthermore, the type of aid measure granted and the context in which that measure was granted may, depending on the case, also constitute relevant factors for determining the presence or absence of an economic unit in the field of State aid.”
“(63) Furthermore, the Commission clarified its interpretation of the concept of ‘undertaking’ in its Notice on the notion of State aid … That notice, while not binding on the Court, may nevertheless serve as a useful source of inspiration”.
“(64) The Commission recognised in paragraph 11 of the Notice on the notion of State aid that several separate legal entities may be considered to form one economic unit for the purposes of the application of State aid rules. To that end, according to that paragraph, it is necessary to take into consideration the existence of a controlling share and the existence of other functional, economic and organic links.”
“(68) In the light of the criteria identified in the case-law …, it is appropriate to examine consecutively the capital, organic, functional and economic links between the Air France-KLM holding, Air France and KLM and their respective subsidiaries, the agreements on the basis of which the measure at issue was granted, as well as the type of aid measure granted and the context of that measure.”
The capital and organic links between the Air France-KLM holding, Air France and KLM
“(69) As regards the capital links between the various entities belonging to the Air France-KLM group, it should be noted, …, that Air France is 100% owned by the Air France-KLM holding and that the latter holds 93.84% of the share capital, 99.7% of the economic rights and 49% of the voting rights in KLM.”
“(71) Although [capital links are] an initial relevant factor in the examination of whether those entities form an economic unit, the case-law on State aid also requires the Court to verify whether the parent company actually exercises control by involving itself directly or indirectly in the management of its subsidiaries and thus takes part in the economic activity carried on by the controlled undertaking”.
“(73) In the present case, … the Air France-KLM holding has a power of control over Air France and KLM by virtue of the veto rights which it enjoys over their business plans and budgets, on the one hand, and over the remuneration, appointment and dismissal of their managers, including the appointment and dismissal of the members of their boards of directors, on the other. Thus, that holding company must approve decisions concerning, inter alia, the strategic options, budget and investment plan of the ‘Air France-KLM group, including KLM’ before they are adopted or implemented.”
“(75) As regards the organic links between the Air France-KLM holding, Air France and KLM, the applicants refer in particular to the 2019 Universal Registration Document for that holding company … the universal registration document is a document made available to the public describing the organisation, business, financial position, earnings and prospects, governance and shareholding structure of the issuer in question.”
“(76) It is apparent from the 2019 Universal Registration Document that there are, at the Air France-KLM group level, a number of mixed bodies, composed of high-level representatives of the Air France-KLM holding, Air France and KLM, responsible for monitoring and coordinating certain important decisions to be taken within that group.”
“(81) It follows that the capital and organic links within the Air France-KLM group indicate that the Air France-KLM holding actually exercises control by involving itself directly or indirectly in the management of Air France and KLM and thus takes part in the economic activity carried on by them. It also follows that there is, at the level of that group, a centralised decision-making procedure and a certain degree of coordination, carried out through joint bodies bringing together high-level representatives of the Air France-KLM holding, Air France and KLM, at least as regards the way in which certain important decisions are taken.”
The functional links between the Air France-KLM holding, Air France and KLM
“(85) Air France and KLM, under the aegis of the Air France-KLM holding, coordinated their activities in the ‘area of sales and price and revenue management on the basis of the strategy determined at the level of [the Air France-KLM holding]’, with the assistance of Air France and KLM employees seconded to that holding company for that purpose.”
“(88) The Air France-KLM holding also performs financial functions as required by Air France and KLM. First, it provides, inter alia, budgetary instructions to its subsidiaries. Secondly, it may, ‘occasionally’ …, raise capital on the financial (debt or equity) markets for the benefit of its subsidiaries depending on their individual requirements. As regards the issuing of shares or instruments giving access to capital, those operations are also carried out at the level of that holding company, whereas debts within the Air France-KLM group are ‘mainly’ incurred directly by Air France and KLM.”
“(92) Significant or strategic decisions on financing, investment and fleet are coordinated, or even approved, by the Air France-KLM holding.”
“(102) Accordingly, the functional links between the Air France-KLM holding, Air France and KLM constitute a further factor indicating that those entities form a single economic unit for the purposes of the application of the rules on State aid.”
The economic links between the Air France-KLM holding, Air France and KLM
“(105) The fact that the Air France-KLM holding generates its revenue solely from its subsidiaries demonstrates that there is a degree of economic interdependence between that holding company and its subsidiaries. This is supported in particular by the fact that Air France and KLM are trying to achieve synergies by coordinating their respective activities under the aegis of the Air France-KLM holding, in particular in the area of sales and price and revenue management …, and that that holding company is involved in the financing of its subsidiaries in a coordinated manner”.
“(106) The Air France-KLM holding acts in the interests of those subsidiaries by raising funds on the financial markets to meet the needs of those subsidiaries. That fact shows that the holding company negotiates the terms of financing on the financial markets on the basis of the financial position of the Air France-KLM group as a whole. It is therefore by virtue of the Air France-KLM holding that synergies are achieved within that group.”
“(107) There are cost-sharing agreements between Air France and KLM and activities carried out collectively by Air France and KLM and their subsidiaries, confirms that there is a degree of economic integration and cooperation between them.”
“(109) It should be borne in mind that the grant of the measure at issue was justified in particular by the fact that it was impossible for Air France to obtain financing on the debt and capital markets under acceptable financial conditions and at sufficient volumes, and that the objective of that measure was to avoid an immediate threat to the continuity of Air France’s business … In those circumstances, the advantage of that measure is precisely the provision of significant amounts of liquidity which would not have been available under market conditions. Thus, such a measure would have the effect of strengthening the financial position of the Air France-KLM group as a whole, inasmuch as it avoids the risk of default by one of its main subsidiaries, namely Air France, and thus reassures investors and the creditors of the companies in that group, it being specified, moreover, that the shareholder loan was subordinate to unsecured and non-subordinated bank or bond debt … In addition, in view of the financial role of the Air France-KLM holding within that group, that holding company could – where appropriate and in the interest of and to meet the needs of its subsidiaries – obtain financing on the market which, in the absence of the aid, would have been inaccessible to it or would have been accessible only on less favourable terms.”
“(111) Accordingly, the economic links between the Air France-KLM holding, Air France and KLM constitute a third factor indicating that those entities form a single economic unit for the purposes of the application of the rules on State aid.”
The agreements on the basis of which the measure at issue was granted
“(116) The measure at issue is granted on the basis of agreements concluded between, on the one hand, a banking pool and the State respectively and, on the other hand, the Air France-KLM holding. Thus, only that holding company – and not Air France – assumed rights and obligations vis-à-vis its contractual partners.”
“(125) Several conditions for the granting of the measure at issue, relating in particular to its term and remuneration, are expressly subject to the decision of the Air France-KLM holding.”
“(128) [The] guarantee, which forms an integral part of the measure at issue, is contractually to the benefit only of the Air France-KLM holding.”
“(129) The measure at issue is intended to provide the ‘group’ with the necessary financing to meet its needs resulting from the COVID-19 crisis.”
“(130) The agreements at issue prohibit the transfer or use of funds ‘for the benefit of KLM’, without mentioning that such a prohibition also applies to the Air France-KLM holding.”
“(132) It is common ground that the Air France-KLM holding retains part of the funds deriving from the measure at issue.”
“(136) In the light of the foregoing, it must be concluded that the contractual clauses cited in the contested decision do not support the conclusion that the sole beneficiaries of the measure at issue are Air France and its subsidiaries, to the exclusion of the Air France-KLM holding and KLM and the subsidiaries controlled by them.”
The type of aid measure granted and the context in which it was granted
“(144) As regards the type of aid measure granted and the context in which it was granted, it should be noted, … that, … the Commission stated that the shareholder loan could, in the long term, be incorporated into the capital of the ‘Air France-KLM group’ in a separate transaction decided on by the ‘Air France-KLM group’ at a later date.”
“(147) There was a chronological, structural and economic link between the measure at issue and the measure forming the subject matter of the Air France-KLM and Air France decision, of which the Commission was fully aware. Thus, that decision constituted a relevant contextual factor which the Commission had to take into account for the purpose of determining the beneficiary of that measure. In spite of this, the Commission did not take it into account in the contested decision.”
“(148) Nor did the Commission explain, in the contested decision, why the beneficiaries were determined differently in the contested decision and the Air France-KLM and Air France decision, even though the financing in question came, in both cases, from the shareholder loan, albeit in different forms.”
“(149) Accordingly, in the particular circumstances of the present case, …, it was for the Commission to take into account, for the purpose of determining the beneficiary of the measure at issue, the type of aid measure granted and the context in which it was granted.”
The difference between indirect advantage and secondary economic effects
The Commission argued that the measure at issue had, at most, only mere secondary economic effects in respect of the Air France-KLM holding and KLM. According to paragraph 116 of the Commission’s Notice on the Notion of Aid, all State aid has secondary effects. But, it does not follow that secondary effects constitute indirect advantages. The General Court did refer to that paragraph in its judgment.
But, first, the General Court, recalled that “(153) an undertaking receiving an indirect advantage must be regarded as a beneficiary of the aid. An advantage directly granted to certain natural or legal persons may constitute an indirect advantage and, therefore, State aid for other legal persons that are undertakings”.
“(155) Paragraph 116 of the Notice on the notion of State aid further states that indirect advantages should be distinguished from mere secondary economic effects that are inherent in almost all State aid measures. For that purpose, according to that paragraph, the foreseeable effects of the measure should be examined from an ex ante point of view. Thus, an indirect advantage is present if the measure is designed in such a way as to channel its secondary effects ‘towards identifiable undertakings or groups of undertakings.’ Footnote 181 to that notice explains that, by contrast, a mere secondary economic effect in the form of increased output, which does not amount to indirect aid, can be found where the aid is simply channelled through an undertaking, for example a financial intermediary, which passes it on in full to the aid beneficiary.”
“(156) In the present case, … the role of the Air France-KLM holding is not limited to that of a ‘mere vehicle for transferring the advantage to the beneficiary’ or to a ‘financial intermediary’ for the purposes of paragraphs 115 and 116 of the Notice on the notion of State aid. That holding company itself retains, in legal terms, the State guarantee and controls several conditions of the measure at issue, enabling it to tailor it to its own interests and to those of the Air France-KLM group as a whole. Thus, the Commission’s argument that that holding company and KLM benefit only from mere secondary economic effects that are inherent in any State aid must be rejected.”
“(157) Similarly, the foreseeable effects of the measure at issue from an ex ante perspective suggest, in view of the type of aid measure granted and the context in which it was granted, consisting, in essence, of a financing solution, that that financing solution was likely to benefit the Air France-KLM group as a whole, by improving its overall financial position, which indicates the existence, at the very least, of an indirect advantage in favour of ‘[an] identifiable [group] of undertakings’ for the purposes of paragraph 116 of the Notice on the notion of State aid.”
“(158) That measure would have the foreseeable ex ante effects of (i) improving the financial situation of that holding company – which is a party to the agreements at issue and has significant contractual rights and obligations in that capacity – and thus of the group as a whole, and (ii) ensuring the financial stability – including in the eyes of the financial markets – of that group as a whole, including KLM.”
“(159) Furthermore, …, in the absence of the measure at issue, the immediate threat to the continuity of Air France’s activities, identified in the contested decision, could have spread to the Air France-KLM group as a whole, given that Air France is one of the main subsidiaries of that group, generating a significant portion of its revenue.”
Conclusion on case T-216/21
“(163) In the light of all of the foregoing, it must be held that the Commission committed a manifest error of assessment by considering that the beneficiaries of the measure at issue were Air France and its subsidiaries, to the exclusion of the Air France-KLM holding and its other subsidiaries, including KLM and KLM’s subsidiaries, and, consequently, the first plea in law must be upheld.”
“(164) Article 107(3)(b) TFEU requires not only that the Member State concerned is indeed faced with a serious disturbance in its economy, but also that the aid measures adopted to remedy that disturbance are, first, necessary for that purpose and, secondly, appropriate and proportionate for achieving that objective.”
“(166) Thus, the examination of the necessity and proportionality of the aid, …, presupposes that the beneficiary of the aid has been identified beforehand. The incorrect or incomplete identification of the beneficiary of an aid measure is likely to have an impact on the entire analysis of the compatibility of that measure with the internal market.”
Therefore, the General Court annulled the Commission decision on SA.57082.
Recapitalisation of Air France: T-494/21, Ryanair & Malta Air v European Commission [SA.59913]
Ryanair and Air Malta advanced largely the same arguments as in the case reviewed above. That is, the recapitalisation of Air France benefitted other companies in the group. Therefore, the General Court, in paragraphs 71-136 of the judgment, also examined the links between Air France and the other related companies. It found that there were all closely linked. Next, in paragraphs 137-146, it examined whether KLM could also receive an indirect benefit from the recapitalisation. It concluded that it could. It then proceeded to annul Commission decision on measure SA.59913 on the grounds that the aid was not compatible with Article 107(3)(b) TFEU because it had not been verified that the indirect aid in favour of KLM was necessary and proportional.
Conclusion
The findings of the General Court in these two judgments allow us to formulate the following questions that shed light on the presence of indirect aid beneficiaries in the case of company groups.
Six criteria for determining the presence of indirect beneficiaries:
1. Capital links: Is the aid recipient owned by another company that can exercise a controlling interest?
2. Organic links: Are related companies involved in the decision-making bodies or procedures of the aid recipient or are there joint decision-making bodies?
3. Functional links: Does the aid recipient cooperate or coordinate with other undertakings in its commercial or financial operations?
4. Economic links: Do the aid recipient and other undertakings benefit from group operations or do they raise finance jointly or do they share sources of revenue or do they share costs?
5. Links through agreements: Does the aid enable the implementation of agreements that may also benefit companies other than the aid recipient?
6. Context of the aid measure: Do companies in the same group receive other State aid?
