Back on April 1, we predicted that with European banks suspending dividends across the board, “if shareholders are impacted, why not also the biggest source of bank cash: banker bonuses.” Today, we got partial confirmation of this when the FT reported that companies given equity injections by EU member states as a result of the coronavirus will not be allowed to pay out dividends, buy back shares or provide bonuses or similar remuneration.
The terms and conditions of corporate bailouts emerged after the FT reported last week that the European Commission was exploring a further relaxation of the bloc’s rules on state aid to help ailing companies as a result of the pandemic.
Similar to the US, although in even stricter terms, bailed-out European businesses are also forbidden to take “excessive risks” or even engage in “aggressive commercial expansion”, said a document setting out amendments to the recent relaxation of state aid rules. They will not be able to buy up rivals or other operators in the same sector while still repaying the state.
The constraints are aimed at preventing “undue distortions of competition” and mirror similar restraints imposed on the banking sector at the height of the global financial crisis more than a decade ago.
Additionally, European businesses that receive an equity injection of more than 20% from a member state will also be obliged to set up a clear exit strategy from that support in the aftermath of the pandemic, although it does not appear that European taxpayers will be granted a stake and instead the only limitation will be on what management should not do, which in light of the current recession where everyone is scrambling to conserve cash, is likely redundant.
The EU is also setting out clear timelines to give companies an incentive to pay back the aid. If by 31 December 2024 the state’s shareholding has not been reduced to below 15 per cent, companies will be obliged to present a restructuring plan to the commission for approval.
“This is more flexible/lenient than the financial crisis principles where the requirement was generally to submit a restructuring plan within 6 months of the recapitalisation,” the document states.
Contrary to the terms established during the financial crisis, Brussels is also encouraging incentives for companies to exit the schemes as soon as possible. It calls for member states to be paid back as close as possible to “market terms” in order to avoid “potential competition distortion caused by the state intervention”.
“The member state shall put a mechanism in place to incentivise redemption before 1 January 2023,” the document adds.
The commission is also proposing that EU countries consider the potential sale of business units for those companies in receipt of large amounts of aid and with considerable market share in a certain sector.
“The commission is expected to ask member states to attach conditions to recapitalisations in order to preserve competition,” explains Natura Gracia, a partner in law firm Linklaters in London. “It shows that the EU has learnt from past crises.”
The constraints on bailed-out companies emerged as regulators rushed to implement a so-called temporary framework that has seen state aid rules relaxed to help companies through the pandemic. This week, competition commissioner Margrethe Vestager encouraged European countries to build stakes in companies that might be vulnerable to unfair takeover by state-backed foreign entities.
It wasn’t immediately clear if this means that banks, all of which are implicitly receiving a bailout courtesy of the ECB’s various QE programs, will see an indefinite pause in bonus payouts or if the banks are exempt and the only targets of this regulation are ordinary corporations and the continent’s small and medium businesses.