On 21 May 2010, the EU’s General Court ruled that statements made by the French Minister of the Economy in July 2002 to the French press, pledging financial support from the French state to struggling public company France Telecom (FT), and the government’s subsequent offer of a €9m shareholder loan to the company, did not constitute illegal state aid. The judgment overturns a European Commission decision from August 2004, which held that the loan the French government offered FT six months after the Minister’s initial public statements, was illegal state aid. The Commission and French operator Bouygues Telecom challenged the General Court’s ruling by lodging an appeal at the European Court of Justice (ECJ) in August 2010.
Background
At the end of 2001, FT, in which the French state had a 56.4% stake at the time, was in a dire financial situation, with a net debt of €63.5bn. This situation further deteriorated over the first six months of 2002, which was reflected by several downgrades in FT’s credit ratings over this period. By July 2002, FT’s debt had increased to €69.7bn. There was growing concern that FT would not be in a position to meet its obligation to pay €48.9bn to creditors (due for repayment between 2003 and 2005). A further downgrading of FT’s credit rating to the level just above a junk bond on 24 June 2002, fuelled concerns that FT would not be capable of obtaining the necessary capital to finance its debts on the open market.
Reacting to this situation, the Minister, Francis Mer, promised in an interview published in the French daily newspaper Les Echos on 12 July 2002 that ‘were FT, to encounter difficulties… which is not the case today’, the French state would ‘act as a prudent investor’, and take ‘appropriate measures’ and ‘necessary decisions in order to overcome them’. The Minister’s statement was followed up by two similar public announcements by the French authorities in September and October 2002, by which the government essentially pledged its continuing financial support to FT.
In response to these promises, the credit agencies maintained the pre-existing credit ratings instead of downgrading the rating to a junk bond. On 4 December 2002 the French government announced that it planned to make a shareholder loan to FT by opening a credit line of up to €9m and sent the proposed loan documents to FT later that month. However, FT did not take up the loan as it had been able to access the necessary capital on the open market to secure the refinancing. The government notified its proposal for a shareholder loan to the Commission under the state aid rules. One month later the mobile operator Bouygues submitted a complaint to the Commission, alleging that both the announcement of the loan offer and the government’s statements pledging financial support constituted illegal state aid.
Commission decision
In 2004 the Commission held that the shareholder loan granted in December 2002 constituted illegal state aid, when placed in the context of the government’s prior public statements. In the Commission’s view, the public statements of July to October 2002, which were an expression of the government’s intentions to resolve FT’s financial difficulties, could not be disassociated from the shareholder loan offer, which the Commission considered to be simply the materialisation of these intentions. Despite this global analysis of the government’s actions, the Commission considered that only the December 2002 loan offer constituted state aid.
According to the Commission, the previous statements clearly conferred an advantage on FT, which is one of the constitutive elements of state aid, by affecting the market operators’ perception of FT’s financial situation. However, the statements had not in themselves involved a transfer of state resources, which is another condition for a state aid finding. The Commission considered that the arguments put forward by the parties that the statements were either equivalent to a state guarantee or put the state’s reputation on the line, thereby putting state resources in jeopardy either by making the state liable to investors or by increasing the cost of future state transactions, were ‘innovative’ and ‘probably not without foundation’. However, the Commission decided to stick with a ‘more traditional approach’ and focus its analysis on the December measures.
In the Commission’s view, the December measures conferred a clear advantage on FT. Even though the shareholder loan was never executed by FT, the appearance of the loan by the government’s announcement of the credit line meant that the market considered FT’s financial position to be more secure, which allowed FT to increase its means of financing and may have influenced its borrowing terms.
The Commission also considered that this advantage involved a potential transfer of state resources (as an additional burden on the state’s resources was created by a combination of the announcement of the loan), the impression given to the market that the loan had actually been provided, and by the dispatch to FT of the signed loan contract. This conclusion was not altered by the fact that FT did not take up the loan, as it could have signed the agreement at any time, which would have given it the right to obtain €9m immediately. For these purposes the state was required to keep this money at FT’s disposal, involving an additional burden on state resources.
General Court Judgment
The General Court considered that, when taken together, the government’s public statements of support and its announcement of the shareholder loan offer in December conferred a financial advantage on FT. These statements had a decisive influence on the credit ratings agencies’ decision to maintain FT’s credit rating, which was instrumental in enabling FT to refinance on more favourable terms. However, the Court considered that the financial advantage from the public statements did not entail any transfer of state resources. The open, imprecise and conditional nature of the statements on the nature, scope and the conditions of potential state intervention precluded them from being considered equivalent to a state guarantee or an irrevocable commitment to provide specific financial assistance to FT.
The first time the government clearly specified the scope of the financial assistance, thus potentially engaging state resources, was in the announcement of the €9bn credit line in December. However, the Commission had failed to demonstrate that the loan announcement in itself entailed a transfer of state resources and the shareholder offer did not constitute an advantage distinguishable from the government’s previous statements. The December announcement and subsequent loan offer represented a break in the series of events rather than a materialisation of the government’s earlier statements, since the Commission had failed to prove that the French state had considered granting specific financial assistance as early as July 2002. The Commission had not managed to establish a link between a possible commitment of state resources in December and the advantages granted by the previous statements. The Court therefore considered that there was no state aid and annulled the Commission’s decision.
Comment
This judgment confirms that the EU’s General Court considers that government statements promising to bail out struggling state-owned telecoms (and other) companies will not be considered state aid if such promises are vague enough to fail to potentially engage state resources, even if such statements confer an advantage on the company by allowing them to have access to refinancing under better conditions on the open market that would be otherwise available. If the ECJ confirms the General Court’s ruling on appeal, this judgment could potentially encourage other EU governments to make similar promises to secure financing for companies hard hit by the financial crisis under better market conditions, safe in the knowledge that they will escape scrutiny by the Commission.