EU Bans Bonuses, Curbs Takeovers for Some Covid-19 Bailouts

The European Union unveiled state-aid rules to help nations to take equity stakes in or give subordinated loans to companies hit by the Covid-19 pandemic -- but imposed a swathe of curbs to protect taxpayers.

“Support comes with strings attached, including a ban on dividends, bonus payments as well as further measures to limit distortions of competition,” EU Competition Commissioner Margrethe Vestager said in an emailed statement. “We have to uphold European values and the need for a level playing field to be able to bounce back strongly from this crisis.”

European rules aiming to prevent subsidy wars between EU countries have come under strain in recent weeks as governments sought to rescue businesses and plotted billion-euro bailouts for airlines and carmakers. EU regulators first loosened rules in March to allow more state support, approving some 1.9 trillion euros ($2.1 trillion) of aid, including guarantees for loans.

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Friday’s changes go further in paving the way for governments to recapitalize companies, potentially putting taxpayers on the hook for a company’s collapse.

But Vestager said such aid comes with limits. Recapitalizations can only be granted “if no other appropriate solution is available,” which is less strict than current terms that demand a company exhaust possibilities to seek funding on markets, the EU said.

The aid can also be given if a government deems it necessary to save a significant number of jobs or prevent the collapse of “an innovative or systemically important company” or disrupt an important service, the EU said.

Subordinated debt can also be issued by the state, but the EU said this can’t be converted into equity while the company is still “a going concern.”

Since such loans increase companies’ ability to take on senior debt in a similar way to capital support, the EU said aid will require higher remuneration.

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Companies can’t issue dividends or share buybacks until the government has fully exited the firm’s capital, the EU said. Until at least 75% of the recapitalization is redeemed, executive pay is curbed and bonus payouts are banned. Companies also can’t “in principle” buy more than a 10% stake in rivals or other companies in their industry, including customers and suppliers until 75% of the recapitalization is repaid.

Terms for paying back the aid should incentivize shareholders or owners to buy out the state. Companies will need to plan an exit strategy and will have to draft a restructuring plan if there is no sign of state exit six years after the recapitalization for a listed company or up to seven years for others.

Large companies would also have to report on what they do with the aid and their compliance with environmental and digital goals. Governments are also free to add extra conditions, including to prevent fraud, tax evasion or aggressive tax avoidance. Several countries have already pledged to shut bailouts off from companies based on an EU tax-haven blacklist that includes the Cayman Islands.

To contact the reporter on this story:
Aoife White in Brussels at awhite62@bloomberg.net

To contact the editors responsible for this story:
Anthony Aarons at aaarons@bloomberg.net

Peter Chapman, Steve Stroth

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