In context

Going national: is government stakebuilding the new normal?

April 24, 2020
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In context

The European Commission is calling on EU member states to take measures to protect EU businesses from hostile takeovers by foreign investors or states (such as China, for example). According to Executive Vice President Margrethe Vestager, member states should use all options available to prevent situations where strategic EU businesses become vulnerable to opportunistic foreign investors or states. Vestager also suggested that of the many options, members states could also consider stakebuilding for companies that are especially susceptible to hostile takeovers. Will nationalised companies, whether partially or entirely, become the new normal? Or will they be privatised again as has been done in the past under EU-law? In the latter case, any stakebuilding by member states to address short-term concerns, should include a clear exit strategy in the long term.

Although Vestager’s call for action may be justified in these exceptional times, with companies severely impacted by the COVID-19 crisis, where will that action lead us in the long term? If member states pursue the option of stakebuilding to counter any real or perceived threat to businesses considered essential to their economy, will they retain their shareholdings or will they sell their stakes once the dust is settled after the COVID-19 crisis? While the EU normally maintains a neutral stance when it comes to “the system of property ownership”, there have many been occasions – and reasons – over the last few decades where it has pushed member states towards privatisation.

 

State aid

During the financial crisis of 2007-2008, many banks were nationalised. The required recapitalisation of those banks often, in reality, consisted of state aid. As a general rule, the Commission prohibited those state-owned banks from M&A activity as long as they were publicly owned (as in the Kommunalkredit Austria case or the ABN Amro case). And to obtain approval of the state aid, the member state also had to commit to privatisation, as in the SNS Reaal case. Privatisation could take place in two ways. First, as in the Kommunalkredit Austria case, member states could opt to sell parts of a bank through an open and transparent tender process. Second, member states could decide to publicly list the bank on a stock exchange, as in the Banco Mare Nostrum case.

 

Economic reforms to lower debt-to-GDP ratio

During the financial crisis, several member states received aid to support their economy. As a condition to the aid, they had to decrease their debt-to-GDP ratio. To do this, state-owned enterprises were sold to private parties, allowing the revenue debt to be paid off. This was often an obligation imposed on those member states. Italy, for example, had “to reduce the number of publicly-owned enterprises” under the 2017 Stability Programme. The same held true for Greece, which established the Hellenic Republic Asset Development Fund to sell state-owned enterprises. As a result, it sold most ports to China, which seems in contrast to Vestager’s aim to protect EU businesses and infrastructure from non-EU takeovers.

 

Golden shares and the internal market

Over several decades, the European Commission has pursued a clear policy of abolishing minority shareholdings in private companies where special rights are held by member states. Often, these golden shares were what was left of a privatisation process where the member states wanted to maintain their grip over privatised state companies. According to the Commission, such stakeholdings were considered to have a negative impact on the creation of a true single market in the EU. To that end, it successfully initiated infringement procedures against several member states, except in a case against Belgium, where the European Court of Justice decided the Belgian measure was justified “by the objective of guaranteeing energy supplies in the event of a crisis”. On all other occasions, the court concurred with the Commission that this types of construction was in breach of EU law, by impacting free movement of capital and freedom of establishment.

 

Government stakebuilding post-COVID 19?

The Commission’s call on member states to consider stakebuilding to protect the European economy clearly deviates from its previous policy. It seems to highlight the significant concerns voiced in Brussels that non-EU governments or investors will use the current crisis to their advantage. The crisis undoubtedly presents exceptional challenges to businesses: any measures that protect them from opportunistic investors or from foreign governments pursuing a politically motivated agenda, should be seriously considered. Will those measures be here only for the short term or are they here to stay? Looking back at the financial crisis, privatisation might be necessary under state aid rules or because economic reforms are needed to decrease debt-to-GDP ratio. Member states addressing short-term concerns by stakebuilding, might also consider a clear exit strategy in the long term, including screening of potential non-EU investors under the Foreign Direct Investment (FDI) Screening Regulation and additional national measures. If not, member states and companies alike may be left with fewer options than expected.

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