European Court of Justice clarifies the MEO principle in two of its latest judgements

Last month the European Court of Justice (“ECJ”) issued two significant judgments clarifying certain aspects of the applicability and scope of the market economy operator principle (“MEO principle”), which is one of the central pillars to assess whether a state measure constitutes State aid or not.

The SNCF judgement

The case of SNCF Mobilités v Commission (C-127/16) concerned France’s obligation to recover State aid granted to SNCF. The ECJ dismissed SNCF’s appeal and upheld the previous judgement of the General Court (“GC”). The GC had ruled that France had granted around EUR 640 million of incompatible State aid to the SNCF subsidiary Sernam.

The MEO principle was relevant with regard to a condition contained in the European Commission’s decision, which required the sale of all assets of SNCF 'en bloc ... at market price through a transparent and open procedure to a company that has no legal link with SNCF' in order for the aid to be compatible (compensatory measure). In this context, the ECJ confirmed its stance already taken in case C‑224/12 P (Commission v Netherlands and ING Groep, par. 29 and 33) when it held that the question of the applicability of the MEO principle must be distinguished from the question whether the MEO principle has actually been applied.

First, the ECJ underlined that the applicability of the MEO principle depends on the role the state has taken on in each individual case (overall assessment of all circumstances): the decisive question is therefore always whether the state has acted in its capacity as a shareholder or rather in its capacity as public authority when granting an economic advantage. Obviously, the MEO principle can be applied to a state measure only in the first case, whereas, in the second case, the MEO principle is not applicable.

Second, the ECJ clarified that the applicability of the MEO principle cannot necessarily be inferred from its “actual application” because this would mean that the mere application of this principle would already decide on its applicability and thus on the nature of the state measure (shareholder or public authority). Consequently, even if there was an open, transparent and unconditional tender procedure, which is usually sufficient to satisfy the MEO principle, this may neither justify the conclusion that the MEO principle was applied nor that the MEO principle was applicable.

Third, the ECJ pointed out that the MEO principle can, from the very outset, not be applicable to the implementation of a compensatory measure intended to prevent distortions of competition. Such a forced sale did not correspond to “normal market conditions” since the “compensatory logic” of such a measure was different from the rationale of a private operator seeking to maximise his profits or to minimise his losses.

The case Commission v FIH Ehrversbank

The case Commission v FIH Ehrversbank (C-579/16 P) concerned FIH Group, a Danish bank, which had received a first set of State aid in 2009. As the bank faced additional problems, Denmark subsequently decided in favour of a second bail out, which was declared compatible with the internal market by the European Commission in 2014 under the condition of various commitments.

The ECJ reiterated that the applicability of the MEO principle to a state measure may not be excluded simply because of the links that may exist between a second state intervention and the previous grant of State aid to the same undertaking.

The ECJ then considered the question whether, when assessing a second set of state measures under the MEO principle, the risks resulting from a previous set of State aid measures granted have to be taken into account.

The ECJ concluded with regard to the application of the MEO principle that the risks to which the state was exposed and which are the result of a first set of aid are linked to the state’s actions as a public authority. A private operator would, in principle, not take such risks into account in his economic calculations as he could freely decide on how to reach his profit objective.

The crucial question when applying the MEO principle in case of previous State aid is therefore the economic rationality of such a second state measure by reference to the conduct that a private market player might have adopted. Such assessment under the MEO principle must therefore focus on the inherent economic rationality of the proposed second set of state measures on a stand-alone basis, without taking into account the previous State aid or the reasons why the previous State aid had been granted. This is intended to prevent that the state will accept less favourable conditions than a private investor would accept with regard to the second state intervention in order to “justify” or to ensure the success of the previous State aid granted.

Consequently, a case-by-case analysis of the economic rationality of a second state measure considered must be assessed and documented even more carefully than usually to prove that the state acted like a private investor in case of the existence of previous State aid.

Outlook

The two judgments provide valuable additional guidance on the scope and consequences of the applicability and application of the MEO principle as a central pillar of the assessment whether a state measure contains an advantage for the potential beneficiary. The applicability and application of the MEO principle must therefore be clearly distinguished during any State aid assessment. In particular, the role of the state (public authority vs. shareholder) and the economic rationality of the state’s action in the context of consecutive state measures must thoroughly be examined in order to be able to safely rule out any State aid element.