Joined Cases C‑214/12 P, C‑215/12 P and C‑223/12 P, Land Burgenland, Austria and Grawe

Court further defines scope of private investor test and relevance tender procedure

>> By their appeals, Land Burgenland (Case C214/12 P) and Austria (Case C223/12 P) sought to have set aside the judgment of the General Court of the European Union of 28 February 2012 in Joined Cases T268/08 and T281/08 Land Burgenland and Austria v Commission [2012]  (‘the Burgenland judgment’) dismissing their actions for annulment of Commission Decision 2008/719/EC of 30 April 2008 on State aid C 56/06 (ex NN 77/06) implemented by Austria for the privatisation of Bank Burgenland.

By its appeal (Case C215/12 P), Grazer Wechselseitige Versicherung AG (‘GRAWE’) sought to have set aside the judgment of the General Court of the European Union of 28 February 2012 in Case T282/08 Grazer Wechselseitige Versicherung v Commission [2012] dismissing its action for annulment of the contested decision.

Until its privatisation, HYPO Bank Burgenland AG (‘BB’) was a regional bank taking the form of a company limited by shares under Austrian law with its registered office in Eisenstadt (Austria). In 2005, BB had a balance sheet value of EUR 3.3 billion and was wholly owned by Land Burgenland (the Province of Burgenland).

Under Paragraph 4 of the Law on the mortgage bank of the Province of Burgenland (Landes-Hypothekenbank Burgenland-Gesetz, LGBl. No 58/1991), as amended by the law published in LGBl. No 63/1998, if BB defaulted, the Province of Burgenland was liable as deficiency guarantor under Paragraph 1356 of the Austrian Civil Code for all the bank’s liabilities. Under the provisions of that law, the creditors of that bank had direct rights against the guarantor, which was, however, only required to act when the assets of that bank were not sufficient to cover the debts.

That performance guarantee system for public credit institutions (called ‘Ausfallhaftung’), particularly the guarantee provided by that province in favour of BB and its predecessors, had existed in a virtually unchanged form since 1928. The system covered neither a specific period nor a specific amount.

Following an agreement between the Commission of the European Communities and  Austria, on the basis of which Commission Decision C(2003) 1329 final of 30 April 2003, relating to aid E 8/02, was adopted (OJ 2003 C 175, p. 8), Ausfallhaftung had to be abolished by 1 April 2007. As a general rule, all liabilities existing on 2 April 2003 continued to be covered by Ausfallhaftung until their expiry. After that, Ausfallhaftung could be maintained between 2 April 2003 and 1 April 2007 for newly created liabilities provided that they would expire by 30 September 2017.

After two unsuccessful attempts in 2003 and in 2005, the Province of Burgenland launched a third procedure for the privatisation of BB, with the investment bank HSBC being entrusted to carry it out. That procedure started in October 2005 with the publication in the press of a call for tenders.

Two bidders, one being GRAWE, an Austrian undertaking offering a range of insurance services, financial services and leasing which, in 2006, held significant direct stakes in two entities in the banking and investment sector, together with GW Beteiligungserwerbs- und -verwaltungs-GmbH, and the other being an Austro-Ukrainian consortium consisting of the Austrian undertakings SLAV AG and SLAV Finanzbeteiligung GmbH and the Ukrainian joint-stock companies Ukrpodshipnik and Ilyich (‘the Consortium’), made binding offers. Those offers subsequently formed the subject of an individual examination and of contractual negotiations which ended on 4 March 2006.

On 5 March 2006, the Province of Burgenland awarded BB to GRAWE despite the purchase price offered by GRAWE (EUR 100.3 million) being significantly lower than the price offered by the Consortium (EUR 155 million). The decision was based, in particular, on a written recommendation by HSBC, supplemented by oral explanations to the members of the Government of the Province of Burgenland on the day of the decision. HSBC’s recommendation essentially stated that, although on the basis of the proposed purchase price the decision should be made in favour of the Consortium, it was recommended that BB be sold to GRAWE, in view of the other selection criteria, namely the reliability of the purchase price payment, the continued operation of BB while avoiding the use of Ausfallhaftung, capital increases and transaction security.

The sale of BB, which was formally approved by the authorities of the Province of Burgenland on 7 March 2006, was closed on 12 May 2006. Before that closing, BB issued bonds, within the framework of Ausfallhaftung, in the amount of EUR 700 million, EUR 320 million of which had been foreseen under the terms of the privatisation, the ‘additional’ bonds of EUR 380 million not being included, according to point 35 of the contested decision, in the draft contracts with GRAWE and the Consortium.

On 4 April 2006, the Commission received a complaint from the Consortium claiming that  Austria had infringed State aid rules during the privatisation of BB. The Consortium complained, inter alia, that the tender procedure, which had been unfair, untransparent and discriminatory towards it, had resulted in the sale of BB not to the highest bidder, namely the Consortium, but to GRAWE.

To determine whether GRAWE had received a selective advantage, the Commission examined whether the Province of Burgenland had behaved like any seller operating in a market economy (the ‘private vendor’ test). In that respect, the Commission observed that a private vendor might accept the lower bid instead of the higher bid in two situations.

The first was the situation in which it was obvious that the sale to the highest bidder was not realizable.   According to the Commission, not only was there no reason to doubt that the Consortium could pay the purchase price of EUR 155 million that it offered, there was also no indication or any evidence that the FMA would have prohibited BB’s sale to the Consortium.

The second situation covered the case where consideration of factors other than the price was justified, subject to the proviso that only those factors which would have been taken into consideration by a private vendor were taken into account, which, according to the Commission, excluded risks stemming from potential liability to make payment under a guarantee which had to be classified as State aid, such as Ausfallhaftung.

In that respect, the Commission explained that it was apparent from the case-law that the role of the State as the seller of an undertaking and its obligations in its capacity as a public authority should not be mixed up. No private vendors would have entered into a guarantee that did not conform to market conditions and the decision relating to the abolition of Ausfallhaftung confirms that Ausfallhaftung was not granted on those conditions.

In those circumstances, the Commission concluded that  Austria had unlawfully granted State aid in favour of GRAWE in relation to the privatisation of BB, in breach of Article 108(3) TFEU, and that that aid was incompatible with the common market.  

Private investor test

In their first argument, the Province of Burgenland,  Austria and GRAWE claimed, in essence, that the General Court failed to appreciate, in the light of Ausfallhaftung’s characteristics, both the role of the Province of Burgenland as owner and shareholder of BB and, therefore, the private investor test. However, the Court found that the General Court rightly concluded that Ausfallhaftung could not be taken into account when assessing the conduct of the Austrian authorities in the light of the private vendor test and that, consequently, the Commission could not be criticised for having rejected Ausfallhaftung’s relevance when evaluating the offers submitted by the Consortium and by GRAWE.

The Court held that concerning the examination carried out in that respect by the General Court, it was apparent from the Burgenland and GRAWE judgments that the General Court did not base its rejection of the arguments of the Province of Burgenland,  Austria and GRAWE on the fact that Ausfallhaftung was established by law, contrary the what those parties claimed. The General Court examined whether Ausfallhaftung had to be taken into account when implementing the private vendor test and found that a private vendor would not have entered into such a guarantee.

The Court found that the Province of Burgenland,  Austria and GRAWE did not put forward any argument liable to put that finding into doubt, but claimed themselves that Ausfallhaftung was a State aid, as the Commission had moreover found in Decision C(2003) 1329 final. In those circumstances, and since, by granting aid, a Member State pursued, by definition, objectives other than that of making a profit from the resources granted to an undertaking belonging to it, it must be held that those resources were, in principle, granted by the State exercising its prerogatives as a public authority.

The Province of Burgenland also claimed that the General Court had infringed Article 107(1) TFEU by holding that the Commission did not err by establishing BB’s market value on the basis of the Consortium’s bid, without taking into account the independent studies in its possession or having another study carried out.

The Court first of all reiterated that that the market price was the highest price which a private investor acting under normal competitive conditions was ready to pay for a company in the situation it was in (see Case C390/98 Banks [2001] and Case C277/00 Germany v Commission [2004]).

The Court added that for the purposes of checking the market price, the national authorities might take into consideration, in particular, the form of the transfer of company, for example public tendering, deemed to ensure that a sale took place under market conditions or any expert’s report prepared at the time of the transfer (see, to that effect, Case C214/07 Commission v France [2008], on which I wrote this post).

The Court thus concluded that the General Court was correct to find, that, where a public authority proceeded to sell an undertaking belonging to it by way of an open, transparent and unconditional tender procedure, it could be presumed that the market price corresponded to the highest offer, provided that it was established, first, that that offer was binding and credible and, secondly, that the consideration of economic factors other than the price was not justified.

According to the Court, the General Court was also correct in holding that the highest bid submitted in a tender procedure which was unlawful on account of the presence of unlawful conditions could nevertheless correspond to the market price where the deficiencies of the conditions of the call for tenders did not affect the amount of that bid by pushing it lower.

Since none of the other grounds raised by the Province of Burgenland, Austria and GRAWE in support of their appeals can succeed, those appeals were dismissed.