Carri Ginter and Kaspar Endrikson: Goodbye dividends and executive bonuses!

Carri Ginter and Kaspar Endrikson
Carri Ginter and Kaspar Endrikson

Rules for state holdings in struggling companies set. Comment by sworn lawyers Kaspar Endrikson and Carri Ginter.

It has been discussed in Estonia whether one way to help companies struggling in the COVID-19 crisis could be for the state to acquire a piece (i.e. in the context of Tallink and Bolt). The European Commission published new state aid rules on the evening of May 8, following which Estonia could acquire stakes in private companies.

Such state aid could considerably distort competition and through it reduce consumers' choice or hike prices of services. That is why a capital injection from the state would be accompanied by handcuffs to limit the recipient's operating freedom that could in turn cool firms' enthusiasm for entering into such a relationship with the state.

Securing a capital injection from the state would require complying with the following conditions:

1. not everyone is eligible – a state capital injection needs to be in the public interest. For example, to avoid mass layoffs, to keep an innovative or otherwise important company disappearing from the market or avoid a vital service disruption.

2. last straw – the state can obtain a holding if the company is unable to secure necessary financing from the market and other types of state aid are insufficient to ensure its sustainability.

3. less is more – capital contributions cannot exceed the minimal amount needed to ensure sustainability. Other forms of state aid will be taken into account.

4. holdings need to be redeemed – the state cannot remain an owner for too long. That is why capital injection conditions must include stimuli that would motivate the aid recipient to buy back the state's holding as quickly as possible. For example, a mechanism that would see the state's holding grow and those of other shareholders shrink periodically until the former is redeemed. The state can also reserve the right to sell its holding to third persons.

5. avoiding competition distortion – to limit the negative effects of aid measures on competition, mandatory protective measures could apply (and vary based on the recipient and outstanding state participation). For example:

  • a ban on aggressively expanding using state capital and taking excessive risks;
  • if the state's capital injection into a company of considerable market influence exceeds €250 million, the recipient must assume additional obligations, such as pulling out of certain markets or transferring a part of its assets;
  • ban on owning more than 10 percent of other companies;
  • ban on dividend payments and stock buybacks (with the exception of the state);
  • ban on raising the salaries of executives (compared to the end of 2019) and executive bonuses.

6. there is no escaping European green and digital goals – states must make sure aid measures support the European Union's green and digital turns and the climate neutrality 2050 target. Major companies are expected to report on how state aid bolsters efforts to marry plans to relevant EU goals.

It remains to be seen whether companies are willing to accept the state as a shareholder under such conditions, or whether different solutions will be found for weathering the crisis.

For example, German aviation behemoth Lufthansa has said it will seriously consider insolvency and returning to sustainable levels of business as opposed to state aid that would clip its wings.

The latest decision regarding Tallink concerns a turnover capital loan from the state, with no mention made of the possibility of a holding. The press release did not specify whether the decision had anything to do with what selling the state a holding would have meant in terms of the company's freedom.

Estonia and Estonian aviation companies are likely also affected by Latvia's decision to place €250 million in national airline airBaltic. As shown above, such a sum does not obligate the airline to assume additional obligations, for example, cutting flights from Estonia. Limiting state aid to €250 million hardly seems incidental in this light.


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Editor: Marcus Turovski

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