61982C0296
OPINION OF ADVOCATE GENERAL
SIR GORDON SLYNN
delivered on 16 January 1985
My Lords,
In these joined proceedings the Kingdom of the Netherlands and Leeuwarder Papierwarenfabriek BV (‘LPF’) challenge the legality of a Decision of the Commission dated 22 July 1982 that the Government of the Netherlands granted aid to LPF which was incompatible with Article 92 of the EEC Treaty. The Commission as defendant is supported by a number of LPF's competitors.
Prior to the events which are in dispute, Leeuwarder Papierwarenfabriek (‘Leeuwarder’) was a company founded in 1907 which manufactured packaging materials in Friesland. It is described in the Decision as ‘a paperboard processing firm’. In 1968, it became the wholly-owned subsidiary of Papierfabrieken Van Gelder Zonen NV CVan Gelder'). During the early 1970s Van Gelder was in financial difficulties which in turn affected Leeuwarder. After a reorganization in 1977 there was some improvement during 1979 and 1980 in the financial position of Leeuwarder but Van Gelder was itself again in financial difficulties. Agreement was reached with Noordelijke Ontwikkelingsmaatschappij (‘NOM’), the regional development body responsible for Friesland, that a new company (‘LPF’) would be formed in which Van Gelder and NOM would each own 50% of the share capital. NOM paid 6 million guilders for its shares out of money provided by the Dutch Government.
The interveners in Case 318/82 got to know of the proposed transaction before it was concluded and their representatives met the Commission officials responsible on 16 October 1980. They sent a written complaint to the Commission on 22 October 1980. Mr Schlieder, then Director-General for Competition, sent a telex to the Dutch authorities requesting further information and pointing out that aids were required to be notified under Article 93 (3). No reply was forthcoming from the Dutch authorities until 5 December 1980. This reply sought to justify the proposed purchase of shares on the ground that it did not constitute an aid at all. In its written pleadings the Dutch Government has conceded that it never notified the transaction under Article 93 (3) but has claimed that, since it was not an aid, it was unnecessary to do so.
It was not until the summer of 1981 that the Commission opened proceedings under Article 93 (2). This ultimately led to the adoption by the Commission of Decision 82/653 (Official Journal 1982, L 277, p. 15). The Decision, although dated 22 July 1982, was not notified to the Dutch Government until 20 September 1982. In the Decision the Commission found that the payment of 4 million guilders (an error for 6 million guilders) for the purchase of the shares in LPF was an aid which was incompatible with the common market. Article 2 required the Netherlands to take measures to ensure that the aid did not continue to distort competition in future. In their respective actions the Dutch Government and LPF seek the annulment of this Decision.
The action brought by the Dutch Government is clearly admissible under Article 173 and the Commission has rightly conceded that LPF is, directly and individually concerned by the contested Decision within the meaning of that provision, so that the second action is also admissible.
The applicant's principal argument is that the intervention of the Dutch authorities did not constitute an aid within the meaning of Article 92 (1) at all. Alternatively they claim that on this point the reasoning in the preamble to the Decision is inadequate so that Article 190 of the Treaty has been infringed.
In Case 323/82 SA Intermills v Commission (Judgment of 14 November 1984, [1984] ECR 3809), the Court accepted that State participation in the ownership of capital of a company may constitute an aid within the meaning of Article 92 (1) of the Treaty although it was not necessary to define the circumstances in which it did so. In his Opinion in that case, Mr Advocate General VerLoren van Themaat appeared to take the view that participation in the ownership of the capital of a company could constitute such an aid if it was provided in circumstances where capital was not available on the private capital market. In substance I do not read his overall approach as being different from my Opinion in Case 84/82 Gennany v Commission (Judgment of 20 March 1984, [1984] ECR 1451). The question is whether the purchase of shares by the State can be regarded as an investment for the purposes of obtaining income or capital appreciation, the aim of the ordinary investor, or whether it is merely a vehicle for providing financial support for a particular company.
LPF and the Dutch Government contend here that this was in truth an investment. The financial problems of Leeuwarder stemmed from its involvement with Van Gelder. Once separated it would become a viable business. The price paid was no less than the real worth of the equity since the old company was valued at 15.4 million guilders. There was no need for urgent capital expenditure save to the extent of 4 million guilders for the purchase of a new offset press. Other modernization or replacement of equipment could wait and LPF had sufficient credit facilities apart from its equity capital to deal with these. Since Leeuwarder began in 1979 to concentrate on the production of higher-quality materials it did not suffer to the same extent as other manufacturers of paperboard products who were undoubtedly affected by overcapacity in the trade. Moreover LPF had reduced its workforce, thereby increasing its efficiency and potential profitability. It had also reduced its production capacity. Both steps were reflected in the fact that profits were made in 1979 and 1980. NOM was asked to participate because it did not wish to interfere in the running of the business.
A private investor would have wanted to exercise control which was the very thing LPF wished to avoid. Moreover NOM only intervened in situations where new activities were contemplated and there was a real chance of profitability. In the event in this particular case, both NOM and Van Gelder took the same commercial risk in relation to their shareholding.
Although there is force in these arguments, it seems to me that there was clearly material from which the Commission could conclude that this was not an investment but was in truth a State aid. In the first place NOM's viability study of the company in June 1980 shows that LPF's machines were old and that 25 million guilders would be needed to bring the company's stock into line with technical development and to make the investment which should have been made earlier for the purposes of improving machinery and equipment. The company had substantial debts. It was undoubtedly overstaffed at the time and there was serious overcapacity in the paperboard section which even now has not been eliminated. The company made a loss of 400000 guilders in 1978, and a profit before tax in 1979 of 400000 guilders and in 1980 of 600000 guilders, the latter amounting to only 115000 guilders after tax. There is no real evidence that other persons were prepared to invest on a normal commercial basis and I do not find convincing the argument that the lack of private investors willing to come forward does not reflect so much on the viability of LPF but derives from the special features of the structure of the Dutch capital market. The fact that capital would not be invested in regions like the one in question, if anything, points to this being an aid rather than a normal investment. Moreover the Commission can justifiably point out that if higher-quality work was going to be profitable, it was likely that other competitors affected by the recession would also move to concentrate on this type of business.
In my opinion the Commission was entitled on the evidence available, having regard to the functions exercised by NOM, to consider this as a use of public funds to support the company by way of an aid rather than as a normal investment. No error of law has been shown in its approach on this part of the case.
I do not consider either that the applicants have established that there was a breach of Article 190 of the Treaty in that the Commission has failed to give reasons as to why it concluded that this was in truth a State aid.
The essential elements of the Commission's reasoning on this point are set out in the preamble, albeit briefly. The 8th recital states that the prohibition on State aids in Article 92 (1) may apply to injections of capital. The 9th recital reads as follows: ‘The financial structure of the firm, which urgently needed to carry out the replacement investments, and the overcapacity in the paperboard processing industry, constituted handicaps indicating that the firm would probably have been unable to raise on the private capital markets the funds essential to its survival.’ Finally, the 10th recital states that: ‘The situation on the market in question provides no reasonable grounds for hope that a firm urgently needing large-scale restructuring could generate sufficient cash flow to finance the replacement investment necessary, even if it received the proposed assistance.’
The essential conditions of fact and law on this part of the case are thus stated, albeit briefly. It does not seem to be necessary that the full details to support these conclusions should be set out in the Decision so long, of course, as, if the legality of the Decision is challenged before the Court, they can be substantiated.
That, however, is not the end of the case.
The Dutch Government submits that the Commission has also failed adequately to substantiate in the preamble to the Decision its finding that the purchase of the shares distorted or threatened to distort competition and affected trade between Member States within the meaning of Article 92 (1). The Decision is said to be incompatible with Article 190 for these reasons also.
According to NOM's report of June 1980, from 1977 to 1980 inclusive LPF held 11.7% of the market in the Netherlands in cardboard and 9.5% of the market there in flexible or paper packaging. The Dutch Government stated in its application that in the late 1970s, 6% of the company's production was exported, a figure which by 1982 had fallen to 2.5%. The main markets for these exports were Belgium, the Federal Republic of Germany and the United Kingdom. Yet, LPF's figures show that in no case did its share of the market in any of these countries exceed 0.3% in either of its products in 1979 or 1980. Indeed, in most cases the figure was less than 0.05%.
In the Decision, the 5th and 6th recitals simply refer to the allegations of two Member States and two trade associations as to the effect on competition of the assistance provided by NOM. The 7th recital simply states that: ‘The assistance in this case is such as to affect trade between Member States and to distort or threaten to distort competition within the meaning of Article 92 (1) of the EEC Treaty by favouring the undertaking concerned or the production of its goods.’
Thus the Commission has confined itself to a bald assertion that the assistance distorted or threatened to distort competition in the Community without giving any indication as to how it arrived at this conclusion. Neither reasons nor facts are shown to support the general allegation made. This is plainly distinguishable from the Commission's findings as to whether the purchase was in fact a State aid. It does not seem to me to be sufficient for the Commission merely to refer to the allegations of third parties without setting out its own findings. Moreover, the language of the relevant recitals to the Decision at issue in Intermills was identical in all material respects and the Court found in paragraphs 38 and 40 of its judgment in that case that the Decision must be annulled on these grounds.
The same considerations seem to me to apply in respect of the question as to whether the assistance affected trade between Member States within the meaning of Article 92 (1). It is true that in the 17th recital it is stated that ‘the Netherlands belong to the central regions of the Community... where any State aid is most likely to affect trade between Member States’. This, however, does not constitute a sufficient explanation for the bald assertion in the 7th recital that the assistance did affect trade between Member States. Furthermore, in its defence in Case 296/82, the Commission maintains that, where a company holds 10% of the market in its own Member State, an aid to keep that company afloat affects trade between Member States automatically. Whether or not that proposition is sound, it is not so self-evident that any explanation for the view that such an aid affects trade between Member States can be omitted from the preamble, as the Commission appears to suggest.
It follows in my view that the Decision should be annulled for failure to comply with Article 190 of the Treaty since no reasoning is set out in the preamble in support of the Commission's conclusion
(a)
that the assistance affected trade between Member States and
(b)
that it distorted or threatened to distort competition.
A further argument put forward by the applicants is that the Commission should have exercised its discretion to exempt the aid concerned under Article 92 (3). Thus it is said that the 15th recital is manifestly unfounded since it states that ‘the Netherlands Government has not been able to show, nor has the Commission found any evidence to establish that the proposed aid satisfies one of the tests for exemption in Article 92 (3).’
As to Article 92 (3) (a), recital 16 states that the Leeuwarder area is not one ‘where the standard of living is abnormally low or where there is serious underemployment’ within the meaning of that subparagraph. According to the same recital, the rate of unemployment in that area is roughly equal to the Community average. The applicants have not contested these assertions. In Case 730/79 Philip Morris v Commission, [1980] ECR 2671, the Court held that the Commission had been right in assessing the standard of living and the unemployment rate for the purposes of Article 92 (3) (a) by reference to the Community as a whole and not by reference solely to the Member State in question. In view of that ruling the applicants' argument must be rejected with respect to subparagraph (a).
According to recital 17 there is nothing in the measure to qualify it as a ‘project of common European interest’ within the meaning of subparagraph (b). The applicants have not seriously contested this nor to my mind could they have done so. It is asserted in the same recital that the measure cannot be described as being designed to ‘remedy a serious disturbance in the economy of a Member State’, partly because available social and economic data on the Netherlands did not indicate the existence of such a disturbance in that country. This statement is not seriously disputed by the applicants either. What is more, in Philip Morris the Court indicated that in applying this limb of subparagraph (b) one must have regard to the gravity of the recession throughout the Community as a whole.
With regard to Article 92 (3) (c), it seems to me, as stated in my Opinion in Case 84/82 Germany v Commission, that merely to keep alive an ailing company in a period of recession is not ‘facilitating development’. That is what seems to have happened here.
In addition, the applicants claim that the Decision must be annulled in view of the uncertain nature of the obligation contained in Article 2. That provision reads as follows: ‘The Kingdom of the Netherlands shall inform the Commission within three months of the date of notification of this Decision of the measures it has taken to ensure that the aid granted does not continue to distort competition in future, notably competition with undertakings in other Member States.’ The Commission maintains that the meaning of Article 2 was clear. It required the assistance provided by NOM to be brought to an end. The Dutch authorities could comply with this obligation either by withdrawing from LPF completely, or by selling the shares and granting LPF a loan at normal commercial rates of interest, or by some other means. The wording of Article 2 was designed to give the Dutch Government as much leeway as possible in deciding on the method of bringing the assistance to an end.
It seems to me that, where the Commission addresses a mandatory order to a person, it must be reasonably clear to that person what he is required to do. This must emerge from the order itself, even though that may give a certain latitude to the Member State concerned as to how the order is to be complied with, not least in an area like the present. It is no answer for the Commission to say as it does here that it subsequently explained to the Dutch Government what Article 2 meant. (Case 70/72 Commission v Germany [1973] ECR 813, especially paragraphs 22 and 23.)
In determining whether a Decision is sufficiently certain, regard must be had not only to the operative part of that Decision but also to its preamble: Case 70/72 Commission v Germany, paragraph 21. Here the meaning of the requirement in Article 2 to ‘ensure that the aid granted does not continue to distort competition in future’ does not emerge sufficiently clearly from Article 2 itself. Nor is it clear from the preamble. This is precisely because the Commission has failed to specify in the preamble the grounds for its finding that the assistance provided by NOM distorted or threatened to distort competition within the meaning of Article 92 (1). What is more, the closing words of Article 2 (‘notably competition with undertakings in other Member States’) are particularly unclear, because the Commission has failed to show in the preamble that the aid had any effect on trade between Member States. It seems to me that the applicants are right in saying that the Decision must be annulled on this ground also.
Finally, in its reply the Dutch Government claims that the Commission should have adopted a position with respect to the aids within a two-month period. It relies on Case 120/73 Lorenz v Federal Republic of Germany [1973] ECR 1471. No such argument is to be found in the application where the Dutch Government confines itself to making a general criticism of the Commission's delay in this case. Accordingly, this argument is not admissible. In any case, it overlooks the fact that Lorenz related to aids which had been notified, and the Decision in that case does not apply to circumstances like the present where the aid had not been notified.
I conclude that the Decision should be annulled for failure to comply with Article 190 since no reasoning is set out in the preamble in support of the Commission's conclusion that the assistance provided by NOM affected trade between Member States and distorted or threatened to distort competition; and because Article 2 of the Decision is insufficiently clear and precise.
In my view the Commission should be ordered to pay the applicants' costs and the interveners should bear their own costs.