Case C‑526/14

Tadej Kotnik and Others

v

Državni zbor Republike Slovenije

(Request for a preliminary ruling from the Ustavno sodišče)

‛Reference for a preliminary ruling — Validity and interpretation of the Banking Communication from the Commission — Interpretation of Directives 2001/24/EC and 2012/30/EU — State aid to banks in the context of the financial crisis — Burden-sharing — Writing off equity capital, hybrid capital and subordinated debt — Principle of protection of legitimate expectations — Right to property — Protection of the interests of shareholders and others — Reorganisation and winding up of credit institutions’

Summary — Judgment of the Court (Grand Chamber), 19 July 2016

State aid — Prohibition — Exceptions — Aid capable of being regarded as compatible with the internal market — Aid to remedy serious disturbance in the economy of a Member State — Aid to the financial sector in the financial crisis — Burden sharing — Inclusion in the concept of reorganisation measures within the meaning of Directive 2001/24

State aid — Prohibition — Exceptions — Aid capable of being regarded as compatible with the internal market — Aid to remedy serious disturbance in the economy of a Member State — Aid to the financial sector in the financial crisis — Burden sharing — Measures for the conversion of subordinated debt or for its value to be written down — Obligation to comply with the principle of proportionality

State aid — Prohibition — Exceptions — Aid capable of being regarded as compatible with the internal market — Aid to remedy serious disturbance in the economy of a Member State — Aid to the financial sector in the financial crisis — Burden sharing — Compatibility with the provisions of Directive 2012/30 that any increase or reduction in the capital of a public limited liability company must be subject to a decision by the general meeting

State aid — Prohibition — Exceptions — Aid capable of being regarded as compatible with the internal market — Aid to remedy serious disturbance in the economy of a Member State — Aid to the financial sector in the financial crisis — Burden sharing — Breach of the principle of protection of legitimate expectations and the right to property — None

State aid — Prohibition — Exceptions — Aid capable of being regarded as compatible with the internal market — Aid to remedy serious disturbance in the economy of a Member State — Aid to the financial sector in the financial crisis — Adoption by the Commission of the Banking Communication — Burden sharing — Lawfulness

Questions referred for a preliminary ruling — Assessment of validity — Questions concerning the validity of a communication from the Commission having no binding effects but implying the interpretation of a number of provisions of EU law — Admissibility

The questions referred for a preliminary ruling on the validity of the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis, a communication that produces no legal effects directly on third parties, since those questions concern the compatibility, with a number of provisions of EU law, of the condition laid down by the Commission that there must be burden-sharing by shareholders and subordinated creditors, if it is to be able to find, under Article 107(3)(b) TFEU, that the State aid granted in the banking sector is compatible with the internal market, are admissible. (see paras 31-34)

The Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘Banking Communication’) must be interpreted as meaning that it is not binding on the Member States. The adoption of such a communication does not relieve the Commission of its obligation to examine the specific exceptional circumstances relied on by a Member State, in a particular case, for the purpose of requesting the direct application of Article 107(3)(b) TFEU, and to provide reasons for its refusal to grant such a request. It follows from the foregoing, on the one hand, that the effect of the adoption of the guidelines contained in that communication is equivalent to the effect of a limitation imposed by the Commission on itself in the exercise of its discretion, so that, if a Member State notifies the Commission of proposed State aid which complies with those guidelines, the Commission must, as a general rule, authorise that proposed aid. On the other hand, the Member States retain the right to notify the Commission of proposed State aid which does not meet the criteria laid down by that communication and the Commission may authorise such proposed aid in exceptional circumstances. It follows that the Banking Communication is not capable of imposing independent obligations on the Member States, but does no more than establish conditions, designed to ensure that State aid granted to the banks in the context of the financial crisis is compatible with the internal market, which the Commission must take into account in the exercise of the wide discretion that it enjoys under Article 107(3)(b) TFEU. (see paras 41, 43-45, operative part 1)

Articles 107 to 109 TFEU must be interpreted as not precluding points 40 to 46 of the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘Banking Communication’) in so far as those points lay down a condition of burden-sharing by shareholders and holders of subordinated rights as a prerequisite to the authorisation of State aid. First, such burden-sharing measures can be understood as being designed to prevent recourse to State aid merely as a tool to overcome the financial difficulties of the banks concerned. Second, the burden-sharing measures are designed to ensure that, prior to the grant of any State aid, the banks which show a capital shortfall take steps, with their investors, to reduce that shortfall, in particular by raising equity capital and by obtaining a contribution from subordinated creditors, since such measures are likely to limit the amount of the State aid granted. To act otherwise would be liable to cause distortions of competition, since banks whose shareholders and subordinated creditors had not contributed to the reduction of the capital shortfall would receive State aid of an amount greater than that which would have been sufficient to overcome the residual capital shortfall. Moreover, in order to overcome the problem of ‘moral hazard’, which is linked to the fact that individuals are inclined to engage in risk-taking when the possible negative consequences of so doing are borne by the community as a whole, it is important to ensure that banks are not encouraged by the possibility of obtaining State aid to have recourse to financial instruments that carry greater risk and are more likely to cause significant losses, the effect of which would be to create serious distortions of competition and to jeopardise the integrity of the internal market. Last, in adopting the Banking Communication, the Commission did not encroach on the competences conferred on the Council by Articles 108 and 109 TFEU. Since that communication does no more than establish guidelines whose effect is to limit the Commission in the exercise of the discretion conferred on it by Article 107(3)(b) TFEU, it does not impinge on the power granted to the Council, in the third subparagraph of Article 108(2) TFEU, to declare, on application by a Member State, State aid to be compatible with the internal market in exceptional circumstances, and does not constitute a regulation of the kind referred to in Article 109 TFEU, which is, pursuant to the second subparagraph of Article 288 TFEU, binding and of general application. (see paras 55-60, operative part 2)

The principle of the protection of legitimate expectations and the right to property must be interpreted as not precluding points 40 to 46 of the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication) in so far as those points lay down a condition of burden-sharing by shareholders and holders of subordinated rights as a prerequisite to the authorisation of State aid. As regards the principle of the protection of legitimate expectations, on the one hand, the shareholders and the subordinated creditors of the banks concerned were given no guarantee from the Commission to the effect that it would approve State aid designed to overcome the capital shortfall of those banks. On the other hand, those investors received no assurance that, with respect to measures designed to deal with the capital shortfalls of banks who were the recipients of the State aid authorised by the Commission, some of those measures would not be liable to be prejudicial to their investments While the principle of the protection of legitimate expectations is one of the fundamental principles of the European Union, economic operators are not justified in having legitimate expectations in a field such as State aid in the banking sector, whose subject matter involves constant adjustment to reflect changes in the economic situation. As regards whether it was necessary that the Member States should be allowed a transitional period in order to adjust to the Commission’s new requirements in relation to burden-sharing by the shareholders and the subordinated creditors, an overriding public interest may preclude transitional measures from being adopted in respect of situations which arose before the new rules came into force but which are still subject to change. The objective of ensuring the stability of the financial system while avoiding excessive public spending and minimising distortions of competition constitutes an overriding public interest of that kind. As regards the right to property, burden-sharing measures can be adopted voluntarily by the shareholders and by means of an agreement between the credit institution concerned and its subordinated creditors, which cannot be regarded as interference with their right to property. Further, since shareholders are liable for the debts of the bank up to the amount of its share capital, the fact that points 40 to 46 of the Banking Communication require that, in order to overcome a bank’s capital shortfall, prior to the grant of State aid, those shareholders should contribute to the absorption of the losses suffered by that bank to the same extent as if there were no State aid, cannot be regarded as adversely affecting their right to property. The scale of losses suffered by shareholders of distressed banks will, in any event, be the same, regardless of whether those losses are caused by a court insolvency order because no State aid is granted or by a procedure for the granting of State aid which is subject to the prerequisite of burden-sharing. As regards the subordinated creditors, subordinated rights are constituted by financial instruments which share certain characteristics with debt products and certain characteristics with equity capital, which entails that, in the event of the issuer of such instruments becoming insolvent, the holders of those instruments are paid after the holders of ordinary debentures, but before shareholders. The burden-sharing measures on which the grant of State aid in favour of a bank showing a shortfall is dependent cannot cause any detriment to the right to property of subordinated creditors that those creditors would not have suffered within insolvency proceedings that followed such aid not being granted. (see paras 62, 64, 66-70, 74-76, 78-80, operative part 3)

Articles 29, 34, 35 and 40 to 42 of Directive 2012/30 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 TFEU, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, must be interpreted as not precluding points 40 to 46 of the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication) in so far as those points lay down a condition of burden-sharing by shareholders and holders of subordinated rights as a prerequisite to the authorisation of State aid. The Banking Communication contains no specific provision on the legal procedures whereby the burden-sharing measures set out in points 40 to 46 of that communication are to be implemented. Consequently, while the Member States may possibly find it necessary, in a particular situation, to adopt such burden-sharing measures without the agreement of the general meeting of the company, that circumstance cannot however call into question the validity of the Banking Communication in the light of the provisions of Directive 2012/30. The background to Directive 2012/30 is the attainment of freedom of establishment in the internal market, and its principal objective is the protection of the interests of shareholders and others. The measures provided for by that directive in order to guarantee that protection relate to the normal operation of public limited liability companies. By contrast, the burden-sharing measures involving both shareholders and subordinated creditors constitute, when they are imposed by the national authorities, exceptional measures. They can be adopted only in the context of there being a serious disturbance of the economy of a Member State and with the objective of preventing a systemic risk and ensuring the stability of the financial system. Although there is a clear public interest in ensuring throughout the European Union a strong and consistent protection of investors, that interest cannot be held to prevail in all circumstances over the public interest in ensuring the stability of the financial system. (see paras 84-88, 91, 94, operative part 4)

The Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication) must be interpreted as meaning that the measures for converting hybrid capital and subordinated debt or writing down their principal must not exceed what is necessary to overcome the capital short-fall of the bank concerned. Under point 44 of that communication, in the event that a bank does not meet the minimum capital requirements, which means that its capital is not sufficient, in itself, to absorb the bank’s losses, subordinated debt must be converted, or the principal thereof must be written down, as a general rule, before the grant of State aid to that bank. Further, again under point 44, State aid must not be granted before equity and subordinate debt have fully contributed to offset any losses of the bank. A Member State is not therefore compelled to impose on banks in distress, prior to the grant of any State aid, an obligation to convert subordinated rights into equity or to effect a write-down of the principal thereof, or an obligation to ensure that those rights contribute fully to the absorption of losses. In such circumstances, it will not however be possible for the contemplated State aid to be regarded as having been limited to what is strictly necessary, as required by point 15 of the Banking Communication. The Member State, and the banks who are to be the recipients of the contemplated State aid, take the risk that a Commission decision declaring the aid incompatible with the internal market will stand in its way. (see paras 97, 100, 102, operative part 5)