1999/262/EC: Commission Decision of 22 July 1998 on aid granted by France in connection with the recapitalisation and transfer of the assets of Société de Banque Occidentale (SDBO) (notified under document number C(1998) 2406) (Text with EEA relevance)
Date: 1998-07-22
Institutions: European Commission
Subjects: France, State aid, aid for restructuring, bank, capital increase, control of State aid

20. 4. 1999

EN

Official Journal of the European Communities

L 103/19

II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 22 July 1998

on aid granted by France in connection with the recapitalisation and transfer of
the assets of Soci(cid:130)t(cid:130) de Banque Occidentale (SDBO)

(notified under document number C(1998) 2406)

(Only the French text is authentic)

(Text with EEA relevance)

(1999/262/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of
Article 93(2) thereof,

Having regard to the Agreement on the European
Economic Area, and in particular Article 62(1)(a) thereof,

Having given the parties concerned the opportunity to
submit their comments, in accordance with the above-
mentioned Articles,

Whereas:

I. ARTICLE 93(2) PROCEDURE

By letter dated 3 October 1996 the Commission notified
the French authorities of its decision of 18 September
1998 (1) to initiate the Article 93(2) procedure in respect
of the aid granted to Soci(cid:130)t(cid:130) de Banque Occidentale

(SDBO) and to Cr(cid:130)dit Lyonnais (CL) in connection with
the transfer of part of SDBO through Consortium de
R(cid:130)alisations (CDR) to Banque des (cid:144)changes Internatio-
naux (BDEI), a CL subsidiary. CDR is the hive-off vehicle
set up in 1995 under the second CL restructuring plan,
for containing CL’s non-performing assets,
including
SDBO. The resale of the healthy part of SDBO to CL,
agreed at the beginning of 1996, took place on 28 June
1996, with retroactive effect from 1 January 1996. The
Commission learned by letter from CL dated 7 August
1997 that the SDBO assets in question had finally been
transferred to Banque de l’Ile-de-France, a CL subsidiary.

The transaction was part of the Cr(cid:130)dit Lyonnais restruc-
turing plan which the Commission examined in 1995
and 1998 and approved, subject to certain conditions, in
Decision 95/547/EC of 26 July 1995 giving conditional
approval to the aid granted by France to the bank Cr(cid:130)dit
Lyonnais (2) and in Decision 98/490/EC (3). It was in
the
particular stipulated in Decision 95/547/EC that
healthy parts of the banking subsidiaries hived off to
CDR would either be sold off to third parties or returned
to CL before 31 December 1995, so that no active
banking organisation would be retained in CDR after that
date.

(1) OJ L 346, 16.11.1996, p. 5.

(2) OJ L 308, 21.12.1995, p. 92.
(3) OJ L 221, 8.8.1998, p. 28.

L 103/20

EN

Official Journal of the European Communities

20. 4. 1999

As part of the procedure initiated on 18 September 1996,
new information on the amount of capital injected and
the value of the SDBO assets sold by CDR to CL was
submitted by the French authorities to the Commission.
As the information was likely substantially to modify the
assessment of State aid contained in the measures in
question, the Commission decided on 2 April 1997 to
extend the procedure initiated on 18 September 1996
pursuant to Article 93(2) of the Treaty (1).

II. DESCRIPTION OF THE MEASURES COVERED BY

THIS PTROCEDURE

(i) Background to the transaction

SDBO, set up in 1981 through a merger of two medium-
sized banks, was a subsidiary of CL until 1995, at which
time it was tranferred to the CL hive-off structure, CDR,
as part of the overall rescue plan for CL. SDBO carried on
a conventional banking business with a clientele of
mainly small and medium-sized enterprises, and offered a
range of commercial banking services, market products,
asset management and financial engineering products. A
large proportion of its clientele was involved in commer-
cial-court business, property with a strong commercial
presence in respect of estate agents, the art market and
goodwill-financing in the hotel and catering trade.
SDBO’s activities grew very rapidly until 1992, chiefly as
a result of a sharp increase in its lending to the property
market, which totalled FRF 7,6 billion at the end of 1992
out of a total balance sheet of FRF 21,7 billion (cid:190) an
unreasonable concentration of its risks in a sector of
which it had little experience before the mid- 1980s and
in which it did not have any special know-how. At the
beginning of 1990, the slide of the property market began
to have dramatic effects on its business. That decline,
together with a very difficult economic climate in general,
resulted in SDBO’s making provision for default on a
large proportion of its lending. It was also penalised by
inadequate risk control and a concentration of risk on a
few very major clients who proved unable to meet their
obligations (e.g. Immopar and the Tapie group). The crisis
created considerable operating losses of FRF 159 million
in 1992, FRF 643 million in 1993 and FRF 468 million
in 1994 (2).

CDR included FRF 578 million in securities and FRF
2 487 million in loans, representing a contribution to the
hive-off amounting to a total asset value of FRF 3 065
million.

In 1995, SDBO’s financial position worsened further. It
experienced a spectacular drop in business owing to a
reduction in customers’ deposits from FRF 4,5 billion at
the end of 1994 to FRF 2,4 billion at the end of 1995.
The use of clients’ funds fell from FRF 8,8 billion to FRF
7 billion. The bank’s total balance sheet was slashed by
some FRF 5 billion, from FRF 17 billion to FRF 12,1
billion. The conditions in which the bank operated
continued, owing to the trend in its commercial activities,
to generate considerable losses: net receipts from banking,
having been in deficit for several years, settled at the
minus FRF 506 million mark. As a result of the losses, its
own funds were completely exhausted. Once the result for
1985 had been added (and before recapitalisation),
SDBO’s own capital had fallen to FRF 104 million, which
meant that, without recapitalisation by CDR or a poten-
tial buyer, its banking licence would have been withdrawn
since the solvency ratio would have been below the legal
minimum, and it would probably have been wound up.

Table 1

SDBO: principal financial indicators

in FRF million

1992

1993

1994

1995

Overall
net
from banking

receipts

422

431

485

290

Overheads and depre-
ciation

247

288

276

272

Gross operating result

175

142

208

18

Net result

–159 –643 –468

–506

Total balance sheet

21 750

21 393

17 020

12 128

In 1993, SDBO withdrew from its property activities and
transferred its property assets to CL’s property hive-off,
OIG (Omnium immobilier de gestion). SDBO was pared
down to the basic banking services and, in 1995, imple-
mented a social plan to cut the workforce from 372 to
242 employees. In 1995 it was transferred to CDR with
the other hived-off CL assets. According to information
already sent in 1995 to the Commission by the French
authorities, the value at which SDBO was transferred to

(1) OJ C 207, 8.7.1997, p. 5.
(2) Net result of the financial year.

Own capital

917

798

535

104

Source: SDBO management reports, 1994 and 1995.

At the end of 1995, CDR defined an entity that could be
sold, the ‘sound' bank, and entrusted its valuation and sale
to Compagnie Financi(cid:138)re Edmond de Rothschild (CFER).
In November 1995 CFER produced a document assessing
the value of SDBO and setting out a commercial recovery
plan for the new entity (the ‘sound' bank). The valuation

20. 4. 1999

EN

Official Journal of the European Communities

L 103/21

took account of several methods currently used in this
type of analysis of the value of a firm: the revalued net
assets method, the stock exchange comparison method
and the ‘available'
(discounted) cash-flow method. The
three methods provided a very wide range of values for
the healthy parts of SDBO, ranging from minus FRF 134
million (available flow method) and minus FRF 18
million (stock-exchange comparison method) to FRF 51
million (revalued net assets method). The average value of
the healthy parts of SDBO, on the basis of the three
methods, was thus minus FRF 34 million. The document
stated clearly that it would be necessary to recapitalise the
healthy parts of SDBO, valued at FRF 207 million, and
that this would be paid for by the purchaser of the ‘sound'
bank.

This document was then sent in January 1996 to eight
French banks selected as potential acquirers of the ‘sound'
bank, and to CL. The transaction with CL took place,
although the final arrangements had not yet been fully
defined, on 2 February with the signing between CDR
and CL of an agreement on the transfer of a complete
branch of SDBO. The agreement stipulates that
the
partial transfer includes assets, liabilities, performing off-
balance sheet commitments and plant. It was extended by
a supplementary agreement of 20 March 1996. On 21
May 1996 SDBO and BDEI (Banque des (cid:144)changes Inter-
included an asset transfer
nationaux, a CL subsidiary)
agreement. The agreement
that, as SDBO
stipulates
would, under CDR’s terms of reference, lose its banking
licence, the sale to BDEI for FRF 50 million of a package
of the assets and liabilities needed to keep its banking
business going would best enhance the potential of that
package. The transfer would be backdated to 1 January
1996. The agreement was confirmed at an SDBO extraor-
dinary shareholders meeting on 28 June 1996.

(ii) Reasons for initiating the Article 93(2) procedure

on 18 September 1996

At the time, the Commission took the view that the
following measures connected with the transfer of part of
SDBO to CL were likely to contain aid: (i) the conditions
attached to the sale of SDBO; (ii) the capital injected by
CDR before the sale of the healthy part of SDBO to CL;
(iii) the price paid by CL for regaining the healthy part of
SDBO (FRF 50 million); (iv) the payment made by CL to
CDR in the form of preference shares.

in 1996 to express an interest were French. CFER, acting
as an agent for CDR, had contacted the eight preselected
potential buyers on the basis of the buyer’s injecting
sufficient capital to restore own funds to the requisite
level and cover forecast requirements, the amount being
estimated at FRF 207 million. CDR received only two
bids, from CL and Banque Delubac, and did not select
the latter as it covered only a limited number of assets.
However, as was pointed out by the Commission when it
initated the Article 93(2) procedure, CDR had finally
decided to recapitalise the part
transferred to SDBO
before its sale to CL. The last-minute recapitalisation at
the expense of the vendor was not notified to the eight
banks originally contacted, which were thus not given the
opportunity to make an offer on the basis of the new
position.

Secondly, the Commission took the view in its notice on
the initiation of this procedure that the recapitalisation by
CDR in 1996 of the disposable part of SDBO, which had
not been notified to it, was liable to contain a consider-
able proportion of State aid. In particular, it pointed out
that the liquidation costs were not necessarily higher, as
the French authorities believed, than the costs of recapita-
lisation and disposal. Nor war it proven that the recapita-
lisation was in proportion to the absolute minimum
required.

Thirdly, in its notice of 18 September 1996, the Commis-
sion took the view, on the basis of data submitted earlier
by the French authorities, that the price of the sale to CL
(cid:190) FRF 50 million (cid:190) was below the average value of the
healthy part of SDBO as defined by the bank advising
CDR (namely, FRF 173 million after the injection of the
FRF 207 million originally planned), revealing a loss
incurred by CDR on the selling price and corresponding
aid to CL.

Fourthly,
the Commission had taken the view in its
initiation of the procedure that the use of CL preference
shares to pay for its acquisition could contain elements of
State aid, and infringed Decision 95/547/EC.

III. COMMENTS OF OTHER INTERESTED PARTIES

First, the terms on which the healthy part of SDBO was
sold to CL by CDR did not at first sight appear to comply
with the normal
impartiality that could be
expected. In particular, CDR had not put out any uncon-
ditional, competitive tender. All eight banks invited early

rules of

(i) The Commission received two sets of comments
following publication of the procedure in the Official
Journal of the European Communities.

The United Kingdom submitted its comments by
letter of 13 December 1996, stressing the importance
attached
it

L 103/22

EN

Official Journal of the European Communities

20. 4. 1999

to the need for State aid, such as that approved by the
Commission in 1995 under the CL restructuring plan,
to be granted once only, in full and final settlement.

(i) Transfer of the healthy part of SDBO

Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale, which was one of the banks selected
by CDR on the recommendation of its advisory bank
with a view to the purchase of the healthy part of
informed the Commission by letter of 4
SDBO,
December 1996 that it agreed with the analysis set out
by the Commission in its notice on the sales proce-
dure adopted by CDR. Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale had been
contacted at
the beginning of 1996 by the bank
advising CDR only on the basis of recapitalisation at
the expense of the buyer of the transferable part of
SDBO. Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale considered that the cost of
acquiring the relevant branch of SDBO would consist
of FRF 50 million (revalued net assets of the healthy
part of the bank) and the cost of the recapitalisation
(FRF 207 million), giving a total cost of FRF 257
million. Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale states that, on this basis, it
had declined the invitation to tender, that it had not
been informed by CDR of changes to its decision to
recapitalise the relevant parts of SDBO prior to its sale
and that it had only subsequently learned through the
press of the altered terms on which CL had acquired
the healthy part of SDBO. Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale consid-
ered that Cr(cid:130)dit Lyonnais had thus benefited from aid.

(ii) Following the extension of the present procedure on 2
April 1997, the Commission also received a letter
dated 7 August 1997 from CL, which pointed out in
particular that if the transaction had followed the
reverse order, that is, if the sale (at a negative price)
had preceded recapitalisation at the buyer’s expense
(CL), the financial consequences for CL and CDR
would have been exactly the same. Should the
Commission take a negative decision at the end of
this procedure, CL considers that it is not liable for
repayment of any aid that might be calculated by the
Commission, as it believes that it paid a fair price for
the healthy part of SDBO.

In reply to the Commission notice on the initiation of the
present procedure, the authorities stated in their letter of
11 November 1996 that
the small number of banks
contacted by the bank advising CDR was due to the
limited value of such an acquisition to French and Euro-
pean banking establishments. They stressed that a sale
was necessary as quickly as possible in order to offset the
erosion of the bank’s image due to disputes concerning
some of its loans, which justified the simplified procedure
adopted. By letter dated 29 January 1997 the authorities
considered that the fact that the value calculated by the
bank advising CDR was negative necessitated, in order for
the sale to take place, prior recapitalisation by the vendor,
irrespective of the buyer. If the capital had been injected
by the buyer, the selling price would have been negative,
which would have entailed payment of the value of the
healthy part of SDBO by the vendor to the purchaser.
According to the French authorities, such a transaction
would have involved material difficulties. They added in
their letter of 13 June 1997 that the preliminary tender
specifications clearly showed that the value of the assets
to be transferred was negative before recapitalisation.
They attached a letter from CFER showing the very tight
deadlines imposed on the transaction, in view of the crisis
in the operation of SDBO, which meant that the banks
originally approached could be contacted only by tele-
phone. CFER also stated that the question of recapitalisa-
tion by the buyer was simply a working hypothesis with
no immediate bargaining value, as the value of the busi-
ness being sold was negative.

According to the French authorities, CDR rejected the
bid by Banque Delubac, the only one submitted by the
eight banks contacted, because it covered too few of the
assets and activities of SDBO, leaving too high a restruc-
turing cost for CDR.

IV. COMMENTS OF THE FRENCH AUTHORITIES

(ii) Recapitalisation

By letter dated 11 November 1996 the French authorities
presented their comments in defence of the measures
concerned by the Article 93(2) procedure. They enlarged
on their comments by letter dated 29 January 1997. As
the letters in question resulted in the Commission’s
extending the procedure,
the French authorities sent
additional comments on the extended procedure by letter
dated 13 June 1997.

The recapitalisation of the healthy part of SDBO was,
according to the French authorities, re-estimated at FRF
274,5 million at the beginning of 1996. In comparison
with the initial estimate of FRF 207 million presented to
the eight banks questioned in January of the same year,
the increase was due to the need to allocate FRF 57,5
million to the fund for general banking risks in order to
consolidate the solvency ratio and the need for FRF 10
million more own funds because of the FRF 400 million
increase in the volume of assets to be sold.

20. 4. 1999

EN

Official Journal of the European Communities

L 103/23

However, the recapitalisation actually made in the end
was lower: FRF 240,5 million. The French authorities
explained this by the fact that the advisory bank CFER
had reassessed the value of the assets on the basis of
revised estimates made at the beginning of 1996.

(iii) Valuation of the SDBO assets sold. Selling price

By letters of 11 November 1996 and 27 January 1997 the
French authorities sent the following comments on the
value of the healthy part of SDBO sold to CL.

First, they took the view that, of the different methods for
estimating the value of
the healthy part of SDBO
(discounted cash flows, stock exchange comparisons and
revalued net assets), it was proper to prefer the discounted
cash flow method producing a negative value, initially
estimated at minus FRF 134 million. In support of this
view, they have pointed to the concern of potential buyers
to prevent such a purchase from having adverse repercus-
sions on their own profitability. This prompted the
French authorities
the
revalued net assets carried out by the bank advising CDR,
which had arrived at a higher value (FRF 51 million
before recapitalisation), and the valuation made by the
advisory bank in the document submitted to potential
purchasers, by calculating the average of the values arrived
at by the three methods, which produce an estimated
negative value of minus FRF 34 million (before recapital-
isation).

to disregard the estimate of

The French authorities then informed the Commission
that the value of the transferred part of SDBO had been
revised at the beginning of 1996 by the bank advising
CDR. The net receipts from banking were thus revised
downwards by FRF 16 million for 1996. An identical
correction to the net receipts from banking had been
made for
the following years. The
discounted cash flow method thus resulted in an average
negative net value before recapitalisation of minus FRF
220 million instead of minus FRF 134 million set out in
the previous CFER reference document.

the forecasts for

Taking account of the two factors, the value of the part of
SDBO sold after a capital injection of FRF 240,5 million
amounts, according to the French authorities, to FRF 20,5
million. As CL purchased the business for FRF 50
million, it is not possible, according to the French author-
ities, to conclude, as the Commission did in its decision
of 18 September 1996 initiating the procedure, that CL
benefited from State aid in the form of an under-valuation
of the price obtained by CDR, the transfer having on the

contrary produced extra value in relation to the real value
of the assets sold to CL.

The Commission having questioned the French author-
ities in its notice of 2 April 1997 extending the present
procedure concerning the difference between the value of
FRF 20,5 million after recapitalisation and the price of
FRF 50 million paid by Cr(cid:130)dit Lyonnais, the French
authorities replied by letter of 13 June 1997 that the
difference was due to a final adjustment in the volume of
the assets to be sold and to the different valuation
methods used by CFER, so that the reference values for
valuing the business ranged from minus FRF 195 million
to minus FRF 236,7 million before recapitalisation (cid:190) a
range after recapitalisation of FRF 45,5 million to FRF 3,8
million. They attached a letter
from CFER which
explained that the value also depended on the provi-
sioning rate on the outstanding volume of SDBO assets,
where a variation of 0,1 % could alter the value by some
FRF 20 million. The authorities concluded on that basis
that there were no grounds for considering that the price
of FRF 50 million was unusual.

(iv) Terms of payment

The French authorities made the following points
concerning the use of CL preference shares as a menas of
payment in the transaction in question. First, the prefer-
ence shares are securities without any voting rights and
are thus not comparable to shares. CDR does not there-
fore become a CL shareholder, which maintains the
necessary separation between CL and the hive-off vehicle.
According to the French authorities, the CL preference
shares used in this transaction could not, because of stock
exchange regulations, be negotiated by CL itself, entitled
only to carry out price adjustment operations on its own
account. The CL preference shares were transferred at the
stock exchange price on the day the contribution was
made (28 June 1996). The French authorities also pointed
out to the Commission by letter of 11 November 1996
that, from June to October 1996, CDR had been able to
sell nearly all the CL preference shares on the stock
exchange under satisfactory conditions, for a total of FRF
54 million, so that the end result of the share transactions
resulted in a gain for CDR of FRF 6,66 million.

(v) Liquidation costs

In their letter of 11 November 1996, the French author-
ities repeated their argument that the cost of winding up
SDBO, estimated by CDR at FRF 220 to 230 million,
would have exceeded the net cost of the transaction borne
by CDR, namely some FRF 190 million (that is, the cost
of recapitalisation, FRF 240,5 million, minus the product

L 103/24

EN

Official Journal of the European Communities

20. 4. 1999

the sale, FRF 50 million). The French authorities
of
pointed out that the CDR estimate of liquidation costs
was based on an estimate by the bank advising CDR of
costs totalling some FRF 180 to 190 million, to which
CDR had added FRF 40 million, chiefly to cover social
costs, as it considered the amount taken into account by
CFER insufficient.

In their letter of 13 June 1997, the French authorities
presented two fresh arguments concerning the liquidation
costs which CDR would have borne. First, the authorities
considered that Annex 16 to the Protocol of agreement of
5 April 1995 between CL and CDR provided for
compensation by CDR for all companies of the CL group
incurring future costs and consequences of civil, adminis-
trative, arbitration or other ongoing procedures relating to
the assets and liabilities or commitments guaranteed by
CDR, as defined in Annex 16.2.1. The French authorities
informed the Commission of the opinion of their lawyers
that the social plan negotiated within SDBO was covered
by the words ‘other ongoing procedures' and that the fact
that the plan was not specifically referred to in the Annex
in question did not alter that view, the terms defined in
the Annex referring only to CDR liabilities and not assets.
Secondly,
lawyers
referred to recent Court of Appeal (Cour de Cassation)
case-law stipulating that
redundancies on economic
grounds must be preceded by an effort on the part of the
employer to find other employment within the group to
which the firm belongs, failing which the redundancy
becomes void. The French authorities concluded that they
are justified on those grounds in including social costs,
estimated at FRF 162 million, in the liquidation costs that
would be borne by CDR. By letter of 13 June 1997 they
revised the previous estimate of the total liquidation costs
to be borne by CDR, arriving at a figure of FRF 350
million.

the French authorities

and their

In view of the foregoing, the French authorities took the
view that the sale of part of SDBO to CL did not consti-
tute State aid.

V. ASSESSMENT OF THE AID

(i) Distortion of trade between Member States

trade in the Community will be able to develop without
incurring risks or exchange costs, which will heighten the
distortions of competition that had until
then been
limited to Member States’ domestic markets.

is

As the Commission pointed out in its notice initiating
the procedure, aid that is designed to allow credit institu-
tions to survive despite a lower level of profitability and
capacity to meet competitive challenges, such as the aid
to SDBO,
liable to distort competition in the
Community when it makes it more difficult for foreign
banks to enter the various domestic banking markets.
Such is the case with the aid in question. It has been
explicitly established that no foreign bank was contacted
in connection with the disposal of SDBO and none was
able to express an interest. Furthermore, by keeping an
uncompetitive French business alive by means of the
in other
financial
measures
Community countries are deprived of an opportunity to
expand their exports of financial services in France so as
to reach the clientele of the SDBO branch being sold.

in question,

institutions

Furthermore, as it was decided to recapitalise part of the
business rather than wind up the whole of SDBO, no
banks in other Community countries were given the
opportunity to acquire the assets, especially the sounder
assets sold to CL which would have been put on the
market in the event of liquidation.

Consequently, it must be concluded that if the measures
in question contain aid, they are caught by Article 92(1) of
the Treaty as they constitute State aid which distorts
competition to an extent liable to affect trade between
Member States.

(ii) Transfer procedure adopted for the healthy part

of SDBO

The Commission set out
its position on privatisation
transactions in its 23rd Competition Report (1) for 1993,
and listed cases where such a transaction could be
regarded as not containing aid and those where noti-
fication would be required owing to a presumption of aid;
the cases were also listed in its notice of 18 September
1996 on the initiation of this procedure. The principles
provide in particular that there is no State aid and no
need to notify if:

(cid:190) an unconditional competitive tender is held,

(cid:190) it takes place in non-discriminatory and transparent

conditions,

Competition between financial establishments within the
Community is growing as a result of economic and
monetary union. With the creation of the single currency,

(1) See paragraph 403, page 273. The French authorities had been
informed beforehand about
the Commission’s position by
letter of 14 July 1993 from de Director-General for Competi-
tion.

20. 4. 1999

EN

Official Journal of the European Communities

L 103/25

(cid:190) the company is sold to the highest bidder,

(cid:190) bidders are given enough time and information to
carry out a proper valuation of the assets as the basis
of their bid.

On the other hand, the Commission considers that a sale
must be notified in advance in accordance with Article
93(3) of the Treaty as it may contain State aid if it:

(cid:190) takes place either after negotiation with the single
prospective purchaser or a number of selected bidders
(in that event, there may be aid to the purchaser if the
price is not a market price and is under-valued (see
(iii)(b)),

(cid:190) or is preceded by the writing-off of debt by the State,
other public enterprises or any public body, in which
case the aid is granted to the firm receiving the capital
injection,

(cid:190) or is preceded by the conversion of debt into equity or
capital increases, in which case the aid is granted to
the firm receiving the capital injection (see (iii)(a) and
(iv)),

(cid:190) or takes place on conditions that are not customary in
comparable transactions between investors in a market
economy.

It seems that the transaction failed in several respects to
follow the principles outlined above which could have
exempted it from notification, as it was not the subject of
an unconditional,
transparent and non-discriminatory
competitive tender and it was preceded by a capital
increase.

The Commission considers in particular that,
in two
the healthy part of
the sale of
fundamental respects,
SDBO did not satisfy the need for transparency and
impartiality. First, the list of banks contacted in January
1996 by the bank advising CDR is limited to eight french
institutions. The French authorities justified that on the
grounds of the limited value of such an acquisition to
french and European banking establishments and by the
urgency in view of the deteriorating image of SDBO. The
Commission, however, does not see that there is any
justification for the preference given to French banks over
other Community banks. It is not for the vendor to take
the place of a potential buyer in order to decide in
advance whether such an acquisition is in the latter’s
interests. Only by consulting a far larger number of banks,
including banks outside France, would it have been
possible to check a posteriori the accuracy of the French
authorities’ claim.

deadline of 19 January for all expressions of interest. By
22 January 1996, CFER was already writing to CDR
informing it that there were no satisfactory offers for the
healthy part of SDBO; it is reasonable to doubt whether
the banks approached had an opportunity to examine the
file under satisfactory conditions. The sale agreements
with CL was signed on 2 February 1996. The Commis-
sion notes, however, that the actual sales was on 28 June
1996,
the transaction by an
extraordinary general meeting. Thus, there is no evidence
either that an approach to a larger number of banks
would,
the valuation and
the duration of
transfer procedures, have significantly prolonged the
proceedings and would thus have injured SDBO. The
precipitate nature of the procedure followed in January
has therefore not been satisfactorily justified.

following approval of

in view of

The French authorities also refer to the importance of an
adequate knowledge of the French business market owing
to the size of SDBO’s law courts department and SME-
financing department. However, a bank specialising in
this area in another Community country could have
in
contributed know-how an expressed and interest
acquiring the ‘sound' bank assets of SDBO,
thus
expanding its activities into France.

Secondly, basic information on the valuation of the busi-
ness and the recapitalisation of the SDBO branch being
sold was modified in the course of the transfer procedure.
Only CL was able to benefit from the information on
these changes. The other eight banks were not informed
by CDR of the revised estimate made by its advisory bank
at the beginning of 1996 of the value of the healthy part
of SDBO or of the transfer of the obligation to recapita-
lise the firm from the buyer to the vendor, or of the
change in the volume of assets sold by the authorities or,
in fine, of the decision by CDR to increase the recapitali-
sation from FRF 207 million to FRF 240,5 million. As
was confirmed by the comments received from Soci(cid:130)t(cid:130)
G(cid:130)n(cid:130)rale, none of the eight other banks was given the
opportunity to modify their assessment and make an offer
on the basis of the new information. By letters of 29
January and 13 June 1997, the French authorities denied
that the banks were approached on the basis of recapitali-
sation at the expense of the buyer and considered tha
Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale could not claim that the invitation to
tender would, if it had made an offer, have required it to
provide the capital itself.

The procedure was extremely brief for a sale of this type:
the CFER letters to the pre-selected banks were sent
between 8 and 11 January 1996 and imposed a strict

The Commission has checked this particular point. The
assessment report prepared by the bank advising CDR
served as a basic document to the invitation to tender and
was sent to each of the eight banks in question. Chapter
6.1 ‘Valuation framework' of the report states that the

L 103/26

EN

Official Journal of the European Communities

20. 4. 1999

valuation of the healthy part of SDBO, referred to as the
sound bank, is based on its transfer from CDR to an
establishment that will be responsible for its recapitalisa-
tion. [. . .] The valuation [. . .] will also take account of the
fact that the capitalisation of the new establishment will
becarried out by the beneficiary. It is thus very clear from
this document that the banks approached were consulted
on the basis of recapitalisation at the expense of the
buyer. The Commission cannot therefore consider, as was
claimed by CFER and the french authorities in a letter of
13 June 1997, that recapitalisation by the buyer was only
a working hypothesis.

The Commission is not concerned with the desirability as
such of recapitalising the relevant part of SDBO before or
after a transfer which, in the latter case, would have been
at a negative price: in both cases, the transaction should
have been notified to it under Article 93 of the Treaty as
it involved the transfer of CDR resources. On the other
hand, as soon as one method is chosen rather than
another, the vendor should keep to it throughout the
procedure. These factors, together with the altered es-
timate of the value and the volume of the SDBO assets in
the middle of a transfer procedure, introduce inequality
between CL and the other potential buyers. Any change
in the initial data supplied to the potential buyer should
have given rise to a new invitation to tender. The proce-
dure followed did not therefore guarantee the transfer of
the healthy part of SDBO under the necessary conditions
of impartiality and transparency.

On the basis of the abovementioned criteria which the
Commission aplies in cases of privatisation, the transac-
tion should therefore have been notified to it as it was
likely to include aid in view of the procedure adopted.

(iii) Measures covered by this procedure

(a) The recapitalisation

The recapitalisation measures in question concern the
‘healthy' part of SDBO (the ‘sound' bank) and not its
less-performing assets which, like the legal entity SDBO,
remained the property of CDR after the recapitalisation
and sale of the ‘sound' bank.

The capital injection is an extra cost borne by the State
and is not provided for in the restructuring plans for CL
approved by the Commission in its decisions of 26 July
1995 and 20 May 1998. As the French authorities pointed
out, because the recapitalisation was chiefly intended to
make good the negative value of the ‘sound' bank to avoid
a sale at a negative price, the losses incurred by CDR on
the transaction are not related to the book value of the
SDBO contribution to CDR in respect of which provi-

sions or loss from transfer were made by CDR and
included by the Commission in calculating the estimated
aid (upper value within the range) to CL authorised in its
decision of 20 May 1998 on CL. The aid in question (see
below, confirmation that the transaction comprises aid)
may thus differ in nature and amount from the aid to CL
already authorised by the Commission.

(b) Possible aid to the buyer in the terms and price of the

sale

In its notice of 18 September 1996 on the initiation of
this procedure, the Commission considered that, in view
of the transfer procedure adopted and the value of the
firm as estimated at the time by the authorities, there was
a presumption of aid to the buyer (CL), assuming that the
price paid by the latter for the assets was lower than their
value.

Following the extension of the procedure in April 1997, it
would seem as matters stand that,
in the absence of
alternative offers from the other banks approached in
January 1996 by the bank advising CDR, a transfer agree-
ment was signed on 2 February 1996 by CDR and Credit
Lyonnais on the acquisition of
the healthy assets of
SDBO by the latter at a price (FRF 50 million) which
differed from the reference value fixed by the authorities
(minus FRF 20,5 million after recapitalisation) for the
healthy part of SDBO. The Commission is unable, owing
to that difference and the procedure followed, to conclude
that the selling price agreed on by the parties is a market
price.

The Commission has noted the information sent by the
French authorities by letter of 11 November 1996 on the
revaluation of the healthy part of SDBO carried out at the
beginning of 1996, based on a correction by the bank
advising CDR of the expected results achieved by the
SDBO branch being sold and the value of the bank
obtained on the basis of discounted income flows, namely
a negative value of FRF 220 million. The Commission
notes, however,
the valuation method currently
preferred by the French authorities is in contradiction
with their original presentation of the transaction based
on the weighted average of three valuations obtained by
different methods.

that

the Commission is prepared to accept

the transfer procedure
Despite the inadequacies of
adopted,
the
French authorities’ argument that the discounted cash
flow method is an appropriate method of valuing the
assets to be sold. The Commission generally takes the
view that
is the standard method that should be
preferred in transactions of this kind, as it values the firm

it

20. 4. 1999

EN

Official Journal of the European Communities

L 103/27

concerned with a view to its long-term prospects, usually
the aim of any buyer. The bank advising CDR had
already drawn the latter’s attention, in a letter dated 23
February 1996, to the downward revision of the expected
results for 1996 and, given the repercussions of the revi-
sion on the forecast for subsequent years, stressed the
impact on the value of the company determined using
the discounted cash flow method. On that basis,
the
Commission can also accept the new estimated value
presented by the French authorities, namely a negative
value for the SDBO assets sold of minus FRF 220 million
(before recapitalisation).

then later to consider that the selling price should be
assessed again on the basis of a range comprising several
methods. By imposing an additional cost, corresponding
to the extra value, on CL, thus producing an improper
transfer of value from CL to CDR, the transaction runs
counter to the objectives of the CL restructuring plan.
Nevertheless, a price that is higher than the value of the
asset does not in itself constitute State aid, especially as
the beneficiary of the extra value, CDR, is the holding
company created to wind-up CL’s bad assets rather than a
firm in competition with others.

Given CDR’s decision to recapitalise the healthy part of
SDBO at its own expense to the tune of FRF 240,5
million, the value of the part sold after recapitalisation is
FRF 20,5 million, as the French authorities note in their
letter to the Commission of 11 November 1996.

Accordingly, on the basis of the estimated value of the
assets accepted by the French authorities and in view of
the selling price of FRF 50 million, the Commission
concludes that the transaction did not involve aid to the
buyer.

It is pointed out, however, that the price at which the
healthy part of SDBO (FRF 50 million) was sold to CL is
in itself unusual and unjustified, inasmuch as it exceeded
the value of the assets by FRF 29,5 million (cid:190) an over-
valuation by some 60 %. The French authorities endeav-
oured to justify that price in a letter of 13 June 1997 on
the ground of a last-minute adjustment to the volume of
assets sold and by the very wide range of valuations of the
bank, ranging from FRF 3,8 million to FRF 45,4 million,
depending on the valuation method used by CFER
(namely stock-exchange comparison, revalued net assets
and discounted cash-flow methods); they also provided
data from CFER on the volatility of the estimate in rela-
tion to the provisions for loans of the ‘sound' bank. The
Commission notes that
is highly contradictory to
consider, as the French authorities did in their letter of 11
November 1996, that the value of the bank should in fact
be defined solely on the basis of the flow method, giving
a value of FRF 20,5 million after recapitalisation (which
resulted in the Commission’s extending this procedure to
take account of the change in the valuation method), and

it

(iv) Presence of State aid in the recapitalisation

As the Commission pointed out in its notice initiating
the procedure,
the recapitalisation in question may
contain State aid pursuant to Article 92(1) of the Treaty.
The recapitalisation, which represents a considerable
investment by CDR, should have been notified to the
Commission by the authorities before it was carried out
by CDR. As the latter is a public undertaking, set up by
the State as part of a plan to rescue CL, and is controlled
by the public authorities, its resources are State resources
within the meaning of Article 92(1) of the Treaty. Any
injection of funds by CDR into one of its subsidiaries
thus constitutes State aid if, under normal market condi-
tions, a private investor would not have carried out a
similar operation (1). If it is confirmed that a non-notified
measure of this type constitutes State aid, it is unlawful. It
is for
if appropriate,
whether such aid may be regarded as compatible with the
Treaty.

the Commission to determine,

The French authorities have not backed their claim that
the measure does not constitute State aid with any
information on returns on capital invested which would
similar circumstances, a private
indicate that, under
investor would have been prepared to recapitalise the
firm. On the contrary, the aid was essentially granted on a
non-repayable basis, CDR having recouped only a very
injected from the selling
small fraction of the capital
price. With the exception of Banque Delubac, which
submitted a bid rejected by CDR as it did not cover a
sufficient number of assets, the fact that all the banks
contacted declined the invitation to acquire the ‘healthy'
the volume of assets
part of SDBO, on the basis of
defined by the vendor and recapitalisation at the buyer’s
expense, lends credence to the argument that a private
investor would not have invested the capital. Furthermore,
the forecasts corrected at the beginning of 1996 by the
bank advising CDR indicate that the firm incurred losses
in 1996, 1997 and 1998, so that its estimated value using
the discounted cash-flow method was very negative (FRF
220 million).

(1) In deciding whether injections of public resources into a firm
constitute State aid, the commission applies the principle of a
commercial investment in a market economy, see communica-
tion to the Member States (OJ C 307, 13.11.1993, p. 3).

L 103/28

EN

Official Journal of the European Communities

20. 4. 1999

The Commission noted the argument put forward by the
French authorities by letter of 11 November 1996 that, if
the transferable assets of the firm had been wound up,
CDR would have incurred costs of some FRF 220 million
to 230 million. The recapitalisation (FRF 240.5 million)
followed by the sale (FRF 50 million) resulted in net costs
(FRF 190 million). In the letter of 13 June 1997 the
French authorities also re-estimated at FRF 350 million
the total costs of winding up the transferable assets of
loans
SDBO,
outstanding (FRF 180 to 190 million) and social costs
(some FRF 160 million). They conclude on this basis that
CDR acted as a prudent shareholder and that the recap-
italisation measures in question do not constitute aid.

liquidation costs

including

the

for

The Commission cannot agree that the liquidation costs
referred to by the French authorities are chargeable to the
shareholder. The estimated liquidation costs to be borne
by the shareholder are based on the assumption that
CDR, which owned SDBO, would be required to make
good the liabilities in the event of liquidation and was
liable for various liquidation charges such as the social
costs. In similar precedents, the Commission and the
the European Communities have
Court of Justice of
consistently rejected (1) the argument that such costs are
chargeable to the shareholder, on the ground that a share-
holder’s liability is related to the value of its contribution
to the firm’s capital and not to all the liquidation debts.
The fact that the State (or a public entity such as CDR)
takes over all or part of the liquidation debts is not due to
its status as a shareholder but to additional obligations
which it considers are placed on it and which take the
form of aid. Accordingly, in calculating the liquidation
costs, the Commission can take account only of those
costs that are chargeable to the shareholder State, that is,
usually the amount of
its contribution to the firm’s
capital.

The Commission has in particular examined the provi-
sions of the law of 25 January 1985 on company rehabili-
tation and liquidation (2). The law cannot be invoked to
establish a shareholder’s liability for all the liquidation
debts. Article 180 of the law provides that, in the event of
the management having contributed to a shortfall
in
liquidation assets, the ipso jure or de facto managers are
liable for the firm’s debts. It should be noted in this
connection that CDR cannot in this specific instance be
regarded as an ipso jure or de facto manager (nor is that
its role), SDBO having been transferred from CL to the

(1) See Commission Decision 94/1073/EC (Bull)

(OJ L 386,
31.12.1994, p. 1; see judgment of the Court of Justice in Case
of 14 September 1994 in Case C-278/92 Spain v. Commission
[1994] ECR I-4103 et. seq., paragraph 22.

(2) Official Journal of the French Republic, 26.1.1985, p. 1547 et

seq.

hive-off vehicle only in 1995 and that, if management
errors are at the root of inadequate liquidation assets of
SDBO, those errors are very probably due to decisions
preceding the hive-off of SDBO, at which time SDBO
was already regarded as a poor quality asset of CL, justi-
fying its hive-off. Furthermore,
the error or errors
committed by the ipso jure or de facto managers should
be identified and their effects should be quantifiable. The
managers would thus be liable, not for all the debts of the
firm and its liquidation debts, but within the limits of the
financial consequences due to any such management
errors.

Neither the French authorities nor the present procedure
have produced evidence that CDR is equivalent to an ipso
jure or de facto manager of SDBO following the latter’s
hiving-off to CDR in 1995, or that it committed errors of
management which justify requiring it to make good all
or part of the liquidation debts of SDBO.

In their letter of 13 June 1997 the French authorities
pointed out that Annex 16.2 to the Protocol of 5 April
1995 between CL and CDR provides
for CDR to
compensate any CL company for possible future costs
and consequences of civil, administrative, arbitration or
other ongoing proceedings connected with assets, liabili-
ties or commitments guaranteed by CDR, as defined in
Annex 16.2.1. The authorities concluded from this that, in
the event of liquidation owing to the cessation of the
activities which formed the basis for the social plan of
1995, negotiated before SDBO was hived-off to CDR, the
latter should have borne the cost of compensating the
workforce for the termination of the social plan. The
Commission notes, however, that Annex 16.2.1. refers
only to transferred assets and not to any social commit-
ments. Furthermore,
to which the French
the event
authorities refer is a liquidation which, when the Protocol
was drawn up, was not an ongoing proceeding. The
therefore agree with the French
Commission cannot
authorities on this point or with the views of the lawyers
contained in the same letter, to the effect that the social
costs of
liquidation would have been borne by CDR
under the Protocol of Agreement between CL and CDR.

In support of their argument that CDR would bear all or
part of the social costs of winding up SDBO, the French
authorities referred in the same letter of 13 June 1997 to
a recent judgment of the French Court of Appeal (Cour
for
de

Cassation) (3),

redundancy

stating

that

(3) Judgments of the Court of Appeal of 5 April 1995 and 3

February 1996.

20. 4. 1999

EN

Official Journal of the European Communities

L 103/29

economic reasons must be preceded by a search for other
possible employment within the group to which the
employer belongs, failing which the redundancy proce-
dure would become void. However,
the obligation in
question clearly relates to the search and not to the result.
To the extent that CDR (the ‘group' to which SDBO
belongs) has the task of selling or liquidating the poor-
quality assets hived-off to it, and having regard to the mix
of activities hived-off, most of which have nothing in
is
common with the banking activities of SDBO,
unlikely that, if SDBO had been liquidated, there would
have been any significant chance of re-employing SDBO
staff in the firms hived-off to CDR. Lastly, the French
authorities appear to draw an arguable parallel between
the obligation of the employer (SDBO) and that of the
shareholder
(CDR): according to the abovementioned
case-law of the Court of Appeal, as presented by the
authorities’ legal representatives, a redundancy procedure
initiated by an employer (SDBO) becomes null and void
under certain circumstances (failure to seek alternative
employment within the group), but clearly does not
impose such a requirement or compensatory payments by
the employer, on the shareholder (CDR).

it

It is not for the Commission to assess the real cost of
liquidating the assets transferred to SDBO. According to
the estimate presented by the French authorities, the debt
liquidation costs apparently totalled some FRF 190
million. The claim that all or even part of such debt
liquidation costs would be chargeable to the shareholder
CDR under the abovementioned law of 1985 on company
rehabilitation and liquidation has not been proved either,
and must be rejected by the Commission.

The Commission cannot therefore accept the estimated
liquidation costs borne by the shareholder as presented by
the French authorities. It is not apparent that CDR chose
the least costly option by deciding to recapitalise and sell
SDBO, under the conditions described above. Further-
more, on a secondary basis, even if that were the case as a
result of management errors by CDR as the ipso facto or
de facto manager, the Commission notes that the provi-
sions of the 1985 law would not enable the French State
to claim exemption from Article 92 of the Treaty without
flouting the principle of law that arguments cannot be
based on one’s own faults.

As a result, the private investor would not, on the basis of
the foregoing, have carried out the recapitalisation which,
as it is liable to affect intra-Community trade, thus consti-

tutes a measure containing aid within the meaning of
Article 92(1) of the Treaty. As stated in the Commission
notice initiating this procedure, the compatibility of such
a measure with the common market can be examined
only pursuant to Article 92(3)(c) of the Treaty, on the basis
of a new restructuring plan which, in particular, demon-
strates that the firm is viable.

(v) Assessment of the compatibility of aid granted

in the form of capital injections

As the Court of Justice of the European Communities has
consistently held, aid must be assessed on the basis of its
effects. In the present case, the effects of the measures
concerned, borne by CDR, must be assessed from the
standpoint of the ‘sound' bank.

In assessing the compatibility of the aid in question, the
Commission follows the general principles contained in
its guidelines on rescue and restructuring aid (1) which
sets out the conditions for such aid to be regarded as
compatible with the Treaty. Because the measures do not
constitute rescue aid within the meaning of the guide-
lines, as they are not temporary pending other restruc-
turing measures, their compatibility with the Treaty must
be determined by examining whether
they may be
regarded as restructuring aid and, if appropriate, whether
they satisfy the conditions applicable to restructuring aid.
In particular,
the restructuring plan must restore the
viability of the enterprise. Furthermore, in order to be
compatible with the Treaty, the measures must not cause
distortions of competition contrary to the common
interest, the aid must be in proportion to the costs and
benefits of restructuring and the plan must be imple-
mented in full.

The authorities have not presented the Commission with
any overall restructuring plan for SDBO, although some
of its assets were clearly impossible to manage so as to
yield a satisfactory rate of return. CDR, however under-
took restructuring measures aimed at isolating and resel-
ling to CL the part of SDBO regarded as healthy (cid:190) the
‘sound' bank. The less-performing assets continued to be
held by the legal entity of SDBO, within CDR. The
measures were undertaken with the support of CFER,
which summarised them in a document dated 29
November 1995 (subsequently the subject of consulta-
tions in January 1996 with the banks approached with
regard to the acquisition of the ‘sound' bank), incorpor-
ating a commercial plan aimed at improving the position
of the entity being sold.

(1) Community guidelines on State aid for rescuing and restructu-

ring firms in difficulty (OJ C 368, 23.12.1994, p. 12).

L 103/30

EN

Official Journal of the European Communities

20. 4. 1999

The measures in question were as follows:

(cid:190) withdrawal

from the property business,

already
commenced in 1993 (cid:190) the year in which most
SDBO property assets were hived off to the CL prop-
erty vehicle (Omnium Immobilier de Gestion, sub-
sequently integrated in 1995 in CDR for FRF 44
billion of debt),

(cid:190) refocusing of the bank’s activities on the legal profes-
sions, commercial banking services for SMEs, finan-
cial engineering, asset management for third parties
and market activities,

(cid:190) the social plan for June to the end of August 1995,
involving a substantial reduction in the workforce
from 372 to 242 employees,

(cid:190) an improvement

in 1995,
including the setting-up of an internal audit team and
reinforced management control,

in audit procedures

(cid:190) internal reorganisation of the bank on the basis of two
main departments with responsibility for operational
matters (law courts department, commercial depart-
ment, private management, merchant banking),
production and logistics.

The Commission notes that these measures, which were
already operative in 1995 (and in 1993 as regards the
withdrawal
from the property market), could not be
regarded in 1996 as constituting, at the time of the capital
increase in the second quarter, a restructuring plan
enabling the fresh aid to be regarded as compatible with
the common market.

Apart from the regrouping and reorganisation measures, a
commercial plan was approved in 1995 designed to place
the ‘sound' bank on a healthy footing. The commercial
plan, intended to stabilise a turnover rate that had steadily
declined in preceding years, was aimed at ensuring that
the business remained in strict equilibrium.

The hypothetical results were, however, dependent on the
amount of capital that would subsequently be injected
into the transferred branch of SDBO, a figure not known
when the forecasts were drawn up at the end of 1995.
Initially estimated by CFER at FRF 207 million, the
recapitalisation would, according to the bank advising
CDR, have had the effect of producing a net operating
result of FRF 45 million and a result of FRF 9,6 million.
If the forecasts had been realised, it would have been
possible to envisage the viability of the healthy part of
SDBO, although that is not certain since not only was the

return on capital insufficient to attract risk capital but also
the firm’s result, very close to equilibrium, was particu-
larly vulnerable to any unforeseen hazards. An operating
result that was higher by FRF 13 million (1) following a
capital injection of FRF 207 million, the figure proposed
at the time, would have produced, on the basis of forecasts
made at the end of 1995, a corrected net result of FRF 15
million in 1998, which still represents a very low rate of
return.

Table 2

Projections for the commercial plan drawn up at the end
of 1995

(FRF million)

1996

1997

1998

Gross margin

Gross operating result

193

40

190

32

195

37

Net result

6,5

0,8

2,5

Own capital (1)

300

Profitability

2,1

na

na

(1) 1996 budget hypothesis

Source: CFER

The figures (see Table 2), however, which were provisional
when the forecasts were drawn up at the end of 1995,
were already irrelevant when the transfer took place in
1996. According to information provided by the French
authorities by letter of 11 November 1996, at the begin-
ning of 1996 the bank advising CDR corrected its 1996
estimate of the expected result for SDBO by FRF 16
million downwards and applied a similar negative correc-
tion to the subsequent years. On the basis of that correc-
tion, the ‘sound' bank would have incurred losses in 1996,
1997 and 1998. As a result, using the discounted cash-
flow method, the advisory bank produced a very negative
estimate of the value of the company. As a result, at the
end of the transaction, the recapitalised entity could not
be regarded as viable.

commercial

Thus the first requirement, according to the abovemen-
tioned guidelines, for aid to be regarded as compatible has
recovery plan
not been satisfied. The
contained in the CFER document submitted by the
French authorities to the Commission cannot be accepted
by the latter as it has been established that, during the
it did not allow the firm to
transaction in question,
become viable. As the aid granted to the assets sold was
not intended to accompany a plan capable of restoring
viability, it cannot be regarded as restructuring aid but as
de facto operating aid. The plan therefore does not satisfy
the requirements of the guidelines.

(1) FRF 207 million multiplied by an average long-term interest

rate of 6,5 % in 1996.

20. 4. 1999

EN

Official Journal of the European Communities

L 103/31

As it distorts competition to an extent which may affect
intra-Community trade (see Section V(i)), the recapitalisa-
tion comprises elements of State aid pursuant to Article
92(1) of the Treaty and, as it was not notified, it is there-
fore unlawful. In view of the fact that, as was established
by the Commission in its notice initiating the procedure,
its compatibility with the Treaty could be assessed only
pursuant to Article 92(3)(c) of the Treaty on the basis of a
new restructuring plan demonstrating, in particular, the
viability of the firm, it must be concluded in view of the
foregoing that the recapitalisation of the healthy part of
SDBO constitutes aid that
is incompatible with the
common market and unlawful as it was implemented
without being notified.

(vi) Mode of payment by the buyer

Taking note of the information supplied by the French
authorities and outlined in Section IV, the Commission
considers that payment in the form of CL preference
shares rather than payment in cash for SDBO was inap-
propriate. In any such transaction, all payments in the
form of listed securities, the value of which is volatile,
may give rise to aid where the State sells some of its assets
in exchange for the buyer’s securities. Furthermore, the
fact that CDR held CL securities, even temporarily, is
contrary to the need for strict separation between the
hive-off vehicle and CL pursuant
to Decision 95/
547/EEC. Any decline in the value of CL would be
reflected in the value of the preference shares held by
CDR.

As the Commission has not been informed of any factors
offsetting the risk incurred by CDR in connection with
this method of payment, it is highly unlikely that, before
the completion of this transaction, a private shareholder
would have agreed to sell its assets in exchange for vol-
atile securities. There was a considerable risk of incurring
a loss, as the poor results of the bank produced the
safeguard measures notified to the Commission in
September; the risk should have been avoided, particularly
in view of the volatility of the preference share rate, which
fell by some 50 % between 31 December 1995 and June
1996. The Commission, which analysed the transaction
on the basis of the conditions known on the date of the
transaction (and not on the basis of the ex post gain made
by CDR on the securities), considered that a private oper-
ator would, in view of such volatile securities as the CL
preference shares which had fallen by almost 50 % in the
month preceding the transaction, have demanded a
discount on the stock exchange rate in order to take
account of that risk. It therefore considers that the trans-

action gives rise to aid in respect of the discount which a
private investor would have required. It is particularly
difficult, however, to assess the amount of aid. In view of
the extra value of FRF 29,5 million which CL paid for the
‘sound' bank (cid:190) about 60 % of the amount of the transac-
tion (cid:190) the Commission considers that this element of
aid to CL cannot exceed the extra value of 60 % in
question and that it should not therefore be included in
the calculation of aid covered by this Decision.

VI. CONCLUSIONS

Concluding the procedure initiated on 18 September
1996 and extended on 2 April 1997 concerning the recap-
the
italisation and transfer of part of SDBO to CL,
Commission has reached the following conclusion:

1. The procedure for the transfer of the healthy part of
SDBO failed to apply the equality of treatment that is
desirable between, on the one hand, the eight pre-
selected potential buyers and, on the other, CL. Having
taken place without an open and unconditional invita-
tion to tender, it should have been notified to the
Commission under the criteria defined in the 23rd
Competition Report. In particular, it did not allow the
banks of other Community countries to submit bids
and consequently distorted competition in the
Community to an extent liable to affect trade between
the Member States. The price paid for the transfer of
the healthy assets of SDBO (cid:190) FRF 50 million (cid:190) is an
excessive purchase price, to the detriment of CL as
regards the FRF 29,5 million in extra value paid by CL.
In view of the selling price and extra value paid by CL,
the Commission concludes that the transaction did not
involve State aid to the purchaser, which would have
been the case, as stated when this procedure was
initiated, if the selling price had been too low in rela-
tion to the real value of the assets sold.

2. The recapitalisation of the SDBO assets sold to CL
increased CDR’s losses and caused the hive-off mecha-
nism to exceed the costs approved by the Commission
in Decisions 95/547/EC and 98/490/EC on CL.
However, the additional losses borne by the hive-off
are not chargeable to CL in the same way as provisions
for asset depreciation which occurred during the
transfer of the CL assets or subsequently during the
hiving-off: the cause of the losses is not the hive-off
operation but a management decision, for which CDR
alone is responsible, taken after the transfer of the
should
assets

in question from CL to CDR.

It

L 103/32

EN

Official Journal of the European Communities

20. 4. 1999

be noted that, although CDR continues to be wholly-
owned by CL, it is not consolidated and is not involved
in any of the management or supervisory bodies of
CDR. The nature of
the aid and its recipient are
different from the aid to CL. As a result, the recapitali-
sation of SDBO is a measure intended to assist the
‘sound' bank sold immediately after the transaction
and not CL as part of the overall hive-off operation.
3. The recapitalisation of FRF 240,5 million prior to the
disposal of the healthy part of SDBO, which had a
negative value and could have been wound up at less
cost to the shareholder, constitutes State aid to the
recapitalised entity because a private investor would
not have invested such capital under similar circum-
stances. As the recapitalisation was not notified to the
Commission, it is unlawful. Furthermore, it was not
accompanied by a restructuring plan demonstrating
the viability of
the
exemption provided for in Article 92(3)(c) of the Treaty
which was, as stated in the notice initiating this proce-
dure, the only possible exemption under the circum-
stances, is not applicable. The aid in question is there-
fore not compatible with the Treaty.

the firm, with the result

that

4. The terms of payment for the sale of the healthy part
of SDBO in the form of CL preference shares are not
appropriate to such a transaction, in particular because
the parties to the contract have unequal information
with a view to determining their value. They are also
contrary to the necessary separation between CDR and
CL. They constitute aid to CL amounting to the value
of
the discount on the securities which a private
vendor, remunerated in this way, would have required
at the end of the transaction. However, in view of the
extra value of FRF 29,5 million paid by CL,
the
Commission takes the view that the discount should
not exceed that amount, namely about 60 % of the
selling price, and that CL did not benefit from any aid
in the transaction in question.

5. The Commission concludes that State aid was granted
through the measures covered by the procedure
initiated on 18 September 1996 in the form of the
recapitalisation by CDR of the SDBO assets sold to CL
for FRF 240,5 million. The Commission cannot
deduct the product of the sale (FRF 50 million) from
that amount, as the funds paid by CL also constitute

State resources within the meaning of Article 92(1) of
the Treaty and do not reduce the amount of State
resources employed in this
transaction. The aid
granted by CDR in the context of the transaction
amounts to a total FRF 240,5 million,

HAS ADOPTED THIS DECISION:

Article 1

The capital increase of FRF 240,5 million granted by the
French State through CDR to SDBO before the transfer
of its healthy activities to CL constitutes State aid within
the meaning of Article 92(1) of the Treaty and Article
61(1) of the EEA Agreement. The aid is unlawful and is
incompatible with the common market within the
meaning of Article 92(2) and (3) of the Treaty and Article
61(2) and (3) of the EEA Agreement.

Article 2

France shall take steps to recover the full amount of FRF
240,5 million constituting the State aid in question. The
amount to be repaid shall bear interest from the date on
which the aid was granted, at the reference rate estab-
lished by the Commission for the calculation of the net
grant equivalent of aid in France.

Article 3

The French Government shall inform the Commission
within two months of the date of notification of this
Decision of the measures it has taken to comply herewith.

Article 4

This Decision is addressed to the French Republic.

Done at Brussels, 22 July 1998.

For the Commission

Karel VAN MIERT

Member of the Commission