2000/536/EC: Commission Decision of 2 June 1999 concerning State aid granted by Italy to Seleco SpA (notified under document number C(1999) 1524) (Text with EEA relevance) (Only the Italian text is authentic)
Date: 1999-06-02
Institutions: European Commission
Subjects: European Commission, Friuli-Venezia Giulia, State aid, control of State aid, electronics industry, infringement of EU law

L 227/24

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Official Journal of the European Communities

7.9.2000

II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 2 June 1999

concerning State aid granted by Italy to Seleco SpA

(notified under document number C(1999) 1524)

(Only the Italian text is authentic)

(Text with EEA relevance)

(2000/536/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of Article
88(2) thereof,

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

Having called on interested parties to submit their comments
pursuant to the provisions cited above,

Whereas:

I. PROCEDURE

(1)

(2)

By letter registered as received on 30 March 1994, the
autonomous region of Friuli-Venezia Giulia, acting in
accordance with Article 88(3) of the Treaty, notified the
Commission of Regional Law No 47/94 on special assis-
tance for Seleco SpA, Pordenone (hereinafter referred to
as ‘Seleco’).

By letters of 12 April and 26 July 1994, the Commis-
sion asked the Italian authorities for further information.
No reply was received to those letters. The Commission
learned from press reports that the notified transaction
had been carried out on 6 August 1994 before it had

expressed its views. Accordingly, on 18 August 1994,
the aid measure was deleted from the register of notified
aid and entered in the register of non-notified aid under
number NN 92/94. The Commission also learned that
Ristrutturazione Elettronica SpA (hereinafter referred to
as ‘REL’) had partially written off loans made to Seleco
under an agreement concluded in 1994 to cover losses
for the financial year 1993.

In the absence of further information from the Italian
authorities and in view of its doubts concerning the
compatibility of the aid with the common market, the
Commission decided on 27 September 1994 to initiate
the Article 88(2) procedure.

The Italian authorities were informed of the initiation of
the procedure by letter of 10 October 1994. They
presented their observations by letter of 27 March 1995.
The Commission invited comments from other inter-
ested parties by publishing a copy of its letter in the
the European Communities (1). No
Official
comments were received from third parties.

Journal of

By letters dated 26 October 1994, 30 January 1995, 19
April 1995, 7 July 1995, 25 August 1995 and 19
November 1996,
the Commission asked the Italian
authorities for more detailed information, which it
received on 10 November 1994, 31 March 1995, 27
June 1995, 19 December 1995, 22 January 1996, 5
December 1996 and 11 February 1997 respectively.
Further details were provided at a meeting held on 22
November 1995 between representatives
the
Commission and the Italian Government.

of

(3)

(4)

(5)

(1) OJ C 373, 29.12.1994, p. 5.

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(6)

(7)

(8)

(9)

As the Commission was about to terminate the proce-
dure,
it learned, once again from press reports, that
further State aid may have been granted to Seleco. By
letter of 19 November 1996, it asked the Italian authori-
ties for details. Replies from the Italian authorities were
received by the Commission on 5 December 1996 and
11 February 1997. In view of the information contained
in the letters, the Commission decided on 3 February
1998 to extend the Article 88(2) procedure to the new
measures.

The letter informing the Italian authorities of the exten-
sion of the procedure was sent on 18 February 1998.
Italy did not comment on the extension by the deadline
set. The Commission invited interested parties
to
comment on the aid in question by publishing its letter
in the Official Journal of the European Communities (2). No
replies were received.

Failing any reply from the Italian authorities, a reminder
was sent on 15 July 1998 stating that, in the event of
continued failure to reply, Italy might be ordered to
reply. On 30 July 1998 the Italian authorities requested
an extension of the deadline to 4 September 1998.

Following various formal and informal requests,
the
Italian authorities notified the Commission by letter of
21 September 1998 that Seleco had been declared bank-
i.e. 10 months before noti-
rupt on 17 April 1997,
fication of extension of the procedure was given. The
Commission responded by letter of 29 September 1998
asking the Italian authorities for further information on
the winding up of Seleco. Having received only partial
information on 17 November 1998, the Commission
adopted a decision (3) on 2 December 1998 ordering
Italy to provide the information required. A reply was
received by the Commission by letter dated 18 January
1999. Further clarification was requested by letter of 28
April 1999. The Italian authorities replied on 21 May
1999.

II. DESCRIPTION OF THE AID

II.1. The recipient

(10)

Seleco, a company located in Pordenone (Friuli-Venezia
Giulia), is engaged in the consumer electronics business,
more specifically in three sectors: colour televisions,
decoders for encrypted programmes (pay-TV sector) and
professional television equipment (video projectors and

(2) OJ C 155, 20.5.1998, p. 10.
(3) Not yet published in the Official Journal.

monitors). Like other firms in this industry in Italy,
Seleco has regularly received State aid over the last 10
years through REL (4).

(11)

The Seleco group (hereinafter referred to as ‘the group’)
operated chiefly in Italy, with subsidiaries in Malta, Spain
(until the end of 1993), Germany and the Netherlands.
The group's sales covered the entire European Union
and the EEA countries.

(12)

The group's turnover, profits and equity (as from 1993)
are set out in the following table:

Turnover

Profits (losses)

Equity capital

(billion ITL)

1989

1990

1991

1992

1993

1994

1995

334

384

351

323

374

266

254

(25,3)

(11,4)

2,4

0,5

(77,5)

(41,6)

(64,2)

—

—

—

—

54,5

45

32,7

(13)

The results for 1996 were not provided. In 1993 75 %
of turnover was accounted for by colour televisions, 6 %
by decoders and 4 % by video projectors.

(14) On 17 April 1997 an Italian court declared Seleco bank-
rupt. The firm had liabilities of some ITL 154 billion, of
which only 43 % was covered by preferential rights. The
Commission was notified only on 21 September 1998,
following a number of reminders requesting information
in connection with the extension of the procedure.

II.1.1. The 1994 recapitalisation

(15) On 31 December 1993 Seleco's equity capital totalled
ITL 54,48 billion and was held by Sofin, REL and Friulia
SpA (hereinafter referred to as ‘Friulia’), as follows:

Capital
(in ITL million)

% of total shares

Sofin SpA

Friulia SpA

REL SpA

20 157

2 000

32 320

37

3,7

59,3

Total

54 477

100

(4) Public agency for the reconstruction of

the consumer electronics
industry in Italy, whose activities were the subject of the Decisions
of 17 January 1984 and 17 September 1985. By Decision of 20
May 1992 (OJ C 166, 3.7.1992, p. 6), the Commission approved
aid granted by REL to a dozen firms in the consumer electronics
industry, the largest of which was Seleco SpA.

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7.9.2000

(16)

(17)

(18)

(19)

Sofin SpA was a private company and Friulia is a finance
company that is wholly controlled by the region of
Friuli-Venezia Giulia and is responsible for promoting
the region's economic development, while REL was set
up in 1982 and is controlled by the Ministry of Industry,
Trade and Craft Trades. REL's purpose was to reorganise
the consumer electronics industry by setting up firms,
taking shareholdings and financing firms in which it had
shares.

The Commission has already examined REL's activities in
the past; in a decision of 17 January 1984, it had asked
the Italian Government to end the restructuring of the
electronics industry being carried out through REL.

In a Decision of 20 May 1992 (5) terminating the proce-
the Commission
dure initiated on 16 July 1991,
required the Italian authorities to wind up REL and took
note of the Italian Government's undertaking to transfer
REL's holdings in electronics firms to private share-
holders.

The financial year 1993 was even more difficult for the
Its net result was
group than the preceding years.
ITL 77,5 billion in losses, exceeding significantly its
equity capital
Italian law,
(ITL 60,6 billion). Under
shareholders in such situations must wind up the firm or
reduce its capital, covering its losses and recapitalising
the firm if liquidation does not take place. According to
the 1993 annual report, the shareholders opted for the
first alternative, i.e. to wind up Seleco (decision of the
administrative board of 1 February 1994).

(20) However, the announcement of this measure prompted
a strong reaction on the part of the workforce, which
endeavoured to prevent liquidation. The ensuing demon-
strations resulted in the national and local authorities
intervening to urge the shareholders to change their
decision. The 1993 annual report, which also covers
events in the first few months of 1994, shows that,
following the intervention of the public authorities, the
shareholders reached an agreement on the basis of
which, after covering losses, they would recapitalise the
company. The agreement was formalised by a directive
adopted by the Italian Government and was subse-
quently notified to the company.

(21) Under that agreement, REL was required to cover all
including those
losses exceeding the equity capital,
which should have been covered by the other share-
holders, and partially to write off
loans to Seleco
(ITL 16,8 billion out of a total of ITL 82 billion). In
exchange for the write-off, the other shareholders would
ITL 45
reconstitute Seleco's capital
billion. Thus Friulia contributed ITL 13 billion and Sofin
ITL 19 billion. The balance, i.e. ITL 10,5 billion, was
provided by a consortium of banks, for the most part

to the tune of

(5) See footnote 4.

private-sector banks,
Seleco (ITL 162 billion, or 40 % of the total debt).

in proportion to their loans to

(22)

The new capital was distributed as follows:

Capital
(in ITL million)

% of total shares

Sofin SpA

Friulia SpA

Banks

Group employees

19 190

13 000

10 500

2 310

42,64

28,89

23,33

5,13

Total

45 000

100

II.1.2. The 1996 recapitalisation

(23)

(24)

(25)

The year 1994 proved as difficult for the company as
the previous year. Because of the delay in recapitalisation
(end of August), production was interrupted for eight
weeks, the workforce was cut by 336 persons (from
1 424 to 1 088) and five subsidiaries filed for bank-
ruptcy. The company incurred losses of ITL 39,2 billion.

By the end of 1995 Seleco showed fresh losses
amounting to ITL 64,2 billion; this further reduced its
equity capital (ITL 3,9 billion) to below the statutory
level. The disappointing results were due to a renewed
interruption in production lasting 50 days and the defin-
itive closure of three subsidiaries that had filed for bank-
ruptcy. The workforce was reduced to 821.

The shareholders were thus faced with the same situa-
tion as in 1994. Compelled once again to choose
between winding up the company and recapitalising it,
they decided to inject
fresh capital amounting to
ITL 32,7 billion, while a new shareholder, the private-
sector Sorec, contributed the other ITL 28,8 billion
required.

(26)

In February 1996 Seleco's capital was distributed as
follows:

Capital
(in ITL million)

% of total shares

28 800

1 710

1 144

924

181

87,91

5,22

3,49

2,82

0,56

Sorec

Sofin

Friulia SpA

Banks

Employees

Total

32 759

100

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(27)

The transaction involving the new shareholder was tied
to additional intervention by REL in June of that year.
This consisted in the repurchase by Seleco of
its
outstanding debt of
ITL 65,2 billion from REL for
ITL 20 billion, the value of this transaction to Seleco
amounting to ITL 48,5 billion. Despite the two transac-
tions, however, its capital still fell below the statutory
level owing to the accumulated losses.

— the conversion into Seleco shares of

the ITL 6
billion loan and the capital contribution of ITL 7
billion (public funds)
from Friulia as part of the
1994 recapitalisation,

— the injection of ITL 10,5 billion by a consortium of
banks, chiefly private-sector, as part of the recapitali-
sation of Seleco;

in 1994,

(28) As these measures were not sufficient to guarantee the
continuation of the business from a legal standpoint,
other measures were essential: (i) a debenture loan of
ITL 12 billion issued by Seleco and subscribed to by a
consortium of chiefly private-sector banks; (ii) a convert-
ible loan of ITL 12 billion granted by Friulia; (iii) the
sale of the holdings in Seleco Multimedia srl (hereinafter
referred to as ‘Multimedia’) for ITL 20 billion.

(29) According to the 1995 annual report, which covers a
large part of 1996, Seleco continued to experience
serious difficulties, despite the February 1996 recapitali-
sation and the extraordinary transactions described
above. The net result for 1996, which remained nega-
tive, was not notified to the Commission. Then, on 17
April 1997, the Italian courts declared Seleco bankrupt.

II.1.3. The setting up of Multimedia

(30) Multimedia was set up with a capital of ITL 20 million
in 1995 by the only private shareholder of Seleco, Mr
Rossignolo.
In March 1996 Seleco, whose majority
shareholder (87,9 %) was Sorec, a private company
whose sole administrator was the same Mr Rossignolo,
hived off its most profitable assets (video projectors and
monitors) to Multimedia, providing ITL 29 billion in
capital and becoming sole owner. Multimedia thus
became Seleco Multimedia srl. In July 1996, months
before it entered into liquidation, Seleco sold a 33,33 %
stake in Multimedia to Italtel (a partly public (50 %) and
partly private (50 %) company which was the only other
Italian producer of the same type of products) and a
33,33 % stake to Friulia. Each package of shares was
sold for ITL 10 billion. The remaining 33,33 % was
transferred by Seleco to Finanziaria Elettronica srl, a
shell company of which it owned 99 %. The 33,33 %
stake in Multimedia held by Seleco through Finanziaria
Elettronica was sold to the private company Formenti
SpA at the Seleco bankruptcy sale on 20 December
1997.

II.2. Matters covered by this procedure

(31)

The following are covered by this procedure:

— the partial write-off in 1994 of the amount owed to
REL by Seleco (ITL 16,8 billion out of a total ITL 82
billion),

— the repurchase by Seleco in July 1996 of

its
from REL for

outstanding ITL 66 billion debt
ITL 20 billion,

— the convertible loan of ITL 12 billion granted in
April 1996 by Friulia for five years at 7 % against a
guarantee
industrial
consisting of Seleco's
brands (Seleco, Brionvea, Elbe and Tandberg),

four

— the debenture loan of

ITL 12 billion granted in
1996 by a consortium of banks, chiefly in the
private sector, for four years and ten months at 5 %,

— the acquisition by Friulia and Italtel of a third each of
the shares in Multimedia at a price of ITL 10 billion
each.

III.1. Doubts expressed by the Commission when
initiating and extending the Article 88(2)
procedure

(32)

the

Commission

In its Decision of 27 September 1994 initiating the
procedure,
doubts
concerning the applicability of the private-investor prin-
ciple to the public measures taken and the compatibility
of the aid with the common market. The reasons why
the Commission initiated the procedure are summarised
below.

expressed

(33) With regard to the 1994 measures, the Commission
noted that the Italian Government had undertaken to
ensure that REL sold its shareholding in Seleco to the
in accordance
private sector by 20 December 1995,
with the Decision of 20 May 1992. It noted that the
recapitalisation had had the effect of replacing a public
shareholder
(REL) with another public shareholder,
Friulia. On the basis of the information in its possession,
the Commission was unable to conclude that Friulia and
the public-sector banks concerned would withdraw from
Seleco by 20 December 1995. It also pointed to the
statement in its Decision of 20 May 1992 to the effect
‘that it will, as a matter of principle, adopt a negative
for an
position on any other
industry that has received aid over such a long period.’
But the partial write-off of REL's loans to Seleco was
tantamount to granting fresh aid since,
it
allowed Seleco to be recapitalised by Friulia, Sofin and
the banks.

future assistance [..]

in practice,

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(34)

In view of the temporary nature of the shareholdings
acquired by Friulia and the banks, the Commission had
doubts concerning both the profitability of the invest-
ment
compliance with the
Community guidelines on State aid for rescuing and
restructuring firms in difficulty (6).

and the question of

rates

(35) When extending the procedure on 3 February 1998, the
Commission questioned the
applied to the
repurchase by Seleco of its outstanding debt from REL,
on the one hand, and the convertible loan granted by
Friulia, on the other.
the repurchase
transaction, the Italian authorities considered that the
rate of 19 % accurately reflected the considerable
economic risks associated with the economic position of
the company (namely Seleco); however, in the case of
the loan, they claimed that a rate of 7 % corresponded to
the market rate applicable to a firm in a similar position
to that of Seleco.

In the case of

(36) At the same time, the Commission also doubted whether
the private-investor principle was applicable to the
acquisition by Friulia and Italtel of the two packages of
shares in Multimedia.

III.2. The position of the Italian authorities

(37) As regards the debt waiver by REL of ITL 16 billion (out
of a total of
the Italian authorities
ITL 82 billion),
consider that the transaction complies with the principle
of a private investor operating under normal market
conditions.

(38) Under the Commission Decision of 20 May 1992, REL
was required to withdraw from Seleco. In addition, REL,
which was put into liquidation on 9 December 1992,
was required under Italian law only to pay its debts and
endeavour to recover as much as possible of its lending
to other electronics companies. However, following the
very poor results in 1993, the choice facing REL and all
the other shareholders was either to wind up Seleco or
to make provision for its survival.
the
Commission Decision, REL could not participate in the
recapitalisation but only in covering Seleco's losses in
1993 by writing off part of the amount owed to it. This
solution allowed it
to try and recover as much as
possible of its lending.

In view of

(39)

(40)

Furthermore, according to the Italian authorities, REL
did not write off its debts without a reciprocal contribu-
tion from the other shareholders, who had agreed to
underwrite ITL 45 billion of the recapitalisation and
subsequently to repay REL the amount outstanding
(ITL 65,2 billion).

The contribution from Friulia to the 1994 recapitalisa-
tion of Seleco amounted to ITL 13 billion, of which
ITL 6 billion consisted in the conversion into shares of a
loan for the same amount and ITL 7 billion represented
new capital. The Italian authorities stated that the trans-

(6) OJ C 368, 23.12.1994, p. 12.

action was justified by the risk of failure to recover the
entire loan if Seleco was wound up. In order to assess
the profitability of the investment and the economic
position of Seleco over the period 1994 to 98, Friulia
had commissioned a study from an outside consultant
(Peat Marwick). On the basis of the information in its
possession, it concluded that the firm's position would
gradually improve under the restructuring plan drawn
up by the private-sector shareholder for the period 1993
to 96. The Italian authorities therefore took the view
they also
that Friulia acted like a private investor;
pointed out
that Sofin, Seleco's private-sector share-
holder, was prepared to reinvest in the company since it
was convinced of the latter's economic and financial
viability.

(41) A consortium of banks, mostly in the private sector, also
contributed ITL 10,5 billion to the recapitalisation of
Seleco since, according to the Italian authorities, the
banks were convinced that Seleco would soon be
economically and financially viable.

(42)

(43)

The convertible loan of ITL 12 billion at 7 % per annum
granted by Friulia on 19 April 1996 is guaranteed by a
lien on all the brands owned by Seleco SpA (Seleco,
Brionvega, Elbe and Tandberg). The Italian authorities
consider that the loan is fully justified in view of the fact
that a consortium of banks, mainly private-sector banks,
had subscribed to a 5 % debenture loan to Seleco for the
same amount.

The ITL 20 billion paid by Seleco in June 1996 to
redeem its ITL 66 billion debt to REL is, according to
the Italian authorities, justified by the application of a
discount rate of 19 %. The rate is obtained by adding
together a basic rate of 13 % to 14 %, corresponding to
the rate applied by banks at the time to mortgage loans
and medium-term secured loans, and a ‘spread’ of 5 % to
7 % reflecting the difficulties of the Seleco group and the
difficulties on the market on which it operates.

(44) As regards the decision taken by Italtel to acquire a
33,33 % stake in Multimedia,
the Italian authorities
stated that it could not have been taken without the
shareholder
explicit
(Siemens AG).

the private-sector

approval of

(45)

(46)

The Italian authorities have stated that Sorec, with an
87 % stake in Seleco following the recapitalisation in
1996, is a private company. It is worth noting that it has
been in voluntary liquidation since 28 July 1997.

The failure of the 1993 to 96 restructuring plan was
said to be due to, among other
the poor
prospects on the consumer electronics market, on which
the company operated.

things,

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(47)

(48)

Seleco allegedly set up Multimedia above all in order to
merge with the only other Italian producer of the same
type of products
(video projectors, monitors and
decoders), Italtel, and to benefit from the pooling of
technical know-how and the customers Seleco had on
the Multimedia shares also
this market. The sale of
provided Seleco with some of the liquidity it needed in
order to cover its 1995 losses.

Seleco was declared bankrupt at the beginning of 1997.
Its debts amount to some ITL 154 billion, of which
43 % is preferential debt. The creditors who benefited
from an initial partial allocation of assets totalling
ITL 40 billion before the end of 1998 were the
employees, who received ITL 28,2 billion, Medio
Credito (a public-sector bank), which received ITL 8,5
ITL 1 billion in interest, and Banca
billion plus
Antoniana
(a private-sector bank), which received
ITL 1.1 billion, all of them being preferential creditors.

(49)

Lastly, the receiver brought an action to revoke the
repurchase by Seleco of its ITL 65,2 billion debt from
REL for ITL 20 billion. The court abolished the prefer-
ential nature of Seleco's debt of ITL 13 billion to Friulia,
which received ITL 1 billion as compensation for the
loss of
its lien on four industrial brands offered by
Seleco as a guarantee.

(52)

(53)

(54)

advantage allowed the recipient to survive artificially on
the market and to avoid a large proportion of the costs
of
such survival. The measures also affected trade
between Member States as the recipient had subsidiaries
in many Member States and its products were also
exported to other EEA countries.

In 1992, after years of growth, the European consumer
electronics industry started to decline; consumption fell
by ECU 4 billion and production by ECU 2,5 billion.
There were significantly more redundancies than in
manufacturing, while labour costs
rose more than
proportionally to the growth in productivity (44 % extra
per unit against a 33 % growth in productivity) (7).

The economic recession caused a slowdown in growth,
stronger competition and a sharp fall
in prices. This
resulted in a surplus market, the fall in prices having
stimulated the sale of electronic goods. According to the
Panorama of EU industry, demand in 1994 could be
and
divided into two segments:
bottom-of-the-range. Success was dependent in the first
segment on price, after-sales service and distribution
quality and in the second segment on an improved
brand image and expansion of the distribution networks
to include supermarkets.

top-of-the-range

In 1993, for the second year running, there was a down-
turn in the Italian consumer electronics market (8)
(– 11,6 % of sales in terms of value). The reasons were
the same as for the rest of Europe, but price erosion was
more rapid than in the other Member States. On the
Italian market Seleco's competitors were investing far
more in advertising and R & D, with some of them
(Thomson, Grundig and Blaupunkt) even launching new
products. Distribution was chiefly through small retailers
but,
supermarkets were
in Europe,
becoming the main sales outlets.

elsewhere

as

IV. ASSESSMENT OF THE AID

(50) Article 87(1) of the Treaty and Article 61(1) of the EEA
Agreement state that, save as otherwise provided for in
the Treaty, any aid granted by a Member State which
distorts or threatens to distort competition by favouring
certain undertakings or the production of certain goods
is, in so far as it affects trade between Member States,
incompatible with the common market.

(51)

For the reasons set out below, the Commission considers
that some of the measures covered by this procedure
constitute State aid within the meaning of Article 87(1)
of the Treaty and Article 61(1) of the EEA Agreement.
They are measures financed through State resources
which distort or threaten to distort competition since
they constitute an economic advantage from which
other producers have been unable to benefit. Such

(55) According to the Panorama of EU industry for 1994, the
prospects for the following years (1994 to 97) were still
very poor. In the short term, companies were endea-
vouring to reduce costs, rationalise production, improve
the quality of existing products and launch new ones. In
the long term, the winning strategy consisted in concen-
trating on R & D.

(56)

for

the Italian market were similar.
The forecasts
According to the February 1994 issue of Euromonitor,
the Italian economy would continue to decline and the
economic recession would affect the whole of 1994.
According to the same issue, growth forecasts for the
Italian television industry in terms of volume and price
were as follows:

(7) Source:
(8) Source: ‘Euromonitor’, February 1994,

‘Panorama of EU industry, 1994’ Eurostat.

‘Television and video products

in Italy’.

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Colour
televisions

1993

1994

1995

1996

1997

1998

Volume

2 900

2 800
(– 3,45 %)

2 850
(+ 1,8 %)

2 900
(+ 1,7 %)

2 950
(+ 1,7 %)

3 000
(+ 1,7 %)

Price

1 723

1 505
(– 12,5 %)

1 522
(+ 1,2 %)

1 542
(+ 1,3 %)

1 542
(+ 1,3 %)

1 640
(+ 4 %)

(57)

The aid in question was not granted under a scheme approved by the Commission and, contrary to
Article 88(3), it was granted without having been notified in advance. It is therefore unlawful. This is
also true of the injection of ITL 13 billion by Friulia into Seleco in 1994, which, although notified,
was carried out before the Commission had taken a decision.

(58)

Because a transfer of public resources is involved, the Commission must determine whether the
public authorities acted like a private investor operating under normal market economy conditions.

(59) Under the guidelines on government capital

injections (9), State aid is not involved where fresh
capital is contributed in circumstances that would be acceptable to a private investor operating under
normal market economy conditions (point 3.2). According to that principle, analysis of the financial
position of the firm and its long-term viability can establish whether the public resources constitute
State aid or not.

IV.1. Partial write-off in 1994 of loans granted by REL

(60)

In 1994 REL wrote off in part the amounts owed to it by Seleco (ITL 16,8 billion out of a total of
ITL 82 billion) to allow the latter to remain in business. According to the Italian authorities, REL
was thus safeguarding the bulk of its claims, which it would recover later once Seleco's financial
position had improved.

(61) However, the Commission notes that, as stated in Seleco's annual report for 1993, its shareholders,
the largest being REL, had decided at the beginning of 1994 to wind up the company in view of the
year's poor financial results, the losses being one and a half times greater than its equity capital. The
report also stated that the decision to wind up Seleco was not implemented owing to action by the
workforce and the subsequent intervention of the public authorities, notably the Prime Minister's
Office, aimed at securing a reversal of the shareholders' decision. Following that intervention, and
contrary to their first decision, the shareholders decided to recapitalise Seleco and REL covered the
company's losses by waiving some of the money owed to it (ITL 16,8 billion out of ITL 82 billion).

(62)

Consequently, the argument put forward by the Italian authorities, namely that REL intervened, as
any private creditor would have, to prevent the liquidation of Seleco in order to safeguard the bulk
of its loans to Seleco, cannot be accepted by the Commission. Even if Italian law enabled share-
holders to avoid liquidation and to recapitalise a company by covering its losses, it is clear that,
without the political intervention of the Italian authorities and the consequent action forced on REL,
the other shareholders would not have reinvested in a company which, despite having received State
aid for more than 10 years, had failed to make a profit during that period (apart, that is, from a very
small one in the financial years 1991 and 1992). The decision to wind up the company, which was
taken by all the shareholders in 1994, including REL, the leading shareholder at the time (59 %), can
be explained only by the fact that the shareholders, who were best placed to assess the true position
of the company, considered that the survival of Seleco would be much more costly for them than its
liquidation and that, in any event, the company was not viable in the long term. In particular, as REL
had to withdraw from Seleco as from 1994 and as it was Seleco's largest creditor at the time, the
liquidation of Seleco would have ensured that it recovered most of its loans.

(9) Bulletin EC 9-1984

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(63)

In view of the foregoing, the Commission must conclude that the measures taken by REL, i.e. its
decision in 1994, contradicting its original intentions, to write off some of its loans (ITL 16,8 billion
out of a total of ITL 82 billion) and its decision in 1996 to allow the outstanding debt of ITL 65,2
billion to be repurchased for ITL 20 billion, are the direct result of the intervention of the public
authorities in 1994 aimed at preventing the winding up of Seleco at all cost. Accordingly, the fact
that REL agreed in 1994 to waive debt totalling ITL 16,8 billion and to await the end of 2015 to
recover the balance is tantamount to writing off the entire debt (ITL 82 billion) and therefore
constitutes aid. The behaviour of REL not only does not conform to the private-investor principle
but must a priori be regarded as State aid in accordance with the Community guidelines on
government capital injections (point 3.3) since the financial position of the company and the volume
of the debt were such that the other investors in Seleco (public and private) were not prepared to
reinvest in the latter. The decision of the other investors (37 % private-sector) to recapitalise the
company once REL had covered the losses, even though they too were subject to that obligation,
does not alter the conclusions reached above (10). The Commission considers that Seleco would not
have been recapitalised in 1994 without REL's prior undertaking to cover all losses through a partial
write-off, which in practice amounted to a complete write-off of the loans given the strong
possibility of the imminent winding up of the company, which indeed occurred three years later. The
fact that REL endeavoured in 1996 to recover part of the amount still owed to it (ITL 20 billion out
of a total of ITL 65,2 billion), a transaction against which the receiver initiated proceedings under
Article 67 of Decree No 267 of 16 March 1942 (11) (bankruptcy law) on the ground that REL must
necessarily have been aware of Seleco's insolvency at the time of the agreement, simply confirms the
merits of the Commission's position on this matter.

IV.2. Conversion of a loan into shares in Seleco and injection of capital by Friulia in 1994

(64) As part of the recapitalisation of Seleco in 1994, Friulia converted into shares its loan of ITL 6
billion granted in 1992 for five years at 9,55 % and injected additional funds totalling ITL 7 billion.
Through these measures it became a shareholder of Seleco with a stake of 28,8 % against the 3,7 %
held previously. The Italian authorities justified this transaction on the ground that it complied with
the private-investor principle. It was claimed, on the one hand, that Friulia acted to protect the
repayment of its loan, which, unlike REL's loan, was guaranteed to the amount of ITL 3 billion by
the private-sector bank Friuladria, which was itself guaranteed to the amount of ITL 2 billion by
Seleco, and, on the other hand, that Friulia was convinced on the basis of the 1993 to 96
restructuring plan drawn up by an outside expert that its investment would be profitable. Thus,
according to the Italian authorities, Friulia's behaviour was consistent since a private shareholder was
again prepared to invest ITL 19 billion in Seleco.

(65)

The Commission considers that its conclusion that the partial write-off by REL of its loans to Seleco
constitutes State aid is also applicable to the intervention by Friulia. The latter was one of the Seleco
shareholders which, according to the 1993 annual report, had decided to wind up the company.
Furthermore, it was a Seleco creditor but, unlike REL, a large part of its claims, which amounted to
one tenth of those of REL, was guaranteed. In the event of liquidation, Friulia would have recovered
a proportionally higher share of its loans than REL. The argument that it was safeguarding an
existing claim cannot therefore be accepted by the Commission.

(66) As stated when the procedure was initiated, the stake taken by Friulia was temporary. Furthermore,
the repurchase price of Friulia's shares was agreed with Sofin and, according to the Italian authorities,
was not related to the variation in the value or number of the shares acquired by Friulia. The price
paid was equal to the purchase price paid by Friulia, discounted at 75 % of the average Treasury
reference rates, plus 1 %. According to Section 3.3 of the Community guidelines on government
capital injections, however, there is State aid where the holding is a short-term one, with duration

(10) It might be concluded that the behaviour of REL amounted to granting aid to the other Seleco shareholders,

in
proportion to their individual liability for loss. But the Commission considers that such an effect is indirect, marginal
and,

in any event, peripheral to the direct and selective effect on Seleco.

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and selling price fixed in advance, so that the return to the provider of capital is considerably less
than he could have expected from a capital market investment for a similar period. The Italian
authorities have not at any time during this procedure claimed or demonstrated that the return on
the Friulia shareholding was greater than or equal to the return it could have expected from a capital
market investment for a similar period. It follows that the holding constitutes State aid.

IV.2.1. Commission assessment of the study commissioned by Friulia and of the Seleco

restructuring plan for the period 1993 to 1996

(67)

(68)

The Commission considers that it has already provided sufficient evidence that the contribution by
Friulia to the recapitalisation of Seleco in 1994 does not conform to the private-investor principle.
However, it must also examine the argument put forward by the Italian authorities that Friulia, like
any private investor, was convinced of the profitability of its investment since it had commissioned a
study on the Seleco restructuring plan and had decided to take part in the recapitalisation on the
basis of its assessment of the company's viability.

The 1993 to 96 restructuring plan is the second to be drawn up since the beginning of the 1990s.
The first plan, covering the period 1990 to 93, forecast a return to significant profits in 1993. Based
on a hypothetical recapitalisation of ITL 45 billion, the second plan forecast a return to profitability
in 1995, i.e. after absorption of the residual restructuring costs during 1994. The main points of the
plan can be summarised as follows: concentration of production, reduction of costs, reorganisation
and reduction of the workforce, and investment in R & D. Overall, the plan provided for a 20 % cut
in the production of colour televisions, a 75 % increase in the production of decoders (for sale on
other European markets) and a 33 % increase in the production of video projectors and monitors (to
be sold on non-European markets, including the US and China). It also provided for 267 redundan-
cies at the Pordenone plant.

(69) At the request of Friulia, the plan was studied by an outside expert (KPMG Peat Marwick Corporate
Finance) who came to the conclusion that the restructuring plan for Seleco was too ambitious
because of both the firm's position and the assumptions underlying the plan.

(70)

(71)

The study also pointed out that the commercial, economic and financial structure of Seleco
presented considerable structural weaknesses. First,
in a highly labour-intensive sector, the job
structure was inappropriate since there were too many management staff in relation to workers,
chiefly because of the complex structure of the group (10 operational subsidiaries and six in
liquidation).

The company was also unable to bring its R & D to the marketplace, in a sector where this is an
essential factor in guaranteeing the continuation of business. For example, Seleco had not succeeded
in producing new chassis for television sets for more than two years, although it is essential to renew
this part of the product regularly. The study emphasised that Seleco had not developed any strategy
for designing and marketing new products. There was also the fact that it was totally dependent on
other major producers in the sector for the basic components of its products, and this exposed it
both to variations in production and to financial fluctuations.

(72)

The study revealed the strong influence of REL in the financing of the group, especially between
1991 (52 % of its financial position was dependent on REL loans) and 1993 (42 %). The REL funding
was characterised by extremely low costs, well below market rates. It is worth considering the
possible consequences of the foreseeable withdrawal of REL from Seleco and the extent to which the
latter would have been able to obtain financing on the capital market.

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(73)

(74)

The assumptions underlying the plan did not take account of the group's weaknesses. First, the plan
forecast a fall in production costs based on a reduction in labour costs. The study notes that, at the
end of 1993, Seleco had reduced labour costs through early-retirement measures (cassa integrazione).
The plan proposed the same strategy (solidarity contracts) for the future. These forecasts were not
realistic since Seleco had assumed that the contracts would be concluded at national level, something
which, according to the study, was highly unlikely.

The strategy of the group was focused on improving the company's image, which had deteriorated
following its poor results in previous years. The investments were strategic as the move towards
using supermarkets as distributors was not improving consumers' image of its products. Consumers
had always appreciated the high-quality after-sales service they received when the products were
distributed through specialised shops. The study stressed that considerable investment in advertising
was needed although immediate results should not be expected.

(75)

The success of the plan was thus dependent on the amount of the funding committed and on
external factors over which the firm had no control, such as the strong bargaining power of
supermarkets and the use of solidarity contracts.

(76)

In conclusion, the study indicated that:

— the forecast of a significant contraction in sales, counterbalanced by an 8 % increase in prices as

of the second half of 1994, was unfounded,

— Seleco did not have the means to launch its product as an advanced, quality product,

— the assumption that prices would rise did not take account of the bargaining power of the
supermarkets and hence of the subsequent narrowing in Seleco's profit margins, which had
always been its weak point. Seleco's positioning on a range of average prices had never allowed it
to establish itself, either in terms of margins (high prices) or in terms of quantity (insufficient
market share),

— the development of the only really profitable sector of Seleco (professional products), predicted

to expand by 21 % in 1995, risked being hampered by the group's financial crisis.

(77)

(78)

(79)

The Commission concludes that the strategy adopted by Seleco was not appropriate to the situation.
In 1994 the firm should have positioned itself at either the top end or the bottom end of the
product range and should have chosen the most appropriate distribution network for each product.
However, while manufacturing bottom- and medium-range products, Seleco sought to compete
against top-range products through supermarkets. There was no commercial logic to this as its
products did not stand out from those of its competitors and would have had difficulty in attracting
consumers without the advantages provided by specialised stores.

The strategy was based on incorrect pricing assumptions. All the studies, including the one commis-
sioned by Friulia, agree that such growth was impossible and that, on the contrary, prices would
have continued to fall until the end of the year before recovering to a level slightly below that
predicted in the plan (2 %). In order to absorb the residual restructuring costs in 1994, as provided
for in the plan, a spectacular increase in turnover would have been necessary, an unlikely develop-
ment in view of Seleco's past,

its future prospects and the market on which it operated.

It is clear therefore that, even if Seleco had had the means to achieve the objectives of the plan, this
would have taken much longer than predicted. In view of the forecasts of its results, the shareholders
would also have had to inject further capital. There is nothing to indicate (nor have the Italian
authorities made any such claims) that Seleco had the necessary resources to ensure its survival
during the implementation of the plan. The Friulia study does not comment on this aspect.

(80)

The same is also true of the budget forecasts provided, given that the ‘business plan’ was based on
unrealistic assumptions and inadequate strategies.

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(81)

(82)

(83)

The Commission considers that the study commissioned by Friulia was appropriate and reasonable
and that the expert, on the basis of the restructuring plan and market conditions and prospects, drew
the proper conclusions as to the viability of Seleco. It notes that the accuracy of the study is
confirmed by its own assessment.

The company's performance over the subsequent two years confirms that assessment. Over half its
output of colour televisions and decoders remained unsold, the only growth sector being that of
video projectors and monitors.

The Commission therefore concludes that Friulia could not expect its investment to produce a return
that would be acceptable to a private investor operating under normal market economy conditions.
Consequently, Friulia's entire contribution of ITL 13 billion to Seleco's capital constitutes State aid
within the meaning of Article 87(1) of the Treaty.

IV.3. Capital contributions by the public-sector banks in 1994

(84) A consortium of banks, for the most part private-sector banks, contributed ITL 10,5 billion to the
recapitalisation of Seleco. The protocol of agreement between those banks and the former Seleco
shareholders shows clearly that the funding provided by the banks was purely supplementary, the
banks having agreed to inject capital into Seleco after obtaining a firm assurance from its former
shareholders (REL, Sofin and Friulia) that the losses of the preceding financial year would be covered
by REL and that the other shareholders would contribute ITL 35 billion. They also agreed to
in proportion to the amounts owed, the repayment of Seleco's debts.
renegotiate,

(85) As both the public- and private-sector banks subscribed to the capital increase in proportion to the
amounts owed to them by Seleco (ITL 162 billion in loans, or about 40 % of the firm's total
indebtedness as at 31 December 1993), the Commission concludes that their intervention was
inevitable and was designed chiefly to safeguard their loans. The measures taken by the banks are not
therefore caught by Article 87(1) of the Treaty.

IV.4. Repurchase of the outstanding debt to REL in 1996

(86)

In 1996 Seleco paid REL ITL 20 billion to redeem its outstanding debt of ITL 65,2 billion.

(87)

(88)

It might be concluded from an analysis of the intrinsic aspects of the transaction that the benefit to
Seleco is the difference between the discount rate applied to the debt (19 %), which, as stated when
the procedure was extended, takes account of the risk twice, and the rate which would have been
applied by a private investor, i.e. the real market rate plus a reasonable risk premium. However, for
the reasons explained in point IV.1, the Commission considers that this second transaction is simply
a continuation over time of the first and is equally incompatible with the private-investor principle.

In any event, the Commission notes that the date (2015) on which the outstanding debt (ITL 65,2
billion) was payable and the period in which the repurchase took place, i.e. some ten months before
the bankruptcy of Seleco, prompted the receiver to initiate proceedings to revoke the transaction
(under Article 67 of the Bankruptcy Law) on the ground that REL, a Seleco shareholder until 1994,
could not have been unaware in 1996 that the firm was insolvent.

(89) Accordingly, and on the basis of the considerations set out in point IV.1, all the loans (not recovered
or sub judice) granted by REL to Seleco must be regarded as state aid under Article 87(1) of the EC
Treaty.

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IV.5. The convertible loan granted by Friulia in 1996

(90)

(91)

(92)

(93)

(94)

The loan in question was for ITL 12 billion and was granted for five years at 7 %. Friulia received
four industrial brands owned by Seleco as a guarantee. The Italian authorities claim that Friulia acted
like a private investor since a consortium of banks, mostly in the private sector, had granted Seleco a
debenture loan of ITL 12 billion at 5 %, probably in the same year (the authorities have never
specified the date of the intervention by the banks).

The Commission does not believe that the comparison between the behaviour of Friulia and that of
the banks is relevant. First, unlike Friulia, the banks which acquired the Seleco shares were owed
ITL 20,5 billion by the company, of which only a small proportion was guaranteed. Friulia, in fact,
was not owed anything by Seleco. Second, the types of loan concerned are different (this has never
been denied by the Italian authorities): the transaction with the banks involved a debenture loan,
whereas the loan granted by Friulia was a convertible loan. The Commission notes that, under Italian
law, where a bankrupt company is being wound up, the debts arising out of a debenture loan are
repaid before the other unsecured claims. In addition, although Friulia obtained guarantees on its
loan, these were annulled by the court since, as laid down in Article 67 of the Bankruptcy Law, it
could be shown that Friulia was aware of Seleco's insolvency one year before it went bankrupt.
Unlike Friulia, the banks intervened both to protect their claims and because public resources (REL
and Friulia) had been injected on a much larger scale (ITL 60,5 billion against ITL 12 billion).

The Commission also doubts that the guarantees were appropriate. As the 1994 study commissioned
by Friulia indicates (point IV.2.1), Seleco's image had deteriorated to such a point that only a
considerable investment in advertising could have improved it in the long term. The low market
value of the industrial brands owned by Seleco is confirmed by the price at which three of them
(excluding Elbe) were sold when the assets were liquidated: a little over ITL 1 billion. Thus, even if
the Commission cannot base its conclusions on a posteriori analyses, it notes that, although the
book value of the brands is much higher, their real value appears to be well below the ITL 12 billion
lent. As a result, the interest rate should have taken account both of Seleco's precarious position (risk
premium) and the inadequacy of the guarantees offered by it.

The Commission also notes, on the basis of the information supplied by the Italian authorities, that
the market rate applied at the time to loans such as that granted to Friulia varied from 13 % to 14 %.
In their justification of the discount rate used for the repurchase by Seleco in 1996 of its debt to
REL, the Italian authorities stated that the rate of 19 % was obtained by adding together the basic
rate of 13 % to 14 %, which in 1996 was applied to medium-term financing covered by the
appropriate guarantees, and a risk premium of 5 % to 7 % reflecting the company's position. The
Commission concludes that the rate applied by Friulia does not therefore correspond to the market
rate.

The Commission also notes that Friulia did not act like a private investor. As the annulment by the
court of the guarantee clearly shows, Friulia was fully aware when it granted the loan, account being
taken of Seleco's financial position, that its investment would never produce a return. The Commis-
sion would point out that, when the loan was granted, Friulia, a Seleco shareholder, could not have
been unaware that the latter's only profitable assets had already been transferred to Multimedia one
month previously. Moreover, three months after granting the loan, Friulia purchased a one-third
stake in Seleco.

(95)

Since it follows that no private investor would have granted the loan in question, the entire amount
of ITL 12 billion constitutes State aid under Article 87(1) of the Treaty.

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IV.6. The debenture loan granted by a consortium of banks in 1996

(96)

In 1996 a consortium of banks, for the most part private-sector banks (71 %), granted a debenture
loan at 5 %. Since a majority of the banks are private-sector banks whose conduct falls outside the
scope of Article 87(1) of the EC Treaty and since the public-sector banks, which constituted a
minority, applied the same conditions as the private-sector banks, it must be concluded that their
intervention is not covered by Article 87(1). The Commission also notes that the banks participating
in the consortium were, at the time of the bankruptcy, owed some ITL 20,5 billion by Seleco. It
must therefore be assumed that their intervention was aimed primarily at safeguarding their loans.

IV.7. The Friuli and Italtel investments in Multimedia

(97)

In view of the conditions under which Multimedia was set up, the investments by Italtel (which had
to seek the approval of its private shareholder, Siemens, in order to acquire the shareholding in
Multimedia) and by Friulia do not in themselves contain any elements of State aid within the
meaning of Article 87(1) of the Treaty as they constituted an investment in a firm which would be
operating in a particularly dynamic and promising sector, as stated in point II.1.3.

V. COMPATIBILITY OF THE AID WITH THE COMMON MARKET

(98)

The aid granted in 1994 and 1996 by REL and Friulia cannot be regarded as being compatible with
the common market by virtue of the exemptions provided for in Article 87(2) of the Treaty as it
does not constitute aid having a social character granted to individual consumers or aid to make
good the damage caused by natural disasters or exceptional occurrences. Nor can it be exempted
under Article 87(2)(c) or (3)(a),(b) and (d). The recipient is not located in an assisted region under
Article 87(3)(a) or (c) since the aid is not intended to promote an important project of common
European interest or to remedy a serious disturbance in the economy of a Member State, or to
promote culture and heritage conservation.

(99)

The Commission's analysis is therefore limited to determining whether the abovementioned aid
qualifies for exemption under Article 87(3)(c) and, in particular, whether it can be regarded as rescue
and restructuring aid to firms in difficulty since, in view of its financial position, Seleco must be
regarded as a firm in difficulty.

(100) For the Commission to approve restructuring aid, it must be shown that the recipient is a firm in
difficulty in accordance with the criteria set out in the relevant Community guidelines (see recital 34
of this Decision). It is also essential to have a restructuring plan that complies with the general
conditions laid down in point 3.2.2 of the guidelines. Firstly, the Commission would have to be
convinced that there was a real probability of regaining economic and financial viability in 1994 and
that the restructuring plan was based on realistic assumptions. Secondly, it would have to establish
that the aid did not distort competition and was proportionate to the costs and advantages of the
restructuring.

(101) According to the Community guidelines, a firm in difficulty is a firm unable to recover through its
own resources or by raising the funds it needs from shareholders. Its financial weakness is generally
due to poor past performance and dim future prospects. The typical symptoms are deteriorating
profitability or increasing size of losses, diminishing turnover and increasing debt. As stated in
Section II of this decision, Seleco is to be regarded as a firm in difficulty within the meaning of the
relevant Community guidelines.

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(102) For the reasons given in point IV.2.1, the Commission considers that Seleco's restructuring plan was
based on unrealistic assumptions and an inappropriate and inconsistent strategy regarding its
positioning on the market. The forecasts concerning its future operation were, to a large extent,
based on external factors over which it had no control. Even though it operated in certain growth
segments (professional products and video recorders), it nevertheless concentrated its efforts on a
sector that had reached saturation,

i.e. colour televisions.

(103) As the criterion of a restoration of viability laid down in the guidelines has not been met by Seleco, it
serves no purpose to examine compliance with the other criteria. The Commission nevertheless
would like to comment on several points in this connection.

(104)

If restructuring aid is to be compatible with the common market, measures must be taken to offset,
as far as possible, adverse effects on competitors. Seleco received aid for some 10 years without any
significant improvement in its situation. This dependence on State aid had, in fact, prompted the
Commission to warn the Italian authorities not to grant any further aid to the company. In its
Decision of 20 May 1992 the Commission notified the authorities that it would take a negative
decision on any fresh aid. Accordingly, it must be concluded that that criterion has not been met.

(105) The amount and intensity of the aid must, under the relevant Community guidelines, be limited to
the strict minimum needed to enable restructuring to be undertaken and must be related to the
benefits anticipated from the Community's point of view. Therefore, aid recipients will normally be
expected to make a significant contribution to the restructuring plan from their own resources or
from external commercial financing. In the present case, the public-sector contribution during the
1994 recapitalisation was 49 % compared with a private-sector contribution of 51 %. Without the
public-sector contribution, the private shareholder would not have agreed to recapitalise the firm in
view of the fact that the shareholders had already decided that the best solution was to wind up
Seleco.

(106) Following the failure of the restructuring plan, which was predictable for the reasons given in point
IV.2, only new injections of capital could keep the firm in business. This was done in 1996 during
the second recapitalisation and financial restructuring of the firm. On that occasion the private sector
contributed ITL 30,8 billion and the public sector ITL 60,5 billion. Thus,
following the two
recapitalisations in 1994 and 1996, public-sector contributions to Seleco totalled 55,4 % and
private-sector contributions 44,6 %.

(107) The Commission has to bear in mind that, even if the first transaction involved a majority of funds
from private investors, that was only in theory. For the reasons given in points IV.1 and IV.4, the
manner in which REL managed the recovery of its claim of ITL 82 billion on Seleco resulted in a
write-off of virtually the entire amount as early as 1994. The de facto nature of the majority public
holding in 1994 is confirmed by the fact that, as stated in point II.1.1, all of Seleco's shareholders,
both public and private, were prepared at that time to wind up the firm and were only prevented
from doing so by the Italian authorities. Furthermore, the firm's results in 1994 (losses totalling
ITL 41.6 billion) and in 1995 (losses totalling ITL 64.2 billion) confirmed that the only viable
option in 1994 was to wind up the firm. During the second recapitalisation/financing, public
resources accounted for 60 % of the total funds invested. The Commission therefore concludes that
the principle of proportionality was not complied with in either the first or the second recapitalisa-
tion.

(108) The 1993 to 96 restructuring plan was unable, for the reasons given in point IV.2.1, to restore the
firm's competitiveness within a reasonable time on the basis of realistic assumptions regarding future
operating conditions. The Commission notes as regards the 1996 recapitalisation/refinancing that
the Italian authorities failed to submit any other restructuring plan enabling it to approve the second
transaction.

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(109)

In view of the foregoing, the Commission concludes that the criteria provided for in the Community
guidelines on State aid for rescuing and restructuring firms in difficulty have not been complied with.
Accordingly, the aid must be deemed incompatible with the common market as it does not qualify
for exemption under Article 87(3)(c) of the Treaty.

VI. CONCLUSIONS

(110)

Italy agreed to the conversion of a loan of ITL 6 billion into shares and the injection by Friulia of
ITL 7 billion of fresh capital into Seleco, both operations being notified to the Commission on 30
March 1994, i.e. before the Commission had taken a decision. The Commission also notes that the
other forms of aid were granted in breach of Article 88(3) of the Treaty.

The following aid measures in particular are concerned:

— the partial write-off in 1994 by REL of ITL 16,8 billion on a loan of ITL 82 billion and the

repurchase of the outstanding debt of ITL 65,2 billion for ITL 20 billion in 1996,

— the convertible loan of ITL 12 billion granted in 1996 by Friulia at 7 % per annum and

guaranteed by a lien on four industrial brands owned by Seleco.

(111) The aid, however, is unlawful. For the reasons already given, it is incompatible with the common
market as it does not qualify for exemption under Article 87(2) and (3) of the Treaty.

(112) When the Commission finds that unlawful aid is incompatible with the common market under
Article 88(2) of the EC Treaty, it orders the Member State to recover the aid from the recipient, a
principle upheld by the Court of Justice in Case 70/72 Commission v Germany 12 July 1973 (12),
310/85 Deufil v Commission of 24 February 1987 (13), and Case C-5/87 Commission v Germany 20
September 1990 (14).

(113) Accordingly, the Italian authorities must take all the necessary steps to restore the financial position
in which the firm would have been without the incompatible aid. They must therefore recover the
unlawful and incompatible aid, plus interest running from the date on which it was granted to the
date it was recovered from the recipient, Seleco, currently being wound up. To ensure that the
Commission decision is implemented correctly, the Member State is required to act like a private
creditor (and to act with at least the same diligence as it would to recover its own debts, such as tax
or social security debts) and to recover the aid without delay using all the legal means at its disposal,
including seizure of the firm's assets and, where necessary, its liquidation if it is unable to repay the
amounts in question. The proceeds of the sale of the assets allow the creditors, including the Member
State, to be repaid even if they are not sufficient to cover all the debts of the firm and even if,
consequently, the aid is not recovered in full. In such circumstances, the liquidation of the firm is still
important from a competition standpoint as it frees the market segment previously held by the firm
and makes it available to creditors, while giving them the opportunity to acquire the assets and
reallocate them more effectively.

(114) There are, however, circumstances which can hamper that process, jeopardise the effectiveness of the
recovery decision and frustrate the rules on State aid. Such is the case when, following a Commission
investigation or decision, the assets and liabilities of the firm as an ongoing concern are transferred
to another firm controlled by the same persons at below-market prices or by way of procedures that
lack transparency. The purpose of such a transaction can be to place the assets out of reach of the
Commission decision and to continue the economic activity in question indefinitely.

(115) As in any other recovery procedure, the Member State must, like any other diligent creditor, exhaust
all the legal instruments available under its own legal system, such as those used to combat fraud
against creditors in the form of acts carried out by the firm in liquidation during the suspect period
prior to the bankruptcy, which would allow such acts to be declared invalid.

(12) [1973] ECR 813.
(13) [1987] ECR I-901.
(14) [1990] ECR I-3437.

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(116) Furthermore, in order to prevent the effectiveness of the decision from being frustrated and the
market from continuing to be distorted, the Commission may be compelled to require that the
recovery is not restricted to the original firm but is extended to the firm which continues the activity
of the original firm, using the transferred means of production, in cases where certain elements of
the transfer point to economic continuity between the two firms.

(117) The elements examined by the Commission include the purpose of the transfer (assets and liabilities,
continuity of the workforce, bundled assets, etc.), the transfer price, the identity of the shareholders
or owners of the acquiring firm and of the original firm, the moment at which the transfer was
carried out (after the start of the investigation, the initiation of the procedure or the final decision)
and,

lastly, the economic logic of the transaction.

(118)

In the case under examination, Seleco hived off in March 1996 its most profitable assets (video
projectors and monitors) to Multimedia (set up the preceding year by its only private shareholder, Mr
Rossignolo); it injected ITL 29 billion into Multimedia and became its sole owner. This transaction,
which thus helped to deprive Seleco doubly of its substance (assets and capital), occurred after the
Commission decision of 10 October 1994 to initiate the Article 88(2) procedure. Multimedia is fully
controlled by Seleco, which became its sole owner. It is also likely that the transaction was not
limited to a transfer of assets and that the transfer of Seleco's main assets was accompanied by the
transfer to Multimedia of the corresponding workforce (or part of it) and hence of its social security
debts at the very least.

(119) Four months after that transaction (and nine months before its bankruptcy), Seleco sold two thirds
of its shares in Multimedia, of which Italtel, Friulia and Seleco owned one third each at the time.
Multimedia remained under the control of Seleco (which transferred its share to a shell company,
Finanziaria Elettronica srl, of which it held 99 %) and/or its shareholder Friulia (Seleco's third
shareholder with 3,49 % in February 1996 and with capital of ITL 32,759 billion, which granted it a
convertible loan of ITL 12 billion).

(120) As a result, if the decision to recover the unlawful and incompatible aid is to be implemented
correctly, the Italian authorities must take action not only against Seleco but also against Multimedia
and any other firm which may have benefited from a transfer of the assets in question, thereby
helping to frustrate the effectiveness of this Decision,

HAS ADOPTED THIS DECISION:

Article 1

The following aid granted by Italy to Seleco SpA is hereby declared incompatible with the common market:

(a) the partial write-off in 1994 by Ristrutturazione Elettronica SpA of ITL 16,8 billion on a loan of

ITL 82 billion;

(b) the repurchase in 1996 by Seleco SpA of its outstanding debt to Ristrutturazione Elettronica SpA of

ITL 65,2 billion for ITL 20 billion;

(c) the conversion into shares by Friulia SpA of an ITL 6 billion loan granted by it in 1992;

(d) a capital

injection of ITL 7 billion by Friulia SpA in 1994;

(e) a convertible loan of ITL 12 billion at 7 % granted by Friulia in 1996 and guaranteed by a lien on four

industrial brands owned by Seleco.

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Article 2

1.
Italy shall take all the necessary measures to recover the aid referred to in Article 1, which has already
been granted unlawfully, from Seleco SpA and, additionally, with regard to the part not recoverable from
Seleco, from Seleco Multimedia srl and any other firm which benefited from asset transfers designed to
frustrate the effects of this decision.

2.
Recovery shall be effected in accordance with the procedures of national law. The aid to be recovered
shall include interest from the date on which it was made available to the recipient until the date of its
recovery. Interest shall be calculated on the basis of the reference rate used for calculating the net grant
equivalent of regional aid applicable at the time the aid was granted.

Italy shall inform the Commission, within two months of notification of this Decision, of the measures
taken to comply with it.

Article 3

This Decision is addressed to the Italian Republic.

Article 4

Done at Brussels, 2 June 1999.

For the Commission

Karel VAN MIERT

Member of the Commission