2006/740/EC: Commission Decision of 20 October 2004 implemented by Germany for Hamburgische Landesbank — Girozentrale, now HSH Nordbank AG (notified under document number C(2004) 3928)   (Text with EEA relevance)
Date: 2004-10-20
Institutions: European Commission
Subjects: Germany, State aid, bank, capital increase, control of State aid, share

L 307/110

EN

Official Journal of the European Union

7.11.2006

COMMISSION DECISION

of 20 October 2004

implemented by Germany for Hamburgische Landesbank — Girozentrale, now HSH Nordbank AG

(notified under document number C(2004) 3928)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/740/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Commu-
nity, 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 the Member State and other interested parties
to submit their comments pursuant to the provisions cited
above (1) and having regard to their comments,

Whereas:

(1)

(2)

I.

PROCEDURE

The procedure concerns the transfer of shares in Hambur-
gische Wohnungsbaukreditanstalt (‘WK’) to Hamburgische
Landesbank — Girozentrale (‘HLB’) by the Land of
Hamburg (‘FHH’). There are a further six cases in which
proceedings have been initiated against Germany in
connection with transfers of assets to Landesbanks, and
in particular to Westdeutsche Landesbank — Girozentrale
(‘WestLB’).

By letter of 12 January 1993,
the Commission asked
Germany for information concerning the circumstances of,
and reasons for, a capital increase in WestLB resulting from
the incorporation of Wohnungsbauförderanstalt (‘WfA’) and
similar increases in the own funds of the Landesbanks of
other Länder. Germany replied in March and Septem-
ber 1993 and, in response to further Commission requests
dated 10 November and 13 December 1993, provided
In addition to
information in March 1994.
additional
information concerning WfA's transfer to WestLB,
the
German replies referred to similar transfers in Lower Sax-
ony, Berlin and Schleswig-Holstein.

(3)

By letters of 31 May and 21 December 1994,
the
Bundesverband deutscher Banken e.V. (‘BdB’), an association
established in Germany,
representing private banks

(1) OJ C 81, 4.4.2003, p. 24.

informed the Commission among other things that, with
effect from 1 January 1986 and 1 January 1993, FHH had
transferred shares in WK to HLB directly or indirectly. This
increased the own funds at HLB's disposal and, in the BdB's
view, distorted competition in its favour since the parties
had not agreed remuneration consistent with the market-
economy investor principle.

(4)

(5)

In its second letter, the BdB accordingly lodged a formal
complaint and requested the Commission to initiate
proceedings under Article 93(2) of the EC Treaty (now
Article 88(2)) against Germany. The complaint also related
to similar transfers of assets to Westdeutsche Landesbank in
North Rhine-Westphalia, Norddeutsche Landesbank in
Lower Saxony, Landesbank Schleswig-Holstein (‘LSH’)
in
Schleswig-Holstein, Landesbank Berlin in Berlin and
Bayerische Landesbank in Bavaria. In February and March
1995 and December 1996 several banks associated
themselves individually with the complaint lodged by their
association.

The Commission investigated first the transfer of shares to
WestLB. By Decision 2000/392/EC, (2) it finally found that
the difference between the remuneration paid and the
normal market return constituted state aid incompatible
with the common market and ordered recovery of the aid.
This decision was annulled by the Court of First Instance of
the European Communities on 6 March 2003 as
insufficient reasons had been given for two of the factors
used to calculate the appropriate remuneration, but it was
confirmed in all other respects. (3) Alongside the present
Decision, the Commission is adopting a new decision on
WestLB which takes account of the Court's criticisms.

(6) On 1 September 1999 the Commission sent Germany a
request for information on the transfers of assets to the
other Landesbanks, including HLB. By letter of 8 December
1999, Germany submitted information on the transfer of
WK to HLB which it supplemented by letter of 22 January
2001.

(2) OJ L 150, 23.6.2000, p. 1.
(3)

Joined Cases T-228/99 and T-233/99 [2003] ECR II-435.

7.11.2006

EN

Official Journal of the European Union

L 307/111

(7)

By letter of 13 November 2002, the Commission informed
Germany of its decision to initiate on account of the aid the
procedure laid down in Article 88(2) of the EC Treaty.

(8) After requesting, and being granted, extensions of

the
deadline, Germany submitted its comments and provided
additional information by letters of 14 April and 15 May
2003. Further questions were discussed at meetings with
representatives of the German authorities on 26 June 2003.
Following a renewed Commission request, Germany
provided additional information on 29 August 2003.

(9)

The Commission decision to initiate the procedure was
published on 4 April 2003 in the Official Journal of the
European Union (4) .The Commission called on interested
parties to submit comments. It received comments from
the BdB, which it forwarded to Germany for its opinion.
Germany replied by letter of 30 October 2003.

(10) By letter of 7 April 2004,

the Commission requested
further information from Germany on all the Landesbank
transfers, receiving replies on 1, 2 and 28 June 2004. On
1 October 2004 Germany provided updated figures and
additional information.

(11) Following the merger between HLB and Landesbank
Schleswig-Holstein-Girozentrale (‘LSH’) creating HSH Nord-
bank AG (‘HSH’) on 2 June 2003, the WK shares received
by HLB were transferred back to FHH.

(12) On 19 July 2004 the complainant BdB, the Land of North
Rhine-Westphalia and WestLB notified a provisional under-
standing concerning the appropriate remuneration for the
transferred assets. In their view, this remuneration should
form the basis of the Commission Decision. The definitive
version of the understanding reached the Commission on
13 October 2004. On 29 September 2004 BdB, FHH and
HSH Nordbank, which resulted from the merger of HLB
and Landesbank Schleswig-Holstein in 2003, also reached a
provisional understanding on the appropriate remuneration
for the special-purpose assets transferred. Several
letters
were subsequently sent
to the Commission by these
interested parties and by Germany. The definitive version
of the understanding on the transfer of the special-purpose
assets to HLB reached the Commission on 14 October
2004.

II.

DETAILED DESCRIPTION OF THE MEASURES

HAMBURGISCHE LANDESBANK — GIROZENTRALE (‘HLB’)

(13) At the time of the transfer, HLB was a public-law institution
that had been set up by decree in 1938. This decree was
replaced in 1993 by the Hamburgische Landesbank —

(4) See footnote 1.

amended in 1997 in
Girozentrale Act, which was
connection with the partial sale to ‘LSH’. (5) Up to that
point, FHH had been the sole shareholder in HLB as well as
its sponsor and guarantor. In 1997 LSH, alongside FHH,
in HLB. Each had a 49,5 %
became a shareholder
In addition, HLB-Beteiligungsge-
shareholding in HLB.
sellschaft mbH (‘HLB-BG’), which is controlled by FHH
and the holding company Hamburger Gesellschaft
für
Beteiligungsverwaltung mbH (‘HGV’), owns a de facto share
of 1 % via an atypical silent partnership.

(14) On 2 June 2003 (for tax and balance-sheet purposes,
1 January 2003) HLB and LSH merged to form HSH. The
owners are FHH with over 35 %, the Land of Schleswig-
Holstein with just under 20 %, WestLB with just under 27 %
and the Sparkassen- und Giroverband Schleswig-Holstein
with over 18 %. With a balance-sheet
total of some
EUR 180 billion and some 4 500 employees in all, HSH is
today one of the larger credit institutions in Germany.

(15) When the two transfers took place, HLB had a balance-
sheet total of DEM 36,5 billion (1986) and just under
DEM 60 billion (1992). In 2002, the year preceding the
merger creating HSH, HLB had a group balance-sheet total
of just under EUR 93 billion and an own-funds ratio of
11 %. That same year it had 2 700 employees at group
level.

(16) As a state-owned bank, HLB took charge of FHH's banking
business and that of its public and private legal persons. As
a commercial bank, HLB was active especially in the areas
of shipping and real estate finance, corporate and private
customer business and international capital market busi-
ness. In the field of shipping finance, HSH describes itself as
the world leader.

TRANSFER OF WK SHARES TO HLB

(17) Under Article 1 of the Act amending the sponsorship of the
Hamburgische Wohnungsbaukreditanstalt of 1 July 1986,
FHH transferred 24 % of WK's equity and special capital to
HLB with effect from 1 January 1986. According to the
relevant contract of 10 July 1986 concluded between FHH
and HLB, this was done as a means of increasing the latter's
capital.

(18)

In accordance with the Act
increasing the capital of
Hamburgische Landesbank — Girozentrale of 22 December
1992, FHH transferred with effect from 1 January 1993 a

(5) LSH is an independent public-law institution. In 1998 it had a
balance-sheet total of €100 billion and some 2 000 employees. Since
1994 it has been owned by WestLB (39,9 %), the Land of Schleswig-
Holstein (25,05 %), the Sparkassen- und Giroverband für Schleswig-
Holstein (25,05 %) and Landesbank Baden-Württemberg (10 %).

L 307/112

EN

Official Journal of the European Union

7.11.2006

further 38 % of its shares in WK to HGV and the remaining
shares (a further 38 %) directly to HLB. The FHH holding
HGV in turn acquired an interest in HLB in the form of a
typical silent partnership contribution with 19,86 % of the
shares transferred to it. Consequently, according to the
information supplied by Germany, FHH transferred 81,86%
of its shares in WK to HLB, some directly, some indirectly.

(19) The transfer contract of 22 December 1992 also provided
for a call option whereby FHH could at any time demand
that the Landesbank transfer the WK shares transferred
directly to it either to FHH itself or to a third-party
designated by it. This option also included the right to
receive back the shares transferred in 1986 (cf. a so-called
‘side letter’ of 22 December 1992). In the event of such a
reassignment, payment would be based on the value of the
WK shares as determined by an expert valuation for the
financial year prior to the reassignment. In an addendum
adopted on 21 April 1997 to the contract of 22 December
1992, it was laid down that, in the event of a reassignment,
any increase in undisclosed reserves brought about by a
readjustment of the WK aid scheme would accrue not to
HLB but to FHH.

CAPITAL REQUIREMENTS UNDER THE OWN FUNDS AND
SOLVENCY DIRECTIVES

(the

credit

institutions (6)

(20) The German Banking Act (Kreditwesengesetz — KWG) has been
amended in line with Council Directive 89/647/EEC on a
solvency ratio for
‘Solvency
Directive’) and Council Directive 89/299/EEC on the own
funds of credit institutions (7)
(the ‘Own Funds Directive’),
which require banks to have own funds equivalent to 8 % of
their risk-adjusted assets. At least 4 percentage points of this
amount must consist of what is termed core capital, or ‘tier I’
capital, meaning items of capital which are at the credit
institution's disposal without restriction and immediately to
cover risks or losses as soon as they arise. In determining the
total own funds available to a bank for supervisory purposes,
the core capital is of decisive importance because additional
capital, or ‘tier II’ capital, is accepted as underpinning for risk-
bearing transactions only up to the amount of the available
core capital.

Directive was transposed into German law, many Land-
esbanks had relatively weak own-funds positions. They now
had to strengthen their own-funds base as a matter of
urgency in order to avoid restrictions on their business
expansion and indeed to maintain their current level of
activities. However, because the budgetary situation was
tight, public shareholders were unable to provide any fresh
capital, but neither were they prepared to privatise and to
raise additional capital on the capital markets. The public
banks thus decided to undertake asset and capital transfers:
in the case of WestLB, the assets of the WfA and, in the case
of HLB,
the aforementioned WK shares, which were
transferred to HLB's capital reserves and silent partnership
reserve.

EFFECTS OF THE TRANSFER ON LBB'S CAPITAL BASE

(22) The reason for the transfers was indicated as being capital
requirements and/or a need to improve capital resources for
the purpose of expanding HLB's business. The transfer of WK
shares presented the advantage of allowing this to happen
without the need for an additional capital contribution from
FHH's budget.

(23) Back in the 1980s, business expansion had given rise to a
steadily growing need for capital. According to the available
information, the bank therefore regularly transferred part of
its balance-sheet profit to its interest-bearing share capital.
However, since this was clearly insufficient, FHH decided as
early as 1986 to contribute 24 % of its WK shares (DEM
212,16 million) to HLB. At the beginning of the 1990s, a
further
increase in HLB's equity capital was urgently
required in view of the fourth amendment to the German
Banking Act (‘KWG’) since HLB would have otherwise failed
to comply with the new capital requirements laid down.

(24) Since FHH also did not have adequate liquid budgetary funds
available at the time,
it opted for a contribution of non-
monetary capital and, on 1 January 1993, transferred the
57,68 % of WK shares (DEM 959,362 million) directly and via
HGV to HLB.

(21) German banks had to adapt their own funds to the new
requirements of the Solvency Directive and the Own Funds
Directive by 30 June 1993 (8). Even before the Solvency

(6) OJ L 386, 30.12.1989, p. 14; replaced by European Parliament and

Council Directive 2000/12/EC (OJ L 126, 26.5.2000, p. 1).
(7) OJ L 124, 5.5.1989, p. 16; replaced by Directive 2000/12/EC.
(8) Under the Solvency Directive, credit institutions must have own
funds equivalent to at least 8 % of their risk-adjusted assets, whereas
the previous German legislation required a ratio of 5,6 %; however,
this ratio was based on a narrower definition of own funds than that
which has applied since the entry into force of the Own Funds
Directive.

(25) The total stated value of the transfers was DEM 1 171,552
million. Of this amount, DEM 212,16 million corresponded to
the contribution to the open reserves in 1986 (24 % of the WK
shares), DEM 659,362 million to the contribution to the open
reserves in 1993 (38 % of the WK shares) and DEM 300 million
to HGV's silent partnership reserve of the same year. This
calculation was based on WK valuation reports by two
auditing firms in 1986 and 1993. The total amount of DEM
1 171,522 million was incorporated into the balance sheet for
1993 and subsequent financial years.

7.11.2006

EN

Official Journal of the European Union

L 307/113

(26) The Federal Banking Supervisory Authority (Bundesaufsicht-
samt für das Kreditwesen or ‘BAKred’) recognised the capital
amount of DEM 212,16million for 1986. With regard to
the overall capital valuation after the further transfers in
1993, BAKred did not
initially approve the relevant
application from HLB because it took the view that, for
WK to be recognised as a valuable holding, HLB would have
to be entitled to sell it off. After a amendment to the WK
Act in 1997 under which a decision on dissolution could be
taken by shareholders at the request of a single shareholder
(including HLB), the problem was settled and the full value
was recognised as HLB's liable capital.

(27) According to Germany, HLB expanded its business
significantly following the two transfers;
in the period
1986-99 its balance-sheet total rose from DEM 36,5 billion
to over DEM 145 billion.

REMUNERATION FOR THE OWN FUNDS TRANSFERRED

resources by FHH to HLB had to be investigated in the light
of the market-economy investor principle. According to
this principle, no aid elements are present even in the case
of resources provided by a state investor where such funds
are provided on terms on which a private investor
operating under normal market economy conditions would
be willing to provide funds to a private company (10).

(32) For a credit institution, the economic benefit of a broader
capital base created by the transfers of WK shares in
question resides in the resulting greater capacity to lend and
the opportunity to expand business. If this broader capital
base is provided by the public investor on terms that are
more advantageous than normal market conditions, the
company concerned is favoured by state resources.

(28) According to the available information, FHH received no
remuneration for the shares transferred on 1 January 1986
(24 % or DEM 212,16 million). Likewise, no remuneration
was agreed for the shares transferred directly to HLB on
1 January 1993 (38 % or DEM 659,362 million); however,
HGV received DEM [...] (*) million each year from HLB for
the contribution.

(33) As a result,

the Commission conducted a preliminary
assessment as to whether FHH had provided the funds in
question on normal market conditions. Under normal
market conditions, a remuneration corresponding to its
value, its function and the risk incurred is expected for the
contribution of capital.

(29)

It was agreed that,
in return for its contribution, HGV
would receive [...] of profits, subject to a ceiling of 10 %
each year. According to the information supplied, a sum of
DEM [...] million had been paid by HLB since this
understanding of 23 December 1992 (effective as of
1 January 1993).

(30) No further remuneration was agreed. Germany has never-
theless stated that, up to 1997, FHH, as HLB's sole
shareholder, received the maximum annual dividend of
6 % laid down in the latter's statutes. (9) In addition, HLB
has regularly converted reserves which it had generated
(according to
itself
Germany, comparable to the issue of free shares), and this,
according to the data submitted, resulted in an effective
after-tax return of more than [...] % (and a corresponding
inflow) on the capital actually paid in by the shareholder;
HLB is thus the Landesbank with the highest effective yield.

into interest-bearing share capital

III.

GROUNDS FOR INITIATING THE PROCEDURE

(31)

In its decision of 13 November 2002 to initiate the
procedure, the Commission explained that the provision of

(*) Confidential information: indicated below by [...] or by a range in [].
(9) The redrafted HLB Act, applicable since 1997, no longer provides for
a maximum dividend; according to the data provided, distributed
dividends have more than doubled since, amounting to some 21 %
in 1999.

(10) OJ C 307, 13.11.1993, p. 3, point 11.

the

(34) On the basis of the information available to it at the time,
remuneration
the Commission doubted whether
received by FHH and its holding company HGV, which
amounted to DEM [...] million [...], or some [less than 3 %]
of the total funds transferred, had been paid under normal
market conditions. Since, at the time of the two transfers,
even the return on outstanding ten-year Federal securities, i.
e. risk-free assets, ranged from over 6 % to 7 %, the
provision of capital can hardly be regarded as having taken
place under normal market conditions. Even if the special
features of
the transferred
resources' lack of liquidity, were taken into consideration,
the remuneration received by FHH and HGV can hardly be
regarded as a normal market remuneration.

the transaction,

such as

(35) Germany,

it is true, had stated that, at the time of the
transfer, HLB was an economically sound company whose
value as a going concern had increased year on year.
Proceeds were either distributed to FHH in the form of
dividends or channelled into HLB's capital stock as revenue
increased their value and
reserves, which,
benefited FHH as the only shareholder at the time. On the
basis of a report drawn up at the time of the sale of shares
(49 %) to LSH, an earning capacity value of DEM [...] million
had been calculated for HLB as at [...]. According to internal
calculations, this had still amounted to DEM [...] million as
at 31 December 1985 and at DEM [...] million as at

it is claimed,

L 307/114

EN

Official Journal of the European Union

7.11.2006

31 December 1992, representing an annual average rise in
value of [...] % between 1986 and 1992 and of [...] %
between 1993 and 1996 which FHH, the only shareholder
until 1997, had been able to use entirely for its own benefit
and which had been able to be realised on a pro rata basis
on the occasion of the sale to LSH. Since, however, no other
information or calculations, e.g. relating to the increases in
dividends and value attributable to the contribution of WK
shares, were available, the Commission was unable to carry
out an assessment.

IV.

COMMENTS FROM GERMANY

(40)

In its comments, Germany repeated first of all the view that
the transfer on 1 January 1986 of 24 % of WK's capital
(value transferred to the reserves: DEM 212,16 million) to
HLB could not be recovered as unlawful aid in accordance
with Article 15(2) of Regulation (EC) No 659/1999 since
the ten-year period applicable to the transfer had expired on
1 January 1996.

(36) On the basis of the available information, the Commission
thus had serious misgivings as to whether the conditions on
which FHH had transferred the funds that were apparently
available to HLB in full as liable capital were normal market
conditions. It therefore concluded that HLB was probably
favoured by state resources.

(37) As regards the calculation of remuneration, the Commis-
sion stated that, as things stood and given the special
circumstances of the present case, it intended to apply the
method used in the WestLB Decision of 8 July 1999.

(38) Since HLB is

at

active

regional, national

and
the
international level and since there is strong competition
between financial institutions of different Member States as
a result of the growing integration in the financial services
sector in the Community, it was assumed that the existence
of state aid was distorting this competition and affecting
trade between Member States. Accordingly, the Commis-
sion came to the provisional conclusion that the measures
in question probably constituted aid within the meaning of
Article 87(1) of the EC Treaty, giving rise to misgivings
regarding their compatibility with the common market
since none of the exemption clauses in Article 87(2) and (3)
or in Article 86(2) of the EC Treaty appear to be applicable
in the present situation.

the EC Treaty (11),
there were aid,
if

(39) As part of its provisional assessment and in accordance
with Article 1(b) of Council Regulation (EC) No 659/1999
of 22 March 1999 laying down detailed rules for the
application of Article 93 of
the
Commission also assumed that,
the
measure constituted new aid and not existing aid and
referred here to Article 15(2) of that Regulation. In its view,
the decision to initiate the procedure was a further
Commission measure that interrupted the limitation period
within the meaning of Article 15(2) and, as such, confirmed
previous measures, including the Commission's requests for
information dated 12 January, 10 November and 13 Decem-
ber 1993 and 1 September 1999 as well as the decisions to
initiate the procedure in the WestLB case (12) and in the case
of Landesbank Berlin (13).

(11) OJ L 83, 27.3.1999, p. 1, as amended by the 2003 Acts of Accession.
(12) OJ C 140, 5.5.1998, p. 9.
(13) OJ C 239, 4.10.2002, p. 12.

(41) This transfer (‘1986 transfer’) was to be seen as a legally and
economically independent process separate from the 1993
transfers. In so far as Germany had previously spoken of a
‘single intention to invest’, as the Commission had noted in
its decision to initiate the procedure, this applied solely to
the 1993 transfers. The ‘side letter’ of 22 December 1992,
which was referred to in Germany's letter of Decem-
ber 1999, also referred to — and was only concerned with
— the 1986 transfer
the
reassignment right to reassign the shares given to FHH in
1986 and 1993 was concerned. In addition, Germany's
statement that the direct remuneration of DEM [...] million
each year corresponded to around [less than 3 %] of the
total amount of all the transfers, was intended merely as an
illustration. However, in its view, this in no way altered the
fact that de facto and de jure the 1986 transfer was a quite
separate process.

solely to the extent

that

(42)

If, however, the 1986 transfer was to be viewed separately
from the 1993 transfers, action by the Commission within
the meaning of Article 15(2) of Regulation (EC) No 659/
1999 could interrupt the limitation period only if it were
taken before 1 January 1996. However, the Commission's
requests for information that preceded the one dated
1 September 1999 were of a general nature, had not even
mentioned HLB and so did not meet the conditions for
them to be regarded materially as action interrupting the
limitation period within the meaning of Article 15(2).
Germany also mentioned in this respect the judgment by
the Court of First Instance of 10 April 2003 in Case T-369/
00 Département du Loiret v Commission (14)
(hereinafter
‘Scott’). The Court ruled that a Commission letter requesting
information regarding a possible aid element was a measure
interrupting the limitation period within the meaning of
Article 15(2) of Regulation (EC) No 659/1999. However,
the letter in question had been a request for information
that was concerned expressly and materially with a plot of
land that the firm Scott S.A. had sold on preferential
conditions.
In that letter the Commission had referred
expressly to the fact that the lawfulness of the aid in
question was being examined and that the aid might have
to be repaid. According to Germany, the Court had thus
laid down the minimum requirements that a request for
information must meet in order to be regarded as action
interrupting the limitation period.

(14) [2003] ECR II-1789.

7.11.2006

EN

Official Journal of the European Union

L 307/115

(43)

In the present case, the Commission, with its requests for
information of 12 January, 10 November and 13 December
1993, which were mentioned by it in the decision to initiate
the procedure and were addressed to Germany, fell far short
of these requirements. These letters had referred simply to
request
Westdeutsche Landesbank and to a general
regarding possible similar transfers to other Landesbanks.
HLB and FHH had not been mentioned in any of those
the
letters. According to Germany,
the triggering of
limitation period prevented further examination of
the
1986 transfer.

(44) As for the economic assessment of the capital transfer,
Germany confirmed first of all that the total value of the
WK shares transferred in 1986 and 1993 (DEM 1 171,522
million) had been made available to HLB as equity capital.
At no time had the transferred capital been assigned to a
special purpose or made subject to any other restriction as
to its use.

(45)

It should be borne in mind here that the capital transferred
in 1986 was recognised from then on by BAKred as liable
capital. However, the total amount, i.e. including the 1993
transfer of around DEM 959 million (of which 38 % was
directly transferred WK shares which were assigned to
HLB's open reserves with a value of DEM 659,362 million,
and 19,86 % was WK shares transferred indirectly via HGV,
which were transferred to HLB as a silent partnership
contribution amounting to DEM 300 million), was
recognised by BAKred as liable capital only in 1997. This
was because the WK Act was amended only on 25 June
1997 and because HLB as shareholder was granted the right
to dissolve or liquidate WK.

(46) Germany stated that the transferred funds had, therefore,
been made available to HLB in full as liability cover only
retrospectively on 1 January 1997. Even so, as Germany
later explained, HLB had before that date used part of the
capital reserve as liability cover, viz. DEM 183 million in
1993, more than DEM 436 million in 1994, DEM 255 mil-
lion in 1995 and DEM 208 million in 1996 (figures
rounded;
see also the table in paragraph 183). The
remaining amount of the capital reserve had not been
used and had not been recognised as liable core capital. It
was only after 1 January 1997 and until the divestment of
WK at the time of the merger with LSH to form HSH on
2 June 2003 that the amount of DEM 659,4 million had
been available. The silent partnership contribution of
DEM 300 million had also been available in full as liable
core capital until that date. Prior to 1997 these funds had
not been used and had not been recognised as core capital.

(47) As regards the remuneration, the maximum fixed amount
of DEM [...] million [...], corresponding to [not more than
10 %], was paid throughout on the silent partnership

contribution. No remuneration was paid on the capital
reserve of some DEM 659 million.

(48) Germany nevertheless repeated the view that it was not
only the agreed, direct remuneration for the silent partner-
ship contribution that should be taken into account as a
remuneration component. For one thing,
the dividend
payments to the sole shareholder FHH had to be taken into
consideration since the profits earned by HLB were
necessarily also attributable to the funds transferred by
FHH. And so, as the sole shareholder until 1997, FHH had
received the highest dividend of 6 % laid down in the
statutes and from 1997 onwards had received varying, but
increasing dividends on its share of the share capital. These
dividend payments rose from EUR [...] million in 1985 to
EUR [...] million in 1996, when FHH had still been the only
shareholder. As they were then payable only on 50,5 % of
FHH's shares, they amounted to EUR [...] million in 1997
and to EUR [...] million in 2001.

(49) Moreover, the reserves that HLB had itself built up were
regularly converted into equity capital, which rose from
EUR 228,3 million in 1985 to EUR 250,9 million in 1997
and has remained unchanged since. The revenue reserves
had also risen steadily, from EUR 93,1 million in 1985 to
EUR 321,8 million in 2001. All of these facts indicated a
substantial increase in revenue.

(50) Account must also be taken of the increases in value that
has been produced by the transferred capital and were
attributable solely to FHH. There was an increase in value of
between some [...] % and [...] % that was attributable solely
to the transfer of WK shares. Germany provided more
detailed calculations based on the capitalised value method.
Between 1985 and 1992 the value of HLB had risen by
DEM [...] million, or just under DEM [...] million a year,
giving a return of [...] % in terms of
the WK shares
transferred in 1986. Between 1992 and 1995 the
company's value had risen by DEM [...] million a year,
giving an annual yield of [...] % in terms of the WK shares
transferred on 1 January 1993. This again demonstrated
that, all factors being taken into consideration, FHH had
received appropriate returns.

(51) Lastly, FHH could have expected appropriate returns at the
time of the two investments. At the end of 1985 and at the
end of 1992 HLB had been a profitable company with
equity returns (before tax), given here as examples, of over
19 % in 1985, 8 %-9 % in 1989 and 1990 and over 12 % in
1992. For purposes of comparison, Germany commu-
nicated capital returns it had itself calculated for five private
German banks which showed that in the years 1980-92
HLB had not or had in only a few years lagged behind the
relevant annual average of the other five institutions by
some 1 %-6 % (before tax) and 1 %-4 % (after tax). In other
words, HLB ‘does not lag behind’ the other private banks.

L 307/116

EN

Official Journal of the European Union

7.11.2006

return, what mattered therefore was

(52) For the rest, Germany took the view that the transfers were to
be compared to a non-monetary capital contribution because
of the lack of liquidity of the funds made available. For a
calculation of
the
difference between a non-monetary contribution and a cash
contribution, which consisted in the refinancing costs for the
lending to promote business expansion or in the disadvantage
represented by the fact that the cash value of the deposit
cannot be invested directly. According to the calculations
provided,
the interest-rate difference relative to a cash
the non-monetary capital
contribution in the
transferred in 1986 was some 6,8 % in respect of lending
and some 6,8 % in respect of income-producing, risk-free
investments. For the contribution made on 1 January 1993,
the difference was around 8,3 % for lending and 7,36 % for
risk-free investments.
this
In terms of
represented a difference of some 6 % (1996) and 6,6 % (1993)
between capital assumed to be provided in cash and the illiquid
capital actually provided. A market-economy investor too
take this disadvantage into account when assessing
must
whether his remuneration is appropriate.

the gross return,

case of

V.

COMMENTS FROM THE BDB

(53) The BdB considers the remuneration that was actually paid to
be insufficient. No remuneration at all had been agreed for the
WK shares transferred on 1 January 1986 while, for the shares
transferred in 1993, only the interest payable on the silent
partnership contribution had been agreed. In terms of the total
capital transferred, this corresponded to less than 3 % per
annum and could not in any way be regarded as normal for
the market. FHH's claim to an appropriate remuneration was
not undermined, for instance, by the fact that it had been
HLB's sole shareholder. What mattered was the expectation at
least of an average return that private banks too regularly
associate with the provision of equity capital
to their
subsidiaries.

(54) Admittedly, it is true that this anticipated return did not figure
in the understanding on a fixed interest rate since the return to
the parent company could be in the form not only of dividend
payments but also of the increase in the revenue and associated
value of the subsidiary. Even so, the expected normal market
return corresponded to the setting of a fixed interest rate.

(55) As a market-economy investor, FHH should, therefore, have
expected a normal market return from HLB. However, it had
by no means been able to count on this.

clearly been no remuneration at all for FHH in the early years.
Even the dividends actually paid out subsequently to FHH were
not to be taken into account since, under the circumstances
obtaining, a private investor would have demanded a fixed
annual remuneration. Similarly,
the reserves and revenue
converted into share capital could not be taken into
consideration.

(57) Possible increases in value could not have been expected here
either since the shares in HLB had not been negotiable. In
addition, therefore, the shares had not been subject to any
ongoing assessment of their value. The transfer in 1997 of
49,5 % of the shares to LSH had not removed the aid element.
The sale had taken place after the time of the investment and
had, therefore, been quite immaterial as regards the remunera-
tion expectation. For the state aid investigation it was a matter
of whether a transaction had taken place under normal
economic conditions.

(58)

(59)

It transpired from all this that, under these circumstances, a
private investor would have undertaken the investment only if
revenue or cash flows could have been generated promptly,
either in the form of fixed dividends or alternatively in the
form of variable cash flows. In such a situation, however, a
private investor would presumably prefer
fixed interest
payments. There is also the fact that FHH had not been
entitled to reassign the WK shares without any consideration
(compensatory payment at book value).

In calculating a normal market return, BdB first assumed that
the resources transferred needed to be remunerated in the
same way as share capital because they constituted core capital
recognised for banking supervisory purposes. It stated that an
appropriate return on capital made available would invariably
be based on a risk-free return and a risk premium. In other
words, the basic principle of
‘expected return on a risky
investment = risk-free return + risk premium for the risky
investment’ would be applied.

(60) The BdB then calculated the minimum remuneration applying
the so-called Capital Asset Pricing Model
(CAPM), which
determines the expected individual risk premium with the help
of the so-called beta value (statistically measured deviation of
the individual risk premium from the general
long-term
market risk premium).

(61)

In determining the risk-free return, the BdB used the returns
on long-term government bonds, fixed-rate securities issued by
state bodies being the form of investment with the lowest risk
or with no risk at all (15).

(62) For the purpose of deriving the risk premium, the BdB first
determined the so-called general market risk premium, i.e.
the difference between the long-term average return on the

(56) Even for the transfer on 1 January 1986,

it appears that,
according to the Land Government notice of 17 December
1985, a below-average return of between DEM 0,3 million and
DEM 0,5 million (according to the BdB, corresponding to
between 0,1 % and 0,2 %) was expected. Since dividends were
to be paid only after business had actually expanded, there had

(15) To adjust for inflationary effects, the rate of return on a long-term
government bond had first to be determined for each contribution
period disregarding inflationary expectations. In estimating the long-
term, risk-free basic interest rate, the estimation of the expected long-
term average inflation rate of 3,60 % was then added to the ‘real
basic interest rate’ at the relevant moment.

7.11.2006

EN

Official Journal of the European Union

L 307/117

normal market share portfolio and the risk-free return
(government bonds). In its comments of 25 June 2003, it
assumed in the first place a long-term market risk premium
of a uniform 4,6 %.

(63) The BdB stated that it estimated the beta values on the basis
of a historical data sample for comparable banks.
It
concluded first that all beta values for all Landesbanks and
for all the periods under consideration were greater then
one. In other words, it considered that the risk premium for
investments in Landesbanks was higher than the market
risk premium.

(64) Assuming a risk-free basic interest

rate of 8,05 %
(December 1985, for the 1986 transfer) and of 5,90 %
(December 1992, for the 1993 transfer) and a beta factor
for HLB of 1,1660 (first date) and of 1,0836 (second date),
the BdB arrived at an expected minimum remuneration of
13,41 % for the shares transferred on 1 January 1986 and
of 10,88 % for the shares transferred on 1 January 1993.

(65) The BdB also noted that

the Commission's deduction
pursuant to Decision 2000/392/EC from the minimum
remuneration to take account of the lack of liquidity of
Wfa's assets had been upheld by the Court of First Instance.
There was therefore no reason to depart from this method
in the present case, with the result that a deduction for
liquidity should also be made here. The amount of the
deduction for lack of liquidity would be calculated, using
the WestLB method, on the basis of net refinancing costs
(gross refinancing costs less the applicable corporation tax).

(66) The BdB also took the view that the deduction made by the
Commission pursuant to Decision 2000/392/EC (1,5 %)
and upheld as such by the Court of First Instance, ought
similarly to be made in the case of HLB. In its opinion, if
there were circumstances in the other Landesbank cases
that had the effect of increasing risk as compared with a
‘normal share capital
investment’, such as the in part
exceptionally large size of the asset transfer, the decision
not
to issue new company shares and the associated
absence of additional voting rights as well as the lack of
fungibility of the asset, a deduction would be justified here
too.

(67)

Instead of a normal market return calculated in this way,
FHH had not agreed on or received any remuneration
whatsoever for the 1986 transfer, and the remuneration for
the 1993 transfer had been too small. For the 1993 transfer,
which had been recognised as core capital for supervisory
purposes only in 1997, HLB had, since 1993, paid out an
annual
consisting of a guaranteed
remuneration of 7 % and a variable component (fixed
interest rate of 0,5 % on the dividend payout from net

in profits

share

the remuneration appeared to be too low.

profit for the year). The BdB did not know the actual
amount. However, since it could be compared to share
capital,
In
addition, it had been paid to HGV, which, although it was a
holding company of FHH, was, economically speaking, an
independent unit, whereas nothing had accrued directly to
FHH. No remuneration at all had been agreed for the
transfer of the other shares to the capital reserve.

(68) The limitation period for the transfer of shares on 1 January
1993 had been interrupted by the Commission as a result
of the information request dated 1 September 1999 and the
decision of 13 November 2002 to initiate the procedure.
With regard to the transfer on 1 January 1986, the BdB, in
rejecting the time limitation, relied on the legal concept of a
continuous series of acts, which also had its equivalent in
the case law relating to traditional competition legislation.
The conditions for such related acts were met here because
all the transfers had been in response to a uniform concept
of capital strengthening and business expansion and had
followed the same pattern. Accordingly, the transfer of
1 January 1993 could not be viewed separately either on
account of the new solvency rules. The transfers in 1986
and 1993 were, therefore, to be regarded as a single capital
measure, and the aid was not granted in full until 1 January
1993.

for

requests

(69) Accordingly, it was also immaterial whether the Commis-
information in 1993 could have
sion's
the BdB
interrupted the limitation period. However,
maintains here that this period could have been interrupted
as regards the aid granted to HLB only if those requests had
also related to this aid measure. Since the BdB did not know
the exact content of those letters,
it could not take a
definitive position on the matter.

VI.

GERMANY'S RESPONSE TO THE BDB'S

COMMENTS

(70) Germany stated first that the BdB had misinterpreted the
judgment of 6 March 2003 by the Court of First Instance in
the WestLB case (hereinafter ‘WestLB judgment’). The BdB
apparently felt that the judgment had made it clear that the
increase in value attributable to the capital contribution was
not a normal market return. However, the Court had not
commented in any material way on the decision. The
Court's ruling that a private investor would not normally be
content with minimum losses or a limited return even
where he already held share capital in the company said
nothing about the assessment from the viewpoint of state
aid legislation of a return that consisted not in a fixed
in an increase in the
rate but,
interest
company's value.

for example,

L 307/118

EN

Official Journal of the European Union

7.11.2006

(71) The BdB clearly acknowledged this when,

in discussing
capital contributions by private banks to subsidiaries,
it
stated that the expected return was not expressed in the
setting of a fixed interest rate but in the form of dividends
as well as revenue increases and associated increases in
value. It should be pointed out in this connection that the
BdB was not aware of the facts regarding the possibility —
which it itself doubted — of an increase in the value of HLB
as, contrary to what BdB believed, 49,5 % of the shares
were not negotiable since they were sold to LSH in 1997.

the ranking of

the participation in losses,

liability in the event of insolvency, the
by institutional
irrelevance of voting rights given that FHH was the sole
owner,
the
dividend claim and the period to maturity. On this basis,
Germany, in its reply to the BdB's comments, combined the
two instruments when calculating the remuneration but
weighted their shares of the overall contribution according
to whether they were of limited or unlimited duration. By
it arrived at an
deducting refinancing costs
appropriate
total
the
contribution.

remuneration of 1,48 % for

in full,

(72) The minimum returns of 13,41 % (1986 transfer) and
10,88 % (aggregate 1993 transfer), which had been
calculated on the basis of
the CAPM method, were
incorrect. On the one hand, fundamental misgivings were
expressed regarding the use of the CAPM method and
specific misgivings regarding its use by the BdB. Among
other things, the BdB had restricted the market portfolio to
the German shares making up the CDAX, had estimated the
parameters solely on the basis of what were in part past
data without checking their validity for the relevant date of
the investment, had derived the market risk premium from
a study that dealt solely with the average return on German
shares in the period 1954-88 and, in calculating the beta
factors, had regarded the CDAX banks as companies with
the same business and risk profile. As a result, virtually all
the factors needed for the CAPM were wrongly estimated
and the normal minimum market
the
transactions in question were overstated.

returns

for

(73)

the BdB had maintained that a premium
In addition,
charged to take account of the special features of
the
transactions was simply the result of applying the criteria
specified in Decision 2000/392/EC, without however
carrying out a quantitative assessment such as that criticised
in that decision. Moreover, on account of
the lack of
liquidity, the full refinancing rate had been deducted since it
was not at all admissible to set off the tax-reducing effect
claimed by the BdB as a liquidity deduction against the
appropriate return. This was based on a fundamental
misconception. Expected returns for investors had nothing
to do with the tax effects on the balance sheet
for
companies.

(74)

the law, Germany
interpretation of
In line with its
calculated an alternative normal market return to that
calculated by BdB. It did so only for the 1993 transaction
since the 1986 transfer had been time-barred.

(76)

In line with its interpretation of the law, however, Germany
also calculated in its reply the return on the capital reserve
according to the CAPM. Assuming a market risk premium
of 3 % and a beta value for HLB of 0,7861, this gave a
hypothetical minimum return on cash deposits of 9,74 % in
respect of the increase in the capital reserve although the
full refinancing costs had to be deducted on account of the
lack of liquidity, with the result that the actual minimum
normal market return worked out at 2,36 %. For the silent
partnership contribution, because these instruments were
not traded on the secondary market, Germany did not use
the CAPM but
the comparison with similar financing
instruments. After deducting again the full refinancing
this produced a premium of 1,29 % for silent
costs,
partnership contributions of unlimited duration similar to
HLB's contribution.
this gave an
aggregate remuneration of 2,08 %.

In weighted terms,

(77) As regards the time-bar, which, according to the BdB, had
not been triggered because of the linkage between the two
transactions, Germany repeated the objections it had raised
previously and stated once again that the 1986 transfer had
been a transaction that was de facto and de jure separate from
the 1993 transfer as the documents produced at the outset
and subsequently proved. For the rest, the legal concept of a
continuous series of acts, cited by the BdB, had in the
meantime been called into question by criminal court
judges at the Federal Constitutional Court. The concept of
continuing relationship in European cartel
legislation,
which had been explicitly dealt with in a regulation on
prosecution and enforcement prescription, could not be
applied to the state aid legislation relating to other facts,
especially as Regulation (EC) No 659/1999 did not
recognise that concept.

VII.

UNDERSTANDING BETWEEN THE BDB, FHH AND

HSH

(75) Germany took the view here that a risk profile analysis
should be carried out first for the two non-monetary
contributions. The silent partnership contribution should
be compared with such other contributions with a similarly
long period to maturity (16 years). As regards the capital
reserve, the comparison should preferably be made with a
silent partnership contribution of unlimited duration in
view of the risk profile, e.g. the guarantee, if any, afforded

(78) On 8 October 2004 the Commission was informed of the
outcome of an understanding reached between the
complainant BdB, FHH and HSH, which resulted from the
merger of LSH and HLB in 2003. Irrespective of their basic
interpretations of
the legal situation, which remained
unchanged, the parties to the understanding agreed on
the basic method of calculating a return as a comparative

7.11.2006

EN

Official Journal of the European Union

L 307/119

direct, fixed remuneration. In the light of the 1993 transfer
of 38 % of WK shares to the capital reserve amounting to
some DEM959,4 million, they agreed on the amount of
appropriate remuneration. As regards the indirect con-
tribution to a silent partnership reserve that also took place
on 1 January 1993 of 19,86 % of WK shares amounting to
DEM 300 million, although agreement could be reached on
the basic approach of a fixed remuneration criterion, no
agreement was reached on the exact calculation method,
especially regarding the deduction for lack of liquidity (see
paragraphs 81 to 203). The parties asked the Commission
to take account of the outcome of the understanding in its
decision. The understanding did not concern the 1986
transfer; the parties declared that they would not object to a
definitive Commission decision on the limitation period for
this transfer.

(79) Applying the CAPM,

the parties

first determined a
minimum normal market remuneration for the contribu-
tion to the capital reserve (some DEM 959 million).
Assuming a risk-free interest rate of 7,23 %, a general
market risk premium of 4 % and a beta value of 0,74, the
appropriate minimum remuneration for the shares trans-
ferred to the capital reserve should, under this under-
standing, amount to 10,19 %. Since FHH was the sole
owner, no other premium, e.g. for the lack of voting rights,
was agreed. Lastly, a deduction of 3,62 % was determined
for the capital's lack of liquidity (on the basis of the risk-free
interest rate as gross refinancing costs, of which some 50 %
company taxes plus solidarity surcharge to determine net
refinancing costs). This gives an appropriate remuneration
of 6,57 %.

(80) HSH and FHH calculated a remuneration margin of
129 basis points for the DEM 300 million transfer to the
silent partnership reserve since the gross refinancing costs
had to be deducted. The BdB also preferred a calculation
based on the CAPM and, applying a lower beta factor (0,32)
for this special transaction, which took place at the same
time, and the after-tax liquidity deduction of 3,62 % and
deducting solely the (net refinancing costs), arrived at an
appropriate remuneration of 4,89 %.

nature and so were not measures under Article 15(2) of the
Regulation that could have interrupted the limitation
period.

(82) After

examining the

the
facts of
Commission agrees with this view and will not subject
the transfer of 1 January 1986 to a further state aid
investigation.

case closely,

the

(83)

It is to be noted that Article 15(1) of the Regulation (entry
into force on 16 April 1999), which sets a deadline for the
recovery of unlawful aid, applies to any definitive action
ordering recovery of aid taken after the date on which the
Regulation entered into force, including aid granted before
that date (16) . The beginning of the ten-year period, within
which the Commission may recover unlawful aid, is the day
on which the aid was granted, even if the Regulation was
not applicable at that time (17).

(84) The transfer on 1 January 1986 was a one-off, non-
recurrent state measure. It thus differs from state regula-
tions that provide for recurrent measures such as annual
grants or tax reliefs. Moreover, it has no de facto or de jure
relationship with the 1993 transfer. The side letter of
22 December 1992, which is mentioned by Germany in a
letter dated December 1999 and was subsequently handed
over, does not, as originally claimed, speak of a uniform
investment objective for both transfers. It refers solely to
the 1993 transfer and, for this purpose, takes over a specific
rule governing the 1986 transfer and applies it to the
1 January 1993 transfer of additional shares, namely the
right of FHH to require the transfer of WK's shares.

(85) The transfer of FHH on 1 January 1986 is to be taken as the
time at which the unlawful aid, if any, was granted. As a
result of the legally valid injection of resources under the
conditions described above, the possible economic advan-
tage at issue here accrued to HLB. The resources were
available to HLB with effect from 1 January 1986; they were
recognised by BAKred for 1986. Accordingly, the ten-year
period ended on 1 January 1996.

VIII.

ASSESSMENT OF THE MEASURES

(86)

1.

ON THE GENERAL QUESTION OF THE LIMITATION

PERIOD

In accordance with Article 15(2) of Regulation (EC)
No 659/1999, the ten-year period is interrupted by any
action taken by the Commission or by a Member State,
acting at the request of the Commission, with regard to the
unlawful aid. In Scott the Court of First Instance ruled that,
although a request made by the Commission prior to the
entry into force of
information
concerning a clearly defined possible aid measure could
not possibly interrupt the ten-year period at that time, such
the Commission
an effect could be attributed to it
exercises its powers to recover the aid in question following
the entry into force of the Regulation. (18)

the Regulation for

if

(81) Germany has taken the view that the ten-year limitation
period provided for in Article 15 of Regulation (EC)
No 659/1999 has elapsed as regards the transfer on
1 January 1986 of 24 % of the shares, which increased
it
HLB's capital by DM 212 160 000,
constituted state
for
information dated 12 January, 10 November and 13 Decem-
ber 1993, i.e. those prior to 1 January 1996, were general in

aid. The Commission requests

in so far as

(16) [2003] ECR II-1789 (‘Scott’).
(17) Ibid.
(18) Ibid, paragraph 57.

L 307/120

EN

Official Journal of the European Union

7.11.2006

(87)

In the present case the Commission requests for informa-
tion prior
satisfy the
to 1 January 1996 do not
requirements for action interrupting the ten-year period
as they do not constitute action with regard to the unlawful
aid, as provided for in Article 15(2).

(91) Accordingly, the Commission regards the ten-year period
under Article 15(1) of Regulation (EC) No 659/1999 as
having expired. Any aid associated with the contribution of
24 % of WK's shares to HLB on 1 January 1986 is to be
regarded as existing aid within the meaning of Article 15(3)
of the Regulation. The observations below refer exclusively
to the transfers carried out on 1 January 1993.

(88) Prior to the request for information dated 1 September
1999, the Commission did not, in any letter to Germany,
ask about the transfers in Hamburg and did not mentioned
either FHH or HLB. The three letters from 1993 refer
exclusively to the transfer of WfA to WestLB; what is more,
they simply contain general requests relating to other
In
possible transfers to Landesbanks of other Länder.
addition to questions concerning WestLB, the request for
information dated 10 November 1993 mentions only the
Länder of Berlin, Schleswig-Holstein and Lower Saxony. In
its two letters of 1994 and its letter of 3 January 1995, the
BdB did, it is true, draw attention to the transfers of FHH to
HLB. However, the Commission reacted for the first time in
its letter dated 1 September 1999 and requested informa-
tion on the transfers in Hamburg.

(89) Before the end of the ten-year recovery period on 1 January
1996, there was therefore no evidence of a Commission
investigation into the transfers to HLB. The correspondence
relating to WestLB and the general enquiries regarding
possible transfers in other Länder cannot replace requests
for information with regard to a specific possible aid.
Otherwise, general Commission notices sent out every ten
years would interrupt the period and would undermine the
purpose of any limitation period.

(90)

In the Commission's view, Germany and HLB can, under
the special circumstances of the 1986 transfer, rely on legal
certainty and confidentiality even though the contribution
was not notified in accordance with Article 88 of the
EC Treaty. It should be borne in mind here that state aid
legislation and monitoring was not at
time as
developed in all details as it has been since the 1990s.
injections by
This is particularly true as regards capital
public-sector owners and,
the market-
example,
economy investor principle, which was developed only
after the first transfer to HLB and has been examined in
practice. To this extent, the German authorities and HLB,
which in 1986 undertook share transfers between two
companies wholly owned by it, could not assume the
existence of possible state aid and hence the need for a
notification.

that

for

2.

STATE AID WITHIN THE MEANING OF ARTICLE 87(1)

OF THE EC TREATY

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

2.1 State resources and favouring of a particular

undertaking

(93) As stated above, a total of just under 58 % of FHH's shares
transferred directly and indirectly (silent
in WK was
partnership contribution through HGV)
to HLB on
1 January 1993. This ranks as state resources within the
meaning of Article 87(1) of the EC Treaty.

(94) The economic benefit of a broader capital base resides in a
greater lending capacity and the associated possibility of
expanding business. If additional capital is made available to
the undertaking on conditions better than normal market
conditions, this ranks as favouring within the meaning of
Article 87(1) of the EC Treaty. In examining this matter, the
Commission applies the ‘market-economy investor’ prin-
ciple. The Court of Justice and the Court of First Instance
have accepted and developed this principle in a number of
cases,
in particular in the ruling by the Court of First
Instance of 6 March 2003 (19), which is of relevance to the
present case.

(a) Market-economy investor principle

(95) According to this principle, no state aid is involved where
funds are made available on ‘terms which a private investor
would find acceptable in providing funds to a comparable
private undertaking when the private investor is operating

(19) See footnote 3.

7.11.2006

EN

Official Journal of the European Union

L 307/121

under normal market-economy conditions’ (20). In contrast,
a financial measure is deemed unacceptable for a market-
economy investor if, and this has to be examined, the
expected or agreed remuneration for
the transferred
resources is lower than the remuneration paid on the
market for comparable investments.

(96) The market-economy investor principle is likewise applic-
able to all public undertakings, irrespective of whether they
are profit- or loss-making. This position of the Commission
has been confirmed by the Court of First Instance in
WestLB (21).

(97) The Commission must base its assessment of a case on the
information that was available to the investor when he
decided on the financial measure in question. The transfer
at issue here was decided by the competent authorities at
the end of 1992 and became effective on 1 January 1993.
The Commission must, therefore, assess the transaction on
the basis of the information available and the economic and
market circumstances obtaining at the time. Information in
this decision that refers to subsequent years is used only for
purposes of illustration.

(98)

If a public shareholder decides that a capital injection for
the bank is appropriate for meeting capital requirements,
the question arises whether the specific circumstances
under which the capital is provided would be acceptable to
If a capital measure is
a market-economy investor.
necessary to meet
solvency requirements, a market-
economy investor might be prepared to undertake such a
measure in order to safeguard the value of the existing
investment. He would, however, insist on an appropriate
return for the new capital injection that took account of the
risk profile.

(99) Even if a market-economy investor already holds shares in
an undertaking, he will look into other investment options
outside that undertaking. As a rule, he will then choose to
invest further in the public undertaking only if he can
expect a reasonable return on the additional resources.
Basically, no account is taken of the mere avoidance of
losses or of a better use than previously of the resources in
question in deciding whether a capital contribution
constitutes state aid. Whatever the motives behind it, a
capital
injection by a shareholder should be measured
instead according to whether the investor can expect a
resources within a
normal
reasonable period.

return on the additional

(100) The Court has raised no objections to this interpretation of
the market-economy investor principle, which the Com-
mission has already applied in its Decision 2000/392/
EC (22). It has also adopted as a guiding principle that even a
private investor who already owns share capital
in an
undertaking is not normally content with the fact that an

(20) Commission communication to the Member States: Application of
Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission
Directive 80/723/EEC to public undertakings in the manufacturing
sector (OJ C 307, 13.11.1993, p. 3; see paragraph 11. Although this
communication deals expressly with manufacturing, the principle
doubtless applies likewise to all other sectors of the economy. As
regards financial services, this approach was confirmed by a number
of Commission decisions, e.g. in Crédit Lyonnais (OJ L 221, 8.8.1998,
p. 28) and GAN (OJ L 78, 16.3.1998, p. 1).

(21) See footnote 3 and paragraph 206 et seq.
(22) See footnote 2 and paragraph 161 et seq.

investment does not cause him a loss or produces only
limited profits. Instead he will always seek to obtain an
appropriate return on his investment according to the
particular circumstances and the satisfaction of his short-,
medium- or long-term interests (23).

(101) According to the market-economy investor principle, the
key question in examining this case is, therefore, whether a
market-economy investor would have transferred under the
same conditions capital that had the same characteristics as
the promotion-related assets of FHH, especially in view of
the expected return on the investment.

(b) Article 295 of the EC Treaty

(102) Article 295 lays down that

the system of property
ownership in the various Member States must not be
affected. This does not, however, justify any infringement of
the competition rules of the Treaty.

(103) Germany has stated that the resources transferred could not
have been used in any other profitable manner than by
being injected into a similar public institution. Conse-
quently, the transfer represented the commercially most
sensible use of those assets. So any remuneration for the
transfer, i.e. any additional return on the assets transferred,
would be sufficient to justify the transfer in the light of the
market-economy investor principle.

(104) This line of argument cannot be accepted. It may be that
the contribution of the shares to HLB and the resulting
opportunity for the bank to use the capital for solvency
purposes was the economically most sensible use to which
it could be put. However, as soon as public monies and
other assets are used for commercial, competition-oriented
activities, the normal market rules must be applied. This
means that the State, once it decides to use certain assets
(also) commercially for public purposes, must demand a
remuneration in line with the normal market remunera-
tion.

(c) Ownership structure

(105) The key question, as formulated by the Court of First
Instance in WestLB with reference to the previous case law,
is whether,
in similar circumstances, a private investor
operating in normal conditions of a market economy and
of a comparable size to that of the bodies operating in the
public interest could have been prompted to make the
capital contribution in question (24). Lastly, as the Court
also points out with reference to other case law,
‘the
comparison between the conduct of public and private
investors must be made by reference to the attitude which a
the
private investor would have had at
transaction in question having regard to the available
information and foreseeable developments at the time’ (25).

the time of

(23) See footnote 3 and paragraphs 241 and 314.
(24) WestLB, paragraph 245.
(25) WestLB, paragraph 246.

L 307/122

EN

Official Journal of the European Union

7.11.2006

This makes it clear that the assessment must focus on the
time of the investment and on the expectations which an
investor might reasonably,
i.e. on the basis of available
information, have had at that time. These expectations
essentially relate to the likely return.

(d) Remuneration and elements of remuneration for
the contribution of DEM 659,4 million to HLB's
capital reserve

Capital base for calculating the remuneration

(106) FHH was the sole owner of HLB. Even if this fact were to
to focus simply on an agreed
make it possible not
remuneration (here DEM [...] million [...], corresponding
to [at most 10 %] on the silent partnership contribution),
ownership of FHH cannot be relied on in the present case
to justify the low level of direct remuneration.

(112) As in the WestLB case and as has been confirmed by the
Court, remuneration is basically payable in respect of the
entire value of the assets transferred. It may differ for parts
of
In setting an appropriate
remuneration, a distinction should be made between the
different parts of the capital reserve according to their
benefit for HLB.

the resources transferred.

(107) Reference to FHH's ownership of HLB would necessitate the
existence of a business plan, expert report or valuation of
the expected return on the investment in question.

(108) This was not the case here. At the time of the investment,
there was no business plan, expert report or valuation of
the expected return on the investment in question. Except
for
the Commission
therefore has no reliable and quantifiable evidence for the
return expected by FHH at the time.

the agreed direct

remuneration,

(109) Germany stated that not only the reserves built up by HLB
itself and regularly converted into capital but also the
dividend payments to FHH as the sole owner ought to have
been considered since the profits generated by HLB were
inevitably also attributable to the resources transferred by
FHH. In addition, account must be taken of the increases in
value that were produced by the capital contributed and
were also achieved in 1997 with the sale of the shares to
LSH.

(110) According to the principle of the market-economy investor,
who, on the basis of the information available to him at the
time of the investment, can either expect or agree on an
appropriate return, dividend payments or increases in value
occurring after the investment are not relevant. Conse-
quently, dividend payments or increases in value that could
not be calculated beforehand cannot be determining
factors. Nor can the question as to whether or not an
increase in value following a sale generates revenue. In
addition, dividends are paid on capital and not on reserves,
even if these contribute to an increase in earnings per share.

(113) The value of the shares transferred and shown on the
balance sheet remained constant after 1 January 1993 at
DEM 659,4 million. However, that amount could not be
used in full as capital prior to its recognition by BAKred.
Until it was recognised as capital on 1 January 1997, its use
was tolerated by BAKred only in so far as this was necessary
to meet the relevant solvency rules. For instance, from
1993 to 1996 HLB covered parts of
reserve
(DEM 182,5 million in 1993, over DEM435,6 million in
1994, DEM 255,1 million in 1995 and DEM 451,1 million
in 1996). After 1997, because of the prudential requirement
to cover the reserve with capital of DEM [...] million at all
times, only DEM [...] million could be utilised in full up to
May 2003. The table in paragraph 183 gives the relevant
basis for calculating the appropriate return on liable capital.

the

(114) Although they were not, and could not, be used to expand
its competitive business, the parts of the reserve that were
not covered up to 1997 and could not subsequently be
covered (see the table in paragraph 183) were still of benefit
to HLB since the amount of capital shown on the balance
sheet provides the bank's lenders with an indication of its
soundness and thus affects the conditions on which it can
borrow capital. Creditors and ratings agencies take the
bank's overall economic and financial
situation into
account. Since these amounts could not be used each year
for business expansion but improved the bank's standing in
the eyes of creditors, the economic function of the capital
can in this respect at least be compared to a guarantee.

(115) A market-economy investor would also have required a
the

these resources on account of

remuneration for
economic benefit they conferred.

Appropriate remuneration for liable capital

(111) The Commission thus takes the view that, in the present
case, an appropriate remuneration should be determined in
the direct return that a market-economy
the light of
investor would have demanded.

(116) Financial assets of differing economic quality demand
differing returns. Determining whether an asset is accep-
table for an investor operating under normal market
conditions must,
therefore, be based on the specific
economic nature of the capital measure in question and
on the value to HLB of the capital made available.

7.11.2006

EN

Official Journal of the European Union

L 307/123

Similarity of the investment to share capital

(117) The Commission takes the view that, apart from its lack of
liquidity, the contribution to the capital reserve, which, at
least from 1997 onwards, has been regarded as core capital
by BAKred, most closely resembles an investment in share
capital.

consisted in the creation of a reserve. Although it is also
true that a capital reserve has a number of characteristics
that are typical, if anything, of silent partnership contribu-
tions, the Commission considers that the risk that the
transferred capital would be used at least in part for cover
purposes in the event of insolvency or liquidation was
generally no less than that associated with a share capital
investment.

(118) The complainant shares this view. Germany had, on
account of the risk profile, compared the capital reserve
to a silent partnership contribution. In their understanding,
the parties took the similarity to share capital as the basis
for calculating an appropriate remuneration.

(123) Given the above views, notably regarding an analysis of the
risk incurred by an investor in carrying out the transaction
at issue, the Commission concludes that the starting point
for calculating the appropriate remuneration for
the
transfer to HLB's capital reserve is the amount of share
capital made available.

(119) The special-purpose reserve has been recognised by BAKred
as core capital
(‘tier 1 capital’) and can therefore be
compared only with equity instruments that were recog-
nised as core capital in Germany in the year of the transfer.
According to the information available to the Commission,
these were in 1992 simply the equity or share capital of a
bank as well as
the reserves and silent partnership
contributions that satisfied the special requirements laid
down in Section 10(4) KWG.

(120) The Commission has already made clear in its Deci-
sion 2000/392/EC that a comparison between WfA's
assets, which were also recognised as core capital, and
hybrid equity instruments that were regarded only as
additional capital, such as profit participation certificates
and non-voting preference shares, cannot serve as a basis
for determining the appropriate remuneration for
the
transferred capital (26). Core capital is of greater benefit to
an undertaking because it can be used to raise additional
own funds (e.g. profit participation certificates) up to the
same amount in order to increase its own funds base. For
the capital provided to be recognised as original own funds,
there must be greater exposure to risk, which, as a general
rule, is also reflected in a higher market remuneration for
such instruments. Any point of comparison with ‘addi-
tional funds’ that offer only limited scope for business
expansion can therefore be ruled out at the outset.

(121) The Commission considers that the comparison with silent
partnership contributions made by Germany and HLB is
not suitable as a basis for determining the appropriate
remuneration for the capital reserve. Instead, the transfer of
the shares is comparable to an investment of share capital
in HLB.

(122) An essential point for the Commission is that the transfer
of the promotion-related assets was precisely not in the
form of a silent partnership contribution but
legal

(26) See footnote 2 and paragraph 199.

Liquidity costs

(124) Germany takes the view that, on account of the lack of
liquidity and the resulting refinancing costs, the transfer of
WK's shares can best be compared to a real capital
contribution. As it stated in its original position,
this
meant, in terms of the gross return, a difference of some
6,6 % compared with capital contributed in cash. A market-
economy investor must take this cost into account when
considering the appropriateness of his remuneration.

(125) The Commission is also of the opinion that the lack of
liquidity should be taken into account. A ‘normal’ capital
injection into a bank supplies it both with liquidity and
with an own funds base which it requires for supervisory
reasons to extend its business. In order to use the capital in
full, i.e. to expand its 100 % risk-adjusted assets by a factor
of 12,5 (i.e. 100 divided by a solvency ratio of 8 %), the
bank must
refinance itself on the financial markets
11,5 times over. Put simply, the difference between 12,5
times the interest received and 11,5 times the interest paid
minus other costs of the bank (e.g. administration) gives
the profit on the equity (27).

(126) Since its capital did not provide any liquidity at first, HLB
incurred additional financing costs to the extent of the
amount of capital if it borrowed on the financial markets
the funds necessary to exploit fully the business opportu-
i.e. to
nities opened up by the additional own capital,
expand the risk-weighted assets by a factor of 12,5 (or to
maintain existing assets at this level) (28). Because of these
extra costs, which do not arise in the case of equity capital
the appropriate remuneration
provided in liquid form,
must be reduced accordingly. A market-economy investor
could not expect to be remunerated in the same way as for
a cash injection.

(27) Of course, in reality, the situation is much more complex because of
off-balance-sheet items, different risk weightings of assets or zero-
risk items, etc. However, the principal reasoning holds.

(28) The situation does not change if one takes into account

the
possibility of raising additional own funds up to the same amount of
original own funds (a factor of 25 instead of 12,5 for original own
funds).

L 307/124

EN

Official Journal of the European Union

7.11.2006

(127) The Commission is here of the opinion that the overall
refinancing interest rate must be taken into account.
Refinancing costs constitute operating expenses and there-
fore reduce taxable income. This means that the bank's net
result is not reduced by the amount of additional interest
expenses incurred. These expenses are offset in part by
reduced cooperation tax. Only the net costs should be
taken into account as an additional burden on HLB because
of the special nature of the capital transferred. Overall,
therefore, the Commission recognises that HLB incurred
‘liquidity costs’ to the amount of ‘refinancing
additional
costs less company taxes’.

(128) In their understanding, the parties similarly base their
calculation on the net refinancing costs. They applied a
long-term, risk-free interest rate of 7,23 % for the total
refinancing costs (29). They also agreed to accept a flat-rate
level of tax of 50 % (30).

Determination of a likely minimum remuneration for an
investment in the share capital of HLB

(129) The expected return on an investment and the investment
risk are key determinants in the decision of a market-
economy investor to invest. In order to determine their
level, the investor incorporates all available firm-related and
market-related information into his calculation. He bases
himself on historical average rates, which, generally
speaking, are also a point of reference for a firm's future
efficiency, and inter alia on an analysis of the company's
business model for the investment period in question, the
strategy and quality of management or
the relative
prospects for the sector in question.

(130) A market-economy investor will undertake an investment
only if it produces a higher return or a lower risk than the
next-best alternative use of his capital. Similarly, he will not
invest in a company whose expected return is lower than
the average return expected for other companies with a
similar risk profile. It can be assumed in the present case
that
to the assumed
investment project that promise a higher expected return
with the same risk.

there are sufficient alternatives

(131) Various methods exist

for determining the minimum
appropriate remuneration. They range from differing
variants of the financing approach to the CAPM method.
In describing the various approaches, it makes sense to
distinguish between two components, viz. a risk-free return
and a project-specific risk premium: minimum appropriate
return on a risky investment = risk-free basic rate + risk
premium for
the
minimum appropriate remuneration for a risky investment

the risky investment. Consequently,

can be described as the sum of the risk-free rate of return
and the additional
risk premium for assuming the
investment-specific risk.

(132) The basis for any determination of return is thus the
existence of a default-risk-free form of investment with an
assumed risk-free return. The expected return on fixed-
is normally used in
securities
interest government
determining the risk-free basic rate (or, as the case may
be, an index based on such securities), but these represent
investment with a comparably low risk. The
forms of
various methods differ, however, when it comes
to
determining the risk premium:

— Financing approach: An investor's expected return on
capital represents, from the point of view of the bank
using the capital, future financing costs. Under this
approach,
the historical capital costs incurred by
comparable banks are first of all determined. Their
arithmetic average is then compared with the future
expected equity capital costs and hence with the
investor's expected return requirement.

— Financing approach with compound annual growth rate: At
the heart of this approach stands the use of the
geometric rather than the arithmetic mean.

— CAPM: The CAPM is the best-known and most
frequently tested model of modern finance with
which the return expected by an investor can be
determined applying the following equation: expected
return = risk-free interest rate + market-risk premium
x beta. The beta factor is used to quantify the risk of a
company relative to the overall risk of all companies.
The risk premium for the specific investment
is
determined by multiplying the market's risk premium
by the beta factor.

(133) The CAPM is the predominant method of calculating
investment returns in the case of large listed companies.
However, since HLB is not a listed company,
it is not
possible directly to infer its beta value. The CAPM can,
therefore, be used only on the basis of an estimate of the
beta factor. Germany is thus critical of the use of the CAPM
for, among other things, a transfer to a Landesbank.

(29) The REX10 Performance Index of Deutsche Börse AG was used as a
generally recognised source in determining the risk-free basic interest
rate.

(30) According to documents provided by the German Government, the
corporation tax rate was 46 % in 1992, to which has to be added the
solidarity surcharge of 3,75 % (i.e. 49,75 % in total). The overall tax
rate fell to 46 % in 1993 before rising to 49,5 % in the period 1994-
2000. It has been 30 % since 2001.

(134) In their calculations, the parties based themselves on the
CAPM and applied a risk-free basic interest rate of 7,23 %
for NordLB. Determination of this interest rate was based
on the assumption that the LTS special-purpose assets were
to be made available on a permanent basis. The parties thus

7.11.2006

EN

Official Journal of the European Union

L 307/125

decided not to use a risk-free rate obtaining on the market
at the time of the capital injection for a fixed investment
period (e.g. 10-year return on government bonds) since
such an approach would disregard the reinvestment risk, i.
e. the risk that it would not be possible to invest again at
the level of the risk-free interest rate once the investment
period had expired. In the view of the parties, a total return
index was the best way of taking the investment risk into
account. They opted, therefore, for the REX10 Performance
Index of Deutsche Börse AG, which tracks the performance
of an investment in Federal loans over a period of ten years.
The index series used in the present case contains the
relevant end-of-year results of
the REX10 Performance
Index after 1970. The parties then determined the rate per
annum, which reflects the trend tracked by the REXIO
Performance Index in the period 1970-91 and, in this way,
arrived at the risk-free basic interest rate of 7,23 % referred
to above.

(135) Since HLB's capital

injection was made available on a
permanent basis, the method of determining the risk-free
basic interest rate appears appropriate in this specific case.
Moreover, the REX10 Performance Index is a generally
recognised source of data. The risk-free basic interest rate
calculated thus appears appropriate here.

(136) The beta factor of 0,74 was estimated on the basis of a
KPMG report on adjusted beta factors for all listed credit
institutions in Germany that is available to the Commis-
sion. In the light of the report and of HLB's business profile,
this beta factor is to be regarded as appropriate.

i.e.

long-term market-risk premium,

(137) The Commission also regards the market-risk premium of
4,0 % as acceptable. Previously in the procedure, the so-
called general
the
difference between the long-term average return on a
normal share portfolio and that on government bonds, was
applied on several occasions. In the corresponding report
on the procedure, a range of some 3 % to 5 % was applied,
depending on the method, the period under examination
and the basic relevant data. A report prepared for BdB
calculated figures of 3,16 % and 5 %. Another report on
WestLB drawn up in the first procedure produced figures of
4,5 % and 5 %, while Lehman Brothers, also for WestLB,
calculated a figure of 4 %. Against this background, the
Commission has no reason to depart from the market-risk
premium used in the understanding. On the basis of the
CAPM, the Commission considers there to be no doubt that
the minimum remuneration determined by the parties can
be regarded as appropriate.

(138) The Commission has no reason to believe that

the
minimum remuneration determined by the parties for a
hypothetical share capital investment cannot pass a market

it sets as the appropriate minimum
test. Accordingly,
remuneration a figure of 10,19 % per annum (after
corporation tax and before investor tax).

Abolition of the return premium on account of sole ownership

(139) It has to be ascertained whether there are reasons for
adjusting the minimum remuneration.
In line with the
practice in the other Landesbank procedures, the following
three characteristics, which are peculiar to the transaction,
justify such a premium: (i) the decision not to issue any new
company shares and the associated voting rights, (ii) the
unusually large transfer of assets; and (iii) the investment's
lack of fungibility.

(140) As in the other procedures, the Commission takes the view
that premiums in connection with the last two aspects
mentioned above are not justified. No premium is possible
either for the decision not to issue any new company shares
and the associated voting rights since FHH already owns all
the voting shares.

No reduction in remuneration for agreement on a flat-rate
remuneration

(141) In the case of shares, the remuneration depends directly on
the company's results and consists primarily of dividends
and a share in the increase in the company's value (e.g.
expressed through share price rises). FHH receives a flat-rate
remuneration which should reflect these two aspects of the
remuneration for a ‘normal’ capital injection. It could be
argued that the fixed remuneration which FHH receives
instead of a remuneration linked directly to HLB's results
constitutes a benefit that justifies a reduction in the level of
remuneration. Whether
such a fixed remuneration is
actually more favourable than a variable, profit-related
remuneration depends on the company's future results. If
these deteriorate, the flat-rate remuneration is beneficial for
the investor but, if they improve, the opposite is true. The
actual
taken into account
though be
subsequently when it comes to assessing the investment
decision. Accordingly, the Commission takes the view that
the rate of remuneration need not be reduced.

trend cannot

Total remuneration

(142) In view of

the foregoing and in agreement with the
complainant BdB, FHH and HLB, the Commission comes to
the conclusion that an appropriate remuneration for the
amounts that were transferred to the capital reserve and
that were used until 1997 and could be used subsequently
as cover would be 6,57 % (after company taxes), i.e. normal
return of 10,19 % on the investment less 3,62 % for the
financing costs which HLB incurred on account of the lack
of liquidity of the assets transferred.

L 307/126

EN

Official Journal of the European Union

7.11.2006

Appropriate remuneration for the uncovered and uncoverable part
of the capital reserve

(143) As stated above, the capital share that was not used up to
1997 and could not be used subsequently is of material
value to HLB and its economic function can be compared
to that of a guarantee or liability. A market-economy
investor would demand an appropriate remuneration in
return for exposing himself to a risk of this sort. The
understanding between BdB, FHH and HSH Nordbank is
silent on this matter.

(144) In Decision 2000/392/EC (31), Germany regarded a remu-
neration of 0,3 % per annum before tax as an appropriate
initial
rate. The grounds given in that decision for
increasing the initial rate do not apply to the present case.
In that decision a premium of a further 0,3 % per annum
was added to the rate of 0,3 % per annum (before tax)
because guarantees are normally tied to certain transactions
and of limited duration (which was not the case in WestLB)
and because the amount of DEM 3 400 million made
available to WestLB was higher than that normally covered
by such bank guarantees.

(145) On account of the fundamental comparability between
WestLB and HLB and for want of other points of reference,
the Commission assumes that a rate of 0,3 % corresponds
to the remuneration that HLB would also have had to pay
on the market in the early 1990s for a guarantee in its
in
favour. It also notes that the amount of the capital
question is much smaller in the case of HLB than in the
case of WestLB and that, for this reason, the second reason
given in the WestLB decision does not hold. Admittedly, in
the case of HLB, the guarantee function was not of limited
duration or tied to a particular transaction. On the other
hand, there was a de facto time limitation since the total
amount could be used for business expansion once BAKred
had recognised it as core capital. As a result, a separate
guarantee commission no longer needed to be paid. The
remuneration for the guarantee function was part of the
remuneration for the business-expansion function. The fact
of the sole guarantee function was, therefore, restricted
from the outset, and this distinguishes the HLB case from
the WestLB case.

(146) Accordingly, the Commission considers that, in the case of
HLB as opposed to WestLB, a premium is not justified and
so sets a rate of 0,3 % per annum (before tax) as an
appropriate remuneration for the guarantee function of the
capital from the time of its inclusion in the balance sheet
its recognition by BAKred.
on 1 January 1993 until
Assuming a corporation tax rate of some 50 % at that time,
an after-tax assessment gives a rate of 0,15 %. This after-tax
rate of 0,15 % was applied by the parties in calculating the
aid element in the table attached to the understanding.

(147) A guarantee premium constitutes an operating expense for
HLB and thus reduces the taxable profit. The remuneration

(31) See footnote 2 and paragraph 221.

payable to FHH comes out of after-tax profits. Conse-
quently, the rate of 0,3 % has basically to be adjusted for the
tax rate. As with the refinancing costs, the Commission
assumes a single overall tax rate of 50 %. Consequently, it
sets a rate of 0,15 % per annum after tax.

(e) Remuneration for the silent partnership contri-

bution

(148) A remuneration of DEM [...] million, i.e. [at most 10 %] on
an amount of DEM 300 million per year, was paid
throughout for the silent partnership contribution. In the
Commission's view, it is of no relevance to the assessment
that this compensation was paid to HGV since the latter
was a wholly owned holding of FHH and since the indirect
way was chosen only for tax reasons. Whether an investor
selects a holding to receive the remuneration or books the
remuneration direct cannot be of any importance for the
state aid investigation in the present case.

(149) The silent partnership contribution had a 16-year maturity,
i.e. it could not be called earlier. And so, in spite of this long
period,
it has to be regarded as a silent partnership
contribution of limited duration.

(150) Germany has stated that a remuneration of 1,29 % would
have been appropriate for the silent partnership contribu-
tion given the comparison with similar instruments and the
lack of
that, although,
compared with the capital reserve, a deduction should be
made, there was basically a similarity to share capital so
that, as stated above, a higher remuneration should be
assumed.

liquidity. The BdB considers

Capital base

remained

contribution

(151) From 1 January 1993 onwards, the value of the silent
partnership
at
DEM 300 million. However, as stated earlier, the amount
was not used as liable capital before its recognition by
BAKred. After 1 January 1997 the DEM 300 million could
be used in full until May 2003. The table in paragraph 183
provides details on the calculation basis of relevance to the
appropriate return on liable capital.

unchanged

(152) Although the silent partnership contribution that was not
covered prior to 1997 was not, and could not, be used to
expand competitive business, it was of benefit to HLB since
the amount of equity shown on the balance sheet provides
the bank's lenders with some indication of its soundness
and thus affects the conditions on which the bank can
borrow outside capital. Creditors and ratings agencies take
the bank's overall economic and financial situation into
consideration. Since this amount cannot be used each year
for business expansion but improves the bank's standing in
its economic function can in this
the eyes of creditors,
respect be compared at least to a guarantee.

7.11.2006

EN

Official Journal of the European Union

L 307/127

these resources on account of

(153) A market-economy investor would also have demanded a
remuneration for
the
economic benefit they conferred. However, as with the
capital reserve, the amount of this remuneration is lower
than that for the part of the equity that can be used by HLB
for its competitive business.

Legal and economic classification of the transferred capital

(154) As with its approach in Decision 2000/392/EC,

the
Commission will determine the appropriate remuneration
for the promotion-related assets transferred on the basis of
their commercial benefit to HLB. As explained above, the
starting point for determining the normal market remu-
neration in this case is the remuneration that would be
demanded by a market-economy investor providing a bank
with equity capital.

(155) The BdB is of

the opinion that

this constitutes an
investment similar to share capital. However, the compar-
ability with share capital is undermined by the fact that the
investment is callable, albeit only after a long time. Even so,
in the event of losses, the silent partnership contribution
would have equal ranking with the share capital. Lastly, the
callability of the investment serves to reduce risk, with the
result that the silent partnership contribution should be
remunerated with a small discount compared with share
capital. However, Germany disputes this similarity to share
capital. In its view, the capital is instead a silent partnership
contribution, with this being reflected in the level of the
remuneration.

(158) The Commission considers that, viewed from a risk analysis
angle, the silent partnership contribution is, typologically
speaking, a ‘normal’ silent partnership contribution, and
not share capital. To this extent, it agrees with Germany. In
the event of
insolvency, both the silent partnership
contribution in question and other silent partnership
contributions of
limited duration raised on the capital
market would be repaid before the share capital and the
investor would receive the relevant percentage in bank-
ruptcy whereas, in the case of a share capital investment, he
would come out with nothing. As long as the undertaking
does not make any losses, FHH receives
the total
remuneration agreed, whereas an investor in share capital
qualifies simply for the payment of a profit-related,
i.e.
much smaller, dividend.

Determining an appropriate remuneration for the silent
partnership contribution of limited duration to HLB

(159) As explained, the Commission regards the capital measure
at issue as a silent partnership contribution. A determining
factor in assessing the market appropriateness of the agreed
remuneration is whether it can be regarded as normal
compared with remunerations agreed on the market for
economically and legally comparable transactions involving
silent partnership contributions. Starting from the meth-
odology employed by FHH and HLB, the remuneration for
the silent partnership contribution in question should be
determined on the basis of silent partnership contributions
that are of limited duration and otherwise comparable.

(156) Germany, the BdB and the Commission agree that the silent
partnership contribution constitutes core capital. Since
1997 at any rate, the silent partnership contribution has
been recognised by BAKred as core capital (‘Tier 1 capital’)
and can, therefore, be compared only with such equity
capital instruments that were recognised in Germany as
core capital at the time of the transfer.

(160) Germany has stated that, during the 1990s, silent partner-
ship contributions were used increasingly by the Land-
esbanks to expand their capital base. The silent partnership
contribution resulting from the transfer of WK's assets to
HLB was, therefore, one of the first such transactions of
appreciable size in the banking sector in Germany.

(157) The Commission agrees with the parties on this point. It
already made clear in its Decision 2000/392/EC that a
comparison between WfA's assets, which were also
recognised as core capital, and equity instruments that
were recognised only as additional capital, such as profit
participation certificates and non-voting preference shares,
cannot serve as a basis for determining the appropriate
remuneration for the transferred capital (32). Core capital is
of greater benefit to an undertaking because it can be used
to raise additional own funds (such as profit participation
certificates) up to the same amount in order to increase the
bank's own funds. For the capital provided to be regarded
as original own funds, there must be greater exposure to
risk, which, as a general rule, is also reflected in a higher
market remuneration for such instruments. Any point of
comparison with ‘additional
funds’, which offer only
limited scope in business expansion, can therefore be ruled
out at the outset.

(32) See footnote 2 and paragraph 199.

(161) As a risk profile analysis of various equity capital
instruments had shown, silent partnership contributions,
given a comparable share of liability and in view of their
fungibility as a contribution of limited duration with a fixed
strongly resembled profit participation
remuneration,
certificates. In addition, there were tax advantages for the
accepting bank since the interest payable does not involve
the use of profits but usually, as in the present case,
represented a (tax-reducing) operating expense.

(162) The silent partnership contribution to HLB on 1 January
1993 was the first and — for almost five years — the only
transaction of
this kind for the bank and HLB knew
nothing about simultaneous reference transactions by other
Landesbanks. It was not possible, therefore, to determine
the appropriate risk premium for the silent partnership
contribution directly on the basis of other agreed silent
partnership contributions. However, the available data on

L 307/128

EN

Official Journal of the European Union

7.11.2006

to equity capital

silent partnership contributions of limited and unlimited
duration that were agreed with third parties in 1997 and
1998 permitted an indirect calculation in cases where the
extent to which the appropriate risk premium for HLB
instruments similar
instruments had
changed between the end of 1992 and the end of 1997.
Changes in the risk premium for long-term HLB profit
participation certificates could serve as a benchmark. As a
general overview that was submitted showed,
the risk
premium on HLB profit participation certificates demanded
by investors increased appreciably overall during this
period (33). If, therefore, the market conditions at the end
of 1997 are transposed to 31 December 1992,
the
appropriate risk premium at the end of 1992 is at least
not understated (34). Accordingly, the risk premium appro-
priate for
the end of 1992 for a silent partnership
contribution with a duration i can be determined by
applying the following equation: risk premium on silent
partnership contributions, i, 1992 = swap spread on Federal
i, 1992 + swap spread on silent partnership
loans,
contributions, i, 1997.

(163) The market data collected for December 1997 and
February 1998 and the interest rates on agreed silent
partnership contributions would give for such contribu-
tions with a duration of 16 years a premium of some
swaps. Taking the market data as at
1,25 % over
31 December 1992 (swap spread for Federal
loans of
0,04 %), an appropriate risk premium for 16-year silent
partnership contributions would be 0,04 % + 1,25 % =
1,29 %.

(164) Alternatively, the fair risk premium could also be derived
from the conditions for other financial instruments with a
similar risk profile,
this being normal practice. Silent
partnership contributions of limited duration rank between
profit participation certificates and silent partnership
contributions of unlimited duration as regards their risk
profile. As a result, their risk premium must basically be
higher than that for profit participation certificates but
lower than that for silent partnership contributions of
unlimited duration. Whereas reference values for silent
partnership contributions of unlimited duration were
available only from October 1999, market data for profit
participation certificates were available as early as the
beginning of the 1990s since the latter had already been in
existence for quite some time and were dealt in daily on the
the report drawn up by
stock exchange.
Lehman Brothers for WestLB gave risk premiums for profit
participation certificates issued by German banks as at mid-
December 1991 (35).

In addition,

(33) The determining factor here in each case is the return premium not
on Federal loans but on swaps since the spread of swaps in the case
of Federal loans (‘swap spread’) is determined basically by supply and
demand on the swap market and not by considerations of
creditworthiness.

(34) In view of several upheavals on financial markets (e.g. the emerging
markets crisis in mid-1997) and the implications of the Commis-
sion's state aid investigation into WestLB, the risk premium that an
investor would have demanded for a silent partnership contribution
of limited duration to HLB at the end of 1992 ought actually to have
been lower than the market conditions at the end of 1997 suggest.
(35) Cf. Lehman Brothers, Analyse der Kapitalzuführung aus der Einbringung
der Wohnungsbauförderungsanstalt des Landes Nordrhein-Westfalen of
8 July 1997, p. 4, and Annex II, p. 27. This basically lists the issues
floated by the leading German private commercial banks (Deutsche
Bank, Dresdner Bank, etc.), which at the time had a higher business
risk than HLB.

(165) In order

to derive from HLB's conditions for profit
participation certificates at the end of 1992 the appropriate
risk premium for
silent partnership contributions of
limited duration to HLB, an assessment is needed of the
fair return premium as between the two instruments. Here
too, because of the incomplete data, reference can be had
only to the market conditions at the end of 1997/beginning
of 1998 and the resulting risk assessment by investors for
HLB can be assumed to be adequate for the end of 1992.
The appropriate risk premium for silent participation
contributions at the end of 1992 can then be determined
by applying the following equation: risk premium for silent
partnership contributions,
i, 1992 = risk premium for
profit participation certificates, i, 1992 + spread for silent
participation contributions/profit participation certificates,
i, 1997.

(166) Market data as at December 1997 and February 1998 give a
premium of 0,35 %-0,40 % over 10-year HLB profit
participation certifications for 16-year silent participation
contributions as at the end of 1997. Taking the market data
as at 31 December 1992 (risk premium on 8-year HLB
profit participation certificates of 0,91 %) gives an
appropriate risk premium for 16-year silent participation
contributions of between 1,26 % and 1,31 %. Applying the
risk premium for 10-year profit participation certificates of
0,90 % used in the Lehman Brothers report for the end of
1991 yields virtually identical values (36).

(167) Using both methods, the information provided by Germany
yields a margin of some 1,26 %-1,31 %. The basic data
concerning issues of profit participation certificates and
contributions made were sent to the Commission. The
Commission also has access to surveys of the risk-free
interest rates prevailing in the years under consideration for
Federal loans and the Federal swap spreads valid for silent
partnership contributions and other relevant spreads. It
concludes, therefore, that the margin of 1,29 % commu-
nicated by Germany is altogether reasonable.

(168) In the Commission's view, there is no need for a further
market
investigation in connection with the state aid
assessment of the market-like nature of the silent partner-
ship contribution at
the
Commission should ensure, on the basis of trend forecasts,
that
the agreed remuneration falls within the normal
market range.

sufficient

issue.

that

is

It

1.1.1. Liquidity costs

(169) The — to this extent concurrent — arguments put forward
by Germany and the BdB regarding the liquidity costs can
be accepted where a ‘normal’ capital contribution to a bank
provides it with both liquidity and an equity capital base
that is necessary for supervisory reasons in order to expand
business. As stated above, a bank that wishes to use the
i.e. to expand its 100 % risk-
capital to its full extent,
adjusted assets by a factor of 12,5 (i.e. 100 divided by the
solvency ratio of 8 %) must refinance itself on the financial

(36) Cf. Lehman Brothers, Analyse der Kapitalzuführung aus der Einbringung
der Wohnungsbauförderungsanstalt des Landes Nordrhein-Westfalen of
8 July 1997, p. 4.

7.11.2006

EN

Official Journal of the European Union

L 307/129

markets 11,5 times over. Put simply, the difference between
12,5 times the interest received and 11,5 times the interest
paid on this capital minus other costs of the bank (e.g.
administration) gives the profit on the equity (37). Since the
silent partnership contribution to HLB in question did not
provide any liquidity initially, HLB incurred additional
financing costs up to the amount of the capital when it
borrowed on the financial markets the resources needed to
exploit the business opportunities to the full. On account of
these additional costs, a corresponding deduction must be
made in order to determine the appropriate remuneration.
A market-economy investor could not expect
to be
remunerated in the same way as for a cash injection.

(170) Unlike the BdB, however, the Commission considers that
the gross refinancing interest is deductible. Refinancing
costs constitute operating expenses and therefore reduce
taxable income. The same, however,
the
remuneration for a silent partnership contribution made
in liquid form at the outset. Compared with the latter,
which, as shown above, provides the appropriate market
test, there is, therefore, no further tax benefit. In both cases,
therefore, the bank's net profit is reduced by the amount of
the interest paid for the liquidity. As a result, the total
refinancing costs are deductible.

true of

is

(171) This situation is similar to that in the Landesbank Hessen-
Thüringen case but differs from the other Landesbanks that
were also the subject of an investigation, including WestLB,
since the promotion-related assets in the latter case are
shown as reserves in the balance sheet and the total
remuneration is to be regarded as a use of profits but not as
an operating expense and thus has to be met out of taxed
profits. The other Landesbanks thus enjoy a tax benefit
where the costs for the liquidity that once more has to be
found are tax-deductible as an operating expense, whereas
this would not be the case for an investment that was in
cash at the outset but otherwise identical, such investment
providing the relevant benchmark.

(172) Since there is no (other) tax benefit, HLB has therefore to
pay only the remuneration for the risk to which FHH is
exposed by virtue of its promotion-related assets in the
form of
the
the silent participation contribution,
guarantee remuneration that is expressed in basis points
and exceeds the relevant reference interest rate.

i.e.

Appropriate remuneration for the uncovered part of the silent
partnership contribution

(173) As stated above, the silent partnership contribution was not
recognised as liable core capital for supervisory purposes in
the period 1993-96.

(174) In Decision 2000/392/EC,

the Commission assumed a
basic rate of 0,3 % before tax for the amount shown in the
balance sheet but which could not be used to underpin its
competitive business. A premium corresponding to a

(37) Of course, in reality the situation is much more complex because of
off-balance-sheet items, different risk weightings of assets and zero-
risk items, etc. However the principal reasoning holds.

further 0,3 % was charged on account of the amount in
question and the absence of any limitation over time (see
paragraph 144).

(175) In addition, unlike in the WestLB case, the Commission
does not regard as justified a premium on account of the
much larger amount for HLB. Since they are otherwise
comparable cases, it also applies here a rate of 0,3 % per
annum (before tax) as the appropriate remuneration for the
guarantee function of the capital at the time of its inclusion
in the balance sheet on 1 January 1993 until its recognition
by BAKred (see paragraph 145). Since the remuneration for
the entire silent participation contribution is tax-deductible
as an operating expense and also differs in this respect from
the tax treatment of the remuneration in Decision 2000/
392/EC, this premium has to be understood as a before-tax
rate that can be claimed in full as an operating expense.

(176) It transpires that the remuneration on the silent partnership
contribution, DEM [...] million [...], corresponding to [at
most 10 %] was altogether excessive.

(f) Date as of which aid no longer present

(177) Germany has shown that after the merger on 2 June 2003
between HLB and LSH to form HSH Nordbank, the WK
shares received by HLB were transferred back to FHH.

(178) After 2 June 2003 HSH was, therefore, no longer able to
underpin risk assets resulting from HLB's competitive
business with special-purpose assets or to use the latter as a
guarantee.

(179) In the Commission's view, it has thus been demonstrated
that, with the hiving-off of the special-purpose assets, the
aid under investigation ceased to be present on 2 June
2003.

(g) Aid element

(180) The calculation methods, remuneration components and
remunerations described for the various forms of trans-
ferred capital give the amounts that are shown in the
Table 1 in paragraph 183 and would have been payable as
appropriate remuneration for the individual components
and years.

for

(181) The amounts agreed as remuneration components at the
time of
In the
the investment need to be deducted.
Commission's view, only the remuneration of DEM [...] mil-
the silent participation contribution is
lion [...]
concerned. Other components such as the dividends paid
and set by Germany cannot, however, be calculated. As
stated above (see paragraph 110), according to the market-
economy investor principle, dividend payments and/or
increases in value occurring after the investment are not
relevant.

L 307/130

EN

Official Journal of the European Union

7.11.2006

(182) The Commission takes the view, however, that, in spite of
the differences between the two capital
instruments
attributable to the fact that the 1993 transfer by FHH
was designed as an overall package, the agreed, excessive
remuneration for the silent partnership contribution can be

(183) Accordingly, the aid element is made up of the following (38):

set off as the remuneration paid for this entire investment
project. The overpayment can therefore be set against the
capital
though be
remuneration.
converted into an after-tax value, something which the
parties left open in their understanding.

reserve as

It must

Table 1

Calculation of the aid element — HLB (in DEM m)

Amount of silent partnership
contribution available to HLB

Remuneration payable (1,29 %)

Guarantee commission payable
(0,3 %)

Paid

Overpaid (= imputable against
capital reserve)

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

300,0

300,0

300,0

300,0

300,0

300,0

300,0

300,0

300,0

300,0

300,0

(5 months)

0,9

0,9

0,9

0,9

3,9

3,9

3,9

3,9

3,9

3,9

1,6

30,0

29,1

30,0

29,1

30,0

29,1

30,0

29,1

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Company taxes

50,00 % 50,00 % 50,00 % 50,00 % 50,00 % 50,00 % 50,00 % 50,00 % 50,00 % 50,00 % 50,00 %

Less tax

- 14,6

- 14,6

- 14,6

- 14,6

14,6

14,6

14,6

14,6

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Recoverable overpayment after
tax

Amount of capital reserve
from WK 1993 available to
HLB

Finally recognised by BAKred

of which not usable as liable
capital

of which used/usable as liable
capital (GS I-Anrechnung) (as of
1997)

of which not used/not usable as
liable capital (as of 1997)

659,4

659,4

659,4

659,4

659,4

659,4

659,4

659,4

659,4

659,4

659,4

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

659,4

659,4

659,4

659,4

659,4

659,4

659,4

[...]

[...]

[...]

[...]

[...]

[...]

[...]

182,9

435,6

255,1

208,3

[...]

[...]

[...]

[...]

[...]

[...]

[...]

476,5

223,7

404,2

451,1

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Remuneration payable (6,57 %)

12,0

28,6

16,8

13,7

Guarantee commission payable
(0,15 %)

Total remuneration payable

Recoverable overpayment from
silent partnership contribution

Aid element

0,7

0,3

0,6

0,7

12,7

14,6

29,0

14,6

17,4

14,6

14,4

14,6

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

- 1,9

14,4

2,8

- 0,2

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(38) On 1 January 1999 the German mark was replaced by the euro at a rate of EUR 1 = DEM 1,95583. The annual data on the aid element given in the

table must be adjusted accordingly in order to calculate the total amount of aid to be recovered.

7.11.2006

EN

Official Journal of the European Union

L 307/131

(184) An aid element of DEM 177,5 million (EUR 90,75 million)
results from the difference between actual payments and
the payments that would correspond to market conditions.

2.2 Distortion of competition and effect on trade

between Member States

(185) As a result of the liberalisation of financial services and the
financial markets, banking within the
integration of
Community has become increasingly sensitive to distor-
tions of competition. This development is intensifying in
the wake of economic and monetary union, which is
dismantling the remaining obstacles to competition in the
financial services markets.

(186) The beneficiary HLB carried on both regional and
It regarded itself as a
international banking business.
universal commercial bank that was engaged above all in
shipping finance and now operates under the name of
HSH Nordbank. Despite its name, tradition and statutory
tasks, HLB was much more than a mere local or regional
bank until 2003.

(187) These facts clearly show that HLB offered its banking
services in competition with other European banks outside
Germany and, since banks from other European countries
are active in Germany, inside Germany.

(188) It should also be pointed out that there is a very close
relationship between a credit institution's equity capital and
its banking activities.
It is only when it has sufficient
recognised equity capital that a bank can do business and
expand its commercial activities. Since HLB was provided
with such capital for solvency purposes as a result of the
state measure, this had a direct impact on the bank's
business opportunities.

(189) It

is clear,

therefore,

that aid given to HLB distorts

competition and affects trade between Member States.

2.3 Finding

(192) Given that the aid has no regional objective — it is designed
neither to promote the economic development of areas
where the standard of living is abnormally low or where
there is serious underemployment nor to facilitate the
development of
areas — neither
certain economic
Article 87(3)(a) nor (c) of the EC Treaty, as regards the
latter's regional aspects,
is applicable. Nor does the aid
promote the execution of an important project of common
European interest.
It is not aimed either at promoting
culture or heritage conservation.

(193) Since the economic survival of HLB was not at stake when
there is no need to consider
the measure was taken,
whether the collapse of a single large credit institution like
HLB could lead to a general banking crisis in Germany,
something which might possibly justify aid to remedy a
serious disturbance
in the German economy under
Article 87(3)(b) of the EC Treaty.

(194) Under Article 87(3)(c) of the EC Treaty, aid may be found
compatible with the common market if it facilitates the
development of certain economic activities. This might, in
principle, apply also to restructuring aid in the banking
sector. However, in the case at hand, the conditions for
applying this exemption clause are not met. HLB was not
an undertaking in difficulty whose viability had to be
restored with the support of state aid.

(195) Article 86(2) of the EC Treaty, which allows exemptions
from the Treaty's state aid rules under certain conditions, is
also applicable, in principle, to the financial services sector.
This was confirmed by the Commission in its report on
in the banking
services of general economic interest
sector (39). The formal conditions for this are not met in
the present case and were not referred to by Germany.

(196) Since no exemption from the principle of the ban on state
aid pursuant to Article 87(1) of the EC Treaty applies, the
aid in question cannot be found compatible with the Treaty.
The contribution of WK's shares to HLB on 1 January 1993
is not existing aid.

(190) On the basis of all these considerations, it can be stated that
all the criteria laid down in Article 87(1) of the EC Treaty
are met and that therefore the transfer of the special-
purpose assets involves state aid within the meaning of that
Article.

(197) The transfer on 1 January 1993 cannot be regarded either
liability and guarantor

as being covered by institutional
liability.

3.

COMPATIBILITY WITH THE COMMON MARKET

(191) None of the exemption clauses of Article 87(2) of the
EC Treaty are applicable. The aid does not have a social
character and is not granted to individual consumers. Nor
does it make good the damage caused by natural disasters
or exceptional occurrences or compensate for the economic
disadvantages caused by the division of Germany.

(198) On the one hand, the test of guarantor liability as a default
liability vis-à-vis creditors in the event that the bank's assets
are not sufficient to satisfy them is not met from the outset.
injection was not designed to satisfy HLB's
The capital
creditors, and HLB's assets were not exhausted.

(39) This report was presented to the Ecofin Council on 23 November
1998 but has not been published. It can be obtained from the
Competition Directorate-General of the Commission and can also be
found on the Commission's website.

L 307/132

EN

Official Journal of the European Union

7.11.2006

liability does not
(199) On the other, the test of institutional
apply either. Under institutional
liability, the institution
concerned is required to provide HLB with the resources
necessary to safeguard its orderly functioning in so far as it
decides to ensure HLB's continued existence. At the time of
the capital injection, however, HLB was in no way unable to
continue orderly operations. The capital injection was not,
therefore, necessary to maintain the orderly functioning of
LBB, which could therefore, on the basis of a conscious
economic calculation by the Land as part-owner, also see
future market opportunities under conditions of competi-
tion. The ‘emergency provision’ of institutional liability is
not applicable to such a normal economic decision by the
Land. Since no other existing aid scheme under Articles 87
(1) and 88(1) of the EC Treaty is applicable, the capital
injection ranks as new aid within the meaning of Article 88
(3) of the EC Treaty.

IX.

CONCLUSION

(200) Since the period specified in Article 15(1) of Council
Regulation (EC) No 659/1999 has expired, the aid that
might result from the transfer of WK's shares on 1 January
1986 can no longer be recovered and is to be regarded as
existing aid under Article 15(3) of that Regulation.

(201) The aid resulting from the transfer of WK's shares on
1 January 1993 cannot be regarded as being compatible
with the common market either under Article 87(2) and (3)
or under any other provision of the Treaty. The aid is,
therefore, declared incompatible with the common market
and must be discontinued, and the aid element of the
measure unlawfully put into effect must be recovered by
the German Government,

amounting to EUR 90,75 million in the period from 1 January
1993 to 1 June 2003 is incompatible with the common market.

Article 2

Germany shall take all necessary measures to discontinue and
recover from the beneficiary the aid referred to in Article 1 and
unlawfully made available to it.

Article 3

Recovery shall be effected without delay and in accordance with
the procedures of national
law provided that they allow the
immediate and effective execution of the Decision.

The aid to be recovered shall include interest from the date on
which it was at the disposal of the beneficiary until the date of its
recovery.

Interest shall be calculated in accordance with the provisions of
Chapter V of Commission Regulation (EC) No 794/2004 (40).

Article 4

Germany shall inform the Commission, within two months of
notification of this Decision, of the measures which were taken
and which it intends to take in order to meet the commitments
described in this Decision.

Article 5

This Decision is addressed to the Federal Republic of Germany.

HAS ADOPTED THIS DECISION:

Brussels, 20 October 2004.

Article 1

The state aid which Germany has implemented for Hambur-
gische Landesbank — Girozentrale, now HSH Nordbank AG,

For the Commission

Mario MONTI

Member of the Commission

(40) OJ L 140, 30.4.2004, p. 1.

7.11.2006

EN

Official Journal of the European Union

L 307/133

INFORMATION REGARDING THE IMPLEMENTATION OF THE COMMISSION DECISION

ANNEX

1.

Calculation of the amount to be recovered

1.1.

Please provide the following details regarding the amount of unlawful state aid that has been put at the disposal of the
recipient:

Date(s) of payment (°)

Amount of aid (*)

Currency

Identity of recipient

(°) Date or dates on which the aid or individual instalments of aid were put at the disposal of the recipient; if the measure consists of

several instalments and reimbursements, use separate rows.

(*) Amount of aid put at the disposal of the recipient, in gross grant equivalent.

Comments:

1.2. Please explain in detail how the interest payable on the amount to be recovered will be calculated.

2.

Recovery measures planned or already taken

2.1. Please describe in detail what measures have been taken and what measures are planned to bring about the immediate
and effective recovery of the aid. Please also explain which alternative measures are available in national legislation to
bring about recovery of the aid. Where relevant, please indicate the legal basis for the measures taken or planned.

2.2. By what date will the recovery of the aid be completed?

3.

Recovery already effected

3.1. Please provide the following details of aid that has been recovered from the recipient:

Date(s) (°)

Amount of aid repaid

Currency

Identity of recipient

(°) Date or dates on which the aid was repaid.

3.2. Please attach supporting documents for the repayments shown in the table at point 3.1.