2008/214/EC: Commission Decision of 18 July 2007 on State aid C 27/2004 which the Czech Republic has implemented for GE Capital Bank a.s. and GE Capital International Holdings Corporation, USA (notified under document number C(2007) 1965) (Text with EEA relevance)
Date: 2007-07-18
Institutions: European Commission
Subjects: Czechia, State aid, commercial bank, control of State aid, financial institution, private bank

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(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

II

DECISIONS

COMMISSION

COMMISSION DECISION

of 18 July 2007

on State aid C 27/2004 which the Czech Republic has implemented for GE Capital Bank a.s. and GE
Capital International Holdings Corporation, USA

(notified under document number C(2007) 1965)

(Only the Czech text is authentic)

(Text with EEA relevance)

(2008/214/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty
Community,
and in particular
Article 88(2) thereof,

establishing the European
subparagraph of
the

first

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

Having called on interested parties to submit their comments
pursuant to the provisions cited above, and in view of these
comments,

Whereas:

1. PROCEDURE

(1)

On 18 December 2003, the Commission received a noti-
fication concerning measures
of
the
(AGB) and GE Capital Bank,
Agrobanka, Praha a.s.
a.s. (1)
regarding aid
the procedure
(GECB), under

benefit

for

the Czech Republic,

measures (interim mechanism) provided for in Annex
IV.3 of the Act concerning the conditions of accession
the
of
the
Republic of Cyprus,
Republic of Lithuania,
the
Republic of Malta, the Republic of Poland, the Republic
of Slovenia, the Slovak Republic and the Adjustments to
the Treaties on which the European Union is founded (2),
signed on 16 April 2003 (Act of Accession).

the Republic of Estonia,
the Republic of Latvia,
the Republic of Hungary,

(2)

(3)

By letter received by the Commission on 30 April 2004,
the Czech Republic withdrew the notification; on the
same day the Czech Republic submitted a new notifi-
cation concerning the same subject.

the Commission
By Decision dated 14 July 2004,
declared that most of the notified measures were not
applicable after accession but opened proceedings under
Article 88(2) EC on other measures, given that the latter
were considered being applicable after accession and
raised serious doubts as to their compatibility with the
common market. The Commission Decision to initiate
the procedure was published in the Official
Journal of
the European Union (3). The Commission invited interested
parties to submit their comments.

(2) OJ L 236, 23.9.2003, p. 23. The Czech version was published in a
the European Union of

the Official

Journal of

special edition of
23.9.2003.

(1) Since 17 January 2005 renamed GE Money Bank, a.s.

14.1.2005, p. 9.

(3) OJ C 292, 30.11.2004, p. 3. Corrigendum published in OJ C 10,

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Official Journal of the European Union

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(4)

(5)

(6)

(7)

on

the

and

opening

decision

end November

On 30 July 2004, 16 August 2004, 22 September 2005
and 18 May 2006 the Czech Republic submitted its
observations
on
17 December 2004 GECB submitted its comments. On
19 September and 11 November 2005 GECB submitted
supplementary comments. By letter of 2 May 2006 the
Commission confirmed to GECB that the period during
which it could submit comments had been extended
until
accordance with
2005
in
last sentence of Council Regulation (EC)
Article 6(1)
No 659/1999 of 22 March 1999 laying down detailed
rules for the application of Article 93 of the EC Treaty (1)
(Procedural Regulation). By letter of 10 May 2006,
the Czech Republic
registered on 18 May 2006,
it had received the
informed the Commission that
submissions made
June,
24
29 September and 25 October 2005 as well as on
11 January and 7 March 2006 meetings with represen-
tatives of the Czech Republic and GECB took place. On
13 March 2007, registered on 14 March 2007,
the
Czech Republic
information. On
submitted further
15 March 2007 the Commission confirmed to the
Czech Republic in accordance with Article 6(1)
last
sentence of the Procedural Regulation that the period
during which it could submit comments had been
extended until 14 March 2007.

GECB. On

by

2. BACKGROUND FACTS

2.1. Beneficiaries of the aid

AGB, which was founded in 1990, used to operate as a
universal commercial bank in the Czech Republic. By
it was the country’s fifth largest bank and the
1995,
largest privately owned bank. After financial difficulties
however, AGB’s banking license was withdrawn in
September 1998 and it is currently in liquidation.

The founding shareholders of AGB were Československá
obchodní banka, a.s. (CSOB), the Ministry of Agriculture
the Czech Republic, Agropol, a.s., Agrodat, státní
of
podnik and Stavoinvest Banská Bystrica.
In 1995, the
private Motoinvest Group acquired control in AGB.

the

imposition of

forced administration on
After
17 September 1996, two separate organisational units,
AGB1 and AGB2, were created within AGB. AGB1
entailed AGB’s core banking activities.
In June 1998,
sold to GECB in an asset deal. The
AGB1 was
remaining parts of AGB are still
in the liquidation
process.

(8)

GECB was founded in 1998 for the purpose of acquiring
AGB1. It is now operating as a universal bank in the

(1) OJ L 83, 27.3.1999, p. 1.

(9)

(10)

(11)

(12)

Czech Republic. As of 17 January 2005 GECB was
renamed GE Money Bank, a.s. It is entirely owned by
the GE Capital International Holdings Corporation, USA
(GECIH).

2.2. AGB’s financial situation

In addition to this, AGB’s

AGB’s difficulties already started in 1993-1994. During
the mid nineties
the whole Czech banking sector
underwent a serious economic crisis which also affected
AGB.
rapid expansion,
combined with deficiencies in risk management and the
lack of internal controls led to a gradual deterioration of
AGB’s loan portfolio. In 1993, AGB had a loss of CZK
2 000 million and the equity was negative (CZK – 515
million).

the

that

explained

In 1993, the Czech National Bank (CNB) ordered that
AGB should prepare and implement a consolidation
programme in order to restore its capital adequacy. The
Czech Republic
consolidation
programme did not
entail measures provided or
granted by the State. It rather would have imposed a
In 1996, AGB ceased to
closer supervision of AGB.
comply with the terms of the consolidation programme
and engaged in high risk operations and faced liquidity
problems and the deterioration of its assets. The liquidity
crisis and the shareholders’ unwillingness to take appro-
priate remedial actions led to the imposition of a forced
administration on AGB on 17 September 1996.

Concerning AGB’s financial situation, the audit carried
out after the imposition of
the forced administration
(balance sheet date 16 September 1996) revealed a loss
of CZK – 8 487 million and an equity balance of CZK
– 5 476 million. The regular annual audit with the
balance sheet date 31 December 1996 would have
recorded a loss of CZK – 10 097 million and an equity
balance of CZK – 6 328 million.

In order to avoid negative consequences for the whole
the Czech Republic started to
Czech banking sector,
implement measures with the aim of ensuring the
rescue and restructuring of AGB. However, since the
above mentioned audits of AGB that were carried out
after the imposition of
forced administration revealed
losses in excess of the bank’s capital it was considered
the best way to ensure AGB’s long term viability by
creating a
for
AGB’s core banking activities. AGB2 consisted mainly
loans extended to AGB’s selected
of classified loans,
subsidiaries or other affiliated entities, a selected asset
portfolio, all of the immovable assets and some of the
movable assets. AGB1 was then to be sold to a strategic
investor via an open, unconditional and transparent
tender procedure.

separate organisational unit, AGB1,

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2.3. The tender

(13)

The Forced Administrator announced a public tender for
the sale of AGB1 in April 1997. In the subsequent tender
procedure, GE Capital Corporation remained as the sole
party interested in the purchase of AGB1. AGB1 was
then sold to GECB on 22 June 1998 for about CZK
304 million, subject to the guarantees and warranties
and a put option. The guarantees and warranties are
in recitals 19 to 26 and the
described in more detail
put option in recitals 27 to 32.

liabilities,

(14) One measure that need not be considered further is the
Depositors’ Guarantee granted by CNB in favour of all of
AGB’s creditors when AGB first encountered difficulties
in September 1996. The Depositors’ Guarantee covered
all of AGB’s
including interest payable,
registered in AGB’s accounts as at 17 September 1996.
Any liabilities maturing within a fixed term were secured
until maturity. Liabilities having no fixed maturity term
were secured for a period of 12 months following the
completion of
forced administration of AGB.
Liabilities incurred by AGB after 17 September 1996
were secured until
respective maturity date or
maximum of 12 months following the completion of
the forced administration of AGB whichever was the
earlier. The guarantee did not set any upper limit for
the
creditors. As of
31 December 2003 however,
there was only one
deposit of CZK 867 882 remaining that could potentially
fall under the Depositors’ Guarantee (1).

secured liabilities

to AGB’s

their

the

(15)

the sale, GECB’s parent company
In the context of
GECIH assumed the CNB’s obligations under
the
Depositor’s Guarantee through a counter guarantee,
which expired on 22 June 2000. From the beginning,
the counter guarantee would have terminated in the
event that GECIH exercised its put option right for the
shares in GECB. After the sale of AGB1 to GECB, the rest
of AGB including AGB2 went into liquidation. In the
ongoing liquidation process CNB is the sole creditor of
AGB.

2.4. Financial situation of GECB

(16)

The results of AGB’s banking business have substantially
improved since GECB took it over.

(1) The Depositors’ Guarantee is a measure notified by the Czech
Republic under the interim mechanism. The measure was considered
not being applicable after accession in the the decision of 14 July
2004 referred to in Commission Decision recital 3, as only one
clearly defined claim remained under the Depositors’ Guarantee.
The Commission therefore considered the potential exposure of
the Czech Republic clearly defined before accession.

Year

1998

1999

2000

2001

2002

2003

2004

Net income
(in CZK million)

Capital adequacy ratio
(Tier 2)

– 16 500

Negative (2)

980

720

840

911

1 988

2 242

74 %

48 %

41 %

30 %

25 %

24 %

(17)

(18)

(19)

2.5. Restructuring efforts made by AGB, GECB and
GECIH

The Czech Republic and GECB submit that AGB, GECB
and GECIH adopted measures to mitigate the State invol-
vement in the restructuring of AGB. AGB’s compensatory
steps consisted of making AGB’s own assets liquid and in
particular the sale of certain AGB subsidiaries to Raif-
feisen Bank. This diminished AGB’s market share as
measured by AGB’s share of
total banking assets or
certain asset classes. Apart from that, AGB reduced its
numbers of employees from about 3 500 in 1996 to
about 2 500 employees in 1998.

It was argued that GECB and GECIH had contributed to
the restructuring by paying the purchase price, by the
purchaser warranties in the Deed of Warranties referred
to in recital 20 and by the counter guarantee in the
referred to therein by which
Indemnity Agreement
GECIH took over CNB’s liability (Depositors’ Guarantee)
towards the creditors of AGB. In addition, the GE group
believes that it contributed by way of the Put Option as
well as by its excellent reputation.

3. DESCRIPTION OF THE MEASURES

In its Decision of 14 July 2004, the Commission assessed
the measures notified to it and came to the conclusion
that the majority of them fell outside the scope of the
the Accession Treaty. These
interim mechanism of
measures did not lead to any further financial exposure
of
the accession date and
therefore were not applicable after accession. However,
two sets of measures were considered to be applicable
after accession, and potentially to constitute State aid
incompatible with the common market — firstly the
Warranties and Indemnities and secondly the Put Option.

the Czech Republic after

(2) AGB1’s balance sheet as of 21 June 1998 recorded a total equity of
– CZK 17 100 million. GECB was founded with CZK 500 million
share capital.

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The Warranties and Indemnities

(20)

In the course of the sale of AGB1 to GECB, AGB as the
seller of AGB1 entered into a number of guarantee
arrangements in favour of GECB which are set out in
the Deed of Warranties, signed on 21 June 1998. CNB
was not a party to this agreement. However,
the
commitments made by AGB in the Deed of Warranties
were backed by the CNB in the Indemnity Agreement,
signed on 22 June 1998 and amended on 25 April 2004
by the Amendment No 1 to Indemnity Agreement
(Indemnity Agreement) (1).

Agreement would be relevant since the other list related
only to the claims under the Deed of Warranties, which
is an agreement between private parties that could not be
relevant for State aid purposes.

(23) Many of the potential claims had already expired before
the accession of the Czech Republic to the European
Union. In its Decision of 14 July 2004, the Commission
declared those measures which had already expired
before accession not
to be applicable after accession.
to the other measures the Commission
With respect
opened the formal investigation procedure.

(21)

the guarantee
The Czech authorities provided lists of
arrangements as part of the Rescue and Restructuring
Plan that forms part of the notification.

(24)

(22)

In the notification, the Czech Republic stated that the list
relating to the Deed of Warranties was ‘not exhaustive’.
In its comments on the decision to open the formal
investigation procedure, however,
the Czech Republic
clarified that the list indeed comprised exhaustive lists
of all potential claims. The wording ‘not exhaustive’
merely meant that the lists did not repeat the full texts
of the underlying agreements. GECB argued that in fact
only the — exhaustive — list concerning the Indemnity

The opening of the formal investigation procedure also
concerns measures for which the Czech Republic did not
ask for an assessment under the interim mechanism.
Notably, certain Warranties and Indemnities and the
Put Option, which were described in the notification
but not included in the request for assessment. In its
investigation procedure
Decision to open the formal
the Commission explained that under
interim
the
the Act of Accession
mechanism of Annex IV.3 of
there was no obligation on the part of the acceding
countries to notify measures and therefore it was in
principle possible to limit the scope of the notification.
the
However,
Warranties and Indemnities and the Put Option were
inextricably linked to the notified measures and could
not
the
separated.
Commission has to assess the measures in their entirety.

Consequently

Commission

considered

artificially

that

the

be

(25)

(26)

The guarantee arrangements on which the Commission opened the procedure are summarised as
follows:

Table 1

Warranties and indemnities expiring on 22 June 2008

Content

Limitation of the amount

1.

2.

Indemnification for any litigation adversely affecting the banking
business: AGB agreed to indemnify the GECIH, GECB and other purchaser’s
indemnified persons (the Purchaser) in respect of any losses resulting from
any claims brought against the Purchaser as a result of any matter occurring
prior to the Closing Date which adversely affects the banking business. Clause
5.1(a)(i) (2)

Aggregate limit of
CZK 2 000 million

Indemnification for violation of
law: AGB agreed to indemnify the
Purchaser in respect of any losses resulting from any violation by the
Seller prior to the closing date of any applicable law or regulation which
adversely affects the banking business. Clause 5.1(a)(ii)

Aggregate limit of
CZK 2 000 million

(1) Unless otherwise

Indemnity
all
Agreement refer to the Indemnity Agreement as amended by the
Amendment No 1 to Indemnity Agreement of 25 April 2004.
(2) Unless otherwise indicated, all references to clauses are to clauses in

references

indicated,

to the

the Deed of Warranties.

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3.

4.

Content

Limitation of the amount

Indemnification in respect of employment litigation: AGB agreed to
indemnify the Purchaser in respect of any losses resulting from any claims
brought against GECB by any of the employees in relation to any actual or
alleged act or omission by the Seller prior to the Closing Date. Clause
5.1.(a)(v)

Aggregate limit of
CZK 2 000 million

Indemnification in respect of employment litigation: AGB agreed to
indemnify the Purchaser in respect of any losses resulting from any claims
relating to any contract duty or liability of employment with any retained
employee or any former, existing or future employee of the Seller who is an
employee relating to AGB2. Clause 5.1.(a)(vi)

Aggregate limit of
CZK 2 000 million

5. Action for the declaration of invalidity of the agreement concerning the sale
of AGB1 to GECB brought on 27 July 1998 with the Regional Commercial
in Prague by Václav Sládek against AGB in liquidation and the
Court
Purchaser; and with the association of minority shareholders of AGB as a
side plaintiff. (Indemnification based on Clause 4.1 of the Indemnity Agreement)

Aggregate limit of
CZK 15 000 million

6. Action for the declaration of invalidity of the agreement concerning the sale
of AGB1 to GECB brought on 22 June 2001 with the Regional Commercial
in Prague by Petr Maur, František Vysloužil, Pavel Tykač, Karel
Court
Tománek, Pavel Šimek and Tomáš Fohler against AGB in liquidation, the
Purchaser and Jiři Klumpar; and with the association of minority shareholders
of AGB as a side plaintiff.
the
Indemnity Agreement)

(Indemnification based on Clause 4.1 of

Aggregate limit of
CZK 15 000 million

7. Action for Declaration of the Validity of the Agreement on the sale of AGB1
brought on 18 June 2002 with the Municipal Court in Prague by HZ Praha,
the Purchaser and Jiři Klumpar.
spol. s.r.o. against AGB in liquidation,
(Indemnification based on Clause 4.1 of the Indemnity Agreement)

Aggregate limit of
CZK 15 000 million

8. Application for Registration of the Sale of AGB1 in the Commercial Registry
made on 18 October 1999, and in which the applicant is currently AGB in
liquidation and the Prague Municipal State Prosecutor Office has joint as a
party to the proceeding. (Indemnification based on Clause 4.1 of the Indemnity
Agreement)

Aggregate limit of
CZK 15 000 million

9. Any claim for Indemnification concerning the validity or legitimacy of the

sale of AGB1 to the Purchaser brought by:

Aggregate limit of CZK
15 000 million

— The Seller, CNB, or a shareholder, liquidator, bankruptcy trustee, auditor

or forced administrator of the Seller

— A member of a corporate body of the Seller or the Purchaser

— An employee, borrower, client, lender, or creditor to the Seller or the

Purchaser

successor or assignee,

— A heir,
legal
liquidator, bankruptcy trustee,
receiver,
trustee, administrator or forced administrator (or a person
having similar powers), or association of one or more of the above-
listed individuals and entities, or

— A Czech State prosecutor, Czech criminal authority, or Czech tax

authority having jurisdiction over the Seller or the Purchaser.

(Indemnification based on Clause 4.1 of the Indemnity Agreement)

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Table 2

Warranties and indemnities expiring on 22 June 2010

Content

Limitation of the amount

Aggregate limit of
CZK 2 000 million

1. Taxes: AGB warrants that it has:

(i) complied with the relevant withholding tax requirements imposed by all

applicable laws;

(ii)

it has disclosed to the Purchaser the existence of any taxes claimed by
any tax authority to be due and owing by AGB;

(iii) no tax audit is pending or, to AGB’s knowledge, threatened with respect

to any taxes due from AGB; and

(iv)

it has not been nor is in violation of any applicable tax law, which would
create a liability for the Purchaser; and

(v) no tax will be imposed on the Purchaser as a result of the consummation

of the transactions contemplated. Clause 2.14(c) and (d).

2. Environmental matters: AGB warrants that, as far as it

is aware, no
hazardous substances are located on any premises of AGB1 in concentrations
exceeding those allowed by the applicable law. Clause 2.20

Aggregate limit of
CZK 5 000 million

3. Taxes in connection with transaction: AGB warrants that no taxes will be
imposed on the Purchaser as a result of the consummation of the sale. Clause
2.14(e)

Aggregate limit of
CZK 15 000 million

4. Non-business assets and liabilities: AGB agreed to indemnify the Purchaser
in respect of any losses resulting from any claims relating to any non-
business assets or non-business liabilities. Clause 5.1.(a)(iv)

Aggregate limit of
CZK 5 000 million

5. Customs and excise liabilities: AGB agreed to indemnify the Purchaser in
respect of
it by the Czech
customs and excise authorities in relation to AGB Customs Guarantee.
Clause 5.1.(a)(iv)

losses resulting from claims brought against

Aggregate limit of
CZK 5 000 million

Table 3

Warranties and indemnities expiring on 22 June 2013

Content

Limitation of the amount

1. Operations of AGB1: AGB warrants that, except as set forth in disclosure
schedules of the transaction documents, no other asset or liability forms part
of AGB1. Clause 2.22

Aggregate limit of
CZK 2 000 million

2. Authorisation: AGB warrants its full power and authorisation to sign the
contractual documentation and implement
the transaction. AGB further
warrants that the contracts are binding and enforceable against it. Clause 2.4

Aggregate limit of
CZK 2 000 million

3. Validity of the sale: AGB agreed to indemnify the Purchaser in respect of
any loss resulting from any claim concerning the validity or constitutional
legitimacy of the sale of AGB1. Clause 5.1.(a)(iii)

Aggregate limit of
CZK 2 000 million

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Table 4

Warranties and indemnities expiring 15 years after closing

Content

Limitation of the amount

1. Environmental losses: AGB agreed to indemnify the Purchaser in respect of
any environmental
loss which the purchaser may incur in respect of any
premises of AGB1 and which arises from a condition existing prior to
closing. Clause 5.1.(b)

Aggregate limit of
CZK 5 000 million

The Put Option

(27) On 22 June 1998, CNB and GECIH entered into the Put
Option Deed which provides that, under certain circum-
stances, GECIH is entitled to require that CNB purchases
from GECIH all its shares in GECB.

the same position as they would have been if such event
had not occurred.
It is stated that this could involve
payments or the transfer of assets to GECB. The put
option right expires on 22 June 2008.

(28)

Two events remain that permit GECIH to exercise the Put
Option. These are:

(31)

(a) a decision or judgment which orders or declares the
transactions by the Purchase Agreement void or
invalid or
that any
portion of the assets of AGB1 be returned; or

they be unwound or

that

The Put Price

The price for which CNB has to purchase all of the
shares in GECB varies depending on the date on which
the Put Option is exercised. From June 2003 until the
date when the Put Option right expires the Put Price is
the greatest of the following:

(a)

the adjusted unwind amount;

(b) CNB elects not to provide indemnity payments under
the ‘Indemnity Agreement’ in excess of CZK 2 000
million or CNB default in making such payments.

(b) the net asset value of GECB as of the date at which

the put price is determined;

(29) After the clarifications made by the Czech Republic and
GECB the Commission considers that the triggering event
referred to in point (b) of recital
(28) refers only to
refusals to make payments under Clause 4.1, Clause
8.3. of the Indemnity Agreement which concern claims
for invalidity of the sale of AGB1 to GECB (1).

(30)

The CNB has the right to remedy an event which gives
rise to the Put Option by putting GECB and GECIH in

(c)

the fair market value of GECB as of the date at which
the put price is determined.

In case that the purchase price is determined by the fair
market value referred to in point (c) the events which
triggered the right to exercise the Put Option will not be
taken into account.

(1) Clause 8.3 of the Indemnity Agreement contains the warranty of the
CNB that it has full power and authority to enter into and perform
the Purchase Agreement and that the execution and delivery of the
Purchase Agreement will not result in any breach of law. Clause 4.1
of the Indemnity Agreement contains the corresponding obligation
to indemnify.

(32)

The Czech Republic informed the Commission that it
was CNB’s and GECB’s understanding that for the deter-
mination of the put price an independent third party’s
opinion in all circumstances had to be obtained and that
such opinion was binding on the parties.

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4. COMMENTS RECEIVED AFTER THE OPENING OF
THE FORMAL INVESTIGATION PROCEDURE

(36)

4.1. Comments from the Czech Republic

(33)

after

are not

In particular,

The Czech Republic considers that the measures under
assessment
accession. The
applicable
potential liability of the State would be limited in time
and amount since the maximum exposure of the Czech
State is fixed and could not increase in the future. Also,
the list relating to the Deed of Warranties is exhaustive.
A further detailed definition of the potential exposure
would not be necessary.
the Czech
Republic cannot see the relevance of being able to
predict who might bring a claim and on what basis it
might be brought. The Czech Republic also relies on the
guarantee provided by the State to the benefit of Komercni
banka where the Commission accepted a similar level of
definition as sufficient to consider the measure not being
applicable after accession. Also, in the case of Slovenska
sporitelna the Commission accepted a lesser degree of
definition as
in that case only a closed group of
potential claimants but not individual claims could be
identified. In any case, with respect to the four individual
claims under Clause 4.1. the Commission’s requirements
to consider
after
accession were fulfilled. In addition,
in May 2006 the
Czech Republic submitted a list comprising the names
of all shareholders of AGB as of 30 April 2004. The
Czech Republic believes that for any claims by these
named shareholders under Clause 4.1 of the Indemnity
Agreement, the Commission’s itemisation requirement is
met.

a measure not being applicable

to the Put Option,
the particular nature of

the Czech Republic
(34) With respect
the Put Option
believes that
is not susceptible to assessment under
means that
it
the interim mechanism or
in the current procedure
since it will be exercised only in the future. The Czech
Republic states that it would be ready to notify the Put
Option for assessment by the Commission once it is
exercised. In any event, concerning the four individual
claims for invalidity which are mentioned under Clause
4.1. the Put Option fulfils the Commission’s requirements
to consider it being not applicable after accession. The
Put Price would be capped by way of a formula that is
applied by an independent expert.

in question represent

(35) Apart from that, the Czech Republic maintains that the
measures do not constitute aid since it would have been
more costly for the State to liquidate AGB than to adopt
sale. Also,
the measures
the
it did to facilitate its
measures
standard commercial
practice which would not involve any unusual benefit
and the impact on trade would be minor. In addition,
since AGB1 was sold in an unconditional and open
tender procedure, GECB did not receive any benefit as
it paid the market price for AGB’s banking business. Any
benefit for the seller (AGB) would have disappeared, since
AGB is in liquidation and no longer active on the market.

Should the measures constitute aid, the Czech Republic
argues that
the aid is compatible with the common
market. In view of the specific situation in the Czech
Republic and the peculiarities of the accession process,
the Commission had to interpret the provisions of the
Treaty and the 1994 Community Guidelines on State aid
for rescuing and restructuring firms in difficulty (1) (1994
Guidelines) more generously than it did in the decision to
open the formal investigation procedure.

(37)

The Czech Republic considers that Article 87(2)(b) EC
and Article 87(3)(b) EC apply in the present context
and render the measures to be compatible with the
common market.

that

there was a general concept

(38) With respect to the 1994 Guidelines, the Czech Republic
for the
points out
restructuring of AGB’s banking business and in other
cases the Commission had not
insisted on a strict
existence of the restructuring plan. The Czech Republic
further considers that the measures could only be seen as
aid to AGB but not as aid to GECB or GECIH since all
measures were aimed at the single goal of ensuring the
long-term viability of AGB’s banking business. Apart
from that, the 1994 Guidelines did not include a prohi-
bition against aid to newly created companies. Since
there was no structural excess of capacity there should
be no strict requirement of reducing or closing capacity.
AGB/GECB would not be left with a cash surplus, which
would be the main issue under the 1994 Guidelines
when considering proportionality. Also, the contributions
by the investors had been sufficient. The relatively high
capital adequacy ratios would just be the technical effect
of the chosen method of capital contribution.

(39)

(40)

The Czech Republic also considers that Article 46(2) of
in the present
the Europe Agreement
context. Article 46(2) EA would not limit the type of
measures which might be permissible, nor would it
prevent State aid measures. In addition,
in the case of
Komercni banka the Commission applied Article 46(2) EA.

(EA) applies

come

to the
Should the Commission nonetheless
the measures are applicable after the
conclusion that
accession and represent
incompatible State aid the
Commission should allow an adequate phase-out of the
Warranties and Indemnities and the Put Option. This
would be justified by the fact that the CNB and GE
had legitimate expectations as to the binding character
of the provisions.

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

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(41) On 13 March 2007 the Czech Republic informed the
Commission that on 28 February 2007 GECIH and
GECB had unilaterally and unconditionally waived the
Warranties and Indemnities under Section 3.1 of
the
Indemnity Agreement for any and all losses in relation
to the failure of the seller of AGB1 to satisfy its obli-
gations pursuant to the warranties and indemnities given
by the seller in Clause 5(1)(a)(i), Clause 5(1)(a)(ii), Clause
5(1)(a)(iii), Clause 5(1)(a)(v), Clause 5(1)(a)(vi) and Clause
5(1)(b). These obligations correspond to the Warranties
and Indemnities set out in recital 26 in:

(a) Table 1, No 1 (Indemnification for any litigation

adversely affecting the banking business);

(b) Table 1, No 2 (Indemnification for any violation of

law);

accession. The Commission should have taken this into
account when interpreting the notion of applicability
after and when applying the rules on State aid.

(45) GECB believes that the Commission’s interpretation of
‘applicability after’ of guarantees as applied in the
decision to open proceedings is too restrictive. In the
present case, all potential claims would be limited by
maximum amounts and limited in time. The claims
provided in submitted lists are exhaustive in the sense
that
for claims. The
wording ‘not exhaustive’ only means that they do not
mirror
In
the Put Option would not overcome the
addition,
maximum amounts
Indemnity
specified
Agreement since it relates only to specific claims of the
Indemnity Agreement and is itself capped.

they list all potential grounds

the underlying agreements.

text of

the

the

in

(c) Table 1, No 3 (Indemnification in respect of

employment litigation);

(46)

(d) Table 1, No 4 (Indemnification in respect of

employment litigation);

(e) Table 3, No 3 (Validity of the sale);

(f) Table 4, No 1 (Environmental losses).

(42)

The waiver took effect ab initio of these Warranties and
Indemnities and therefore renders them invalid with
retroactive effect from the date of the agreement. The
Czech Republic further informed the Commission that
no claims for
indemnification had been brought by
GECIH or GECB under these provisions up to the date
of the waiver.

not

being

applicable

The Commission’s concept of
‘applicability after’ as
applied in its decision of 14 July 2004 would mean
threatened litigation could be
that only pending or
considered
accession.
However, even if this narrow interpretation is applied,
individual claims arising
GECB considers
that
fully
under Clause 4.1 of
satisfy the Commission’s
the tax
claims under Clauses 2.14(c), (d) and (e) would satisfy
the Commission’s requirements since the future plaintiff
(the Czech authorities) is known due to the nature of
these claims.

four
the Indemnity Agreement

In addition,

after

test.

(47) Also,

the

since

triggering events were

the Put Option would be ‘not applicable after
accession’
clearly
defined and the put price clearly determined. With
respect to the triggering events, the Put Option would
be sufficiently defined at least as far as the four speci-
fically listed validity claims are concerned. Concerning
the put price, GECB refers to the case of Ceska sporitelna
where the Commission considered a subordinated debt
and social loans not to be applicable after accession.

4.2. Comments from GECB

(43) GECB submits arguments similar to those advanced by
the Czech authorities and contests the applicability after
of the measures as well as their aid character. In case that
the measures constitute aid,
it argues they would be
compatible with the common market.

(44) GECB points out that six to eight years before accession
the parties could not foresee that an interim mechanism
would be introduced to control State aid granted before

(48) Alternatively, if the Warranties and Indemnities and the
Put Option were ‘applicable after’ they would not amount
to State aid given that the CNB had to be considered a de
facto owner of AGB and that it had a financial interest in
the sale of AGB. Also, the Warranties and Indemnities
and the Put Option were negotiated between the parties
and were reflected in the price paid by GECB. Apart from
that, the measures would not be selective because they
were available to all bidders. There would be no
distortion of competition since GECIH paid the market
price after an unconditional and transparent tender and
there would be no effect on trade since no other bank
had been interested in AGB’s share of the Czech retail
market.

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(49)

the measures, GECB
Concerning the compatibility of
submits
compatible under
Article 87(2)(b), Article 87(3)(b) EC, and in the light of
the Rescue and Restructuring Guidelines.

that any aid would be

before accession and GECB in particular maintains that
the Commission would be applying law retroactively and
creating an exception to the previously accepted rule that
pre-accession aid granted by an acceding Member State
qualifies as existing aid.

(50) GECB considers that Article 87(2)(b) EC applies in the
present context since there was a serious threat to the
stability of the entire banking sector which came close to
a natural disaster. Also, Article 87(3)(b) EC would apply
as the Commission had already qualified a systemic crisis
of the banking sector as a potential ‘serious disturbance
in the economy of a Member State’. The requirement that
the aid needs to be granted in neutral fashion to all credit
institutions would have been fulfilled in the Czech
Republic since the entire banking sector was in a crisis
and all banks were assisted by the State.

(51)

Concerning the 1994 Guidelines GECB points out that
the Commission would be extending its jurisdiction in
looking not only at those measures that are applicable
after accession when assessing the compatibility but at
the whole restructuring. Concerning the beneficiaries of
the aid, the 1994 Guidelines did not contain a strict
limitation concerning newly created companies. Also,
the Commission had not
applied the prohibition
against restructuring aid to newly created companies in
the former East Germany. Footnote 10 of
the 1999
Community guidelines on State aid for rescuing and
restructuring firms in difficulties (1)
(1999 Guidelines)
mentioned this explicitly.

(52) GECB further states that

In addition,

in assisted areas,

the Commission could not
require a full restructuring plan in the present case
since it was not possible to foresee this requirement
there
when the measures were granted.
would be no undue distortion of competition in view
of the fact that the 1999 Guidelines explicitly mention
that
the
conditions for authorising aid may be less stringent as
regards the implementation of compensatory measures
so as to take into account the severity of the regional
capital
problems. Finally, GECB states
adequacy ratio would not
the
conclusion that the aid was not in proportion to the
restructuring costs
and benefits. The high capital
adequacy ratio would rather reflect GE’s conservative
credit policy.

that GECB’s
in itself allow for

like the Czech Republic,

(54) Annex IV.3(1) of the Act of Accession defines as existing

aid only three categories of measures:

(a)

those put into effect before 10 December 1994;

(b) those

that — having been examined by
the
Commission — were included in the list annexed
to the Treaty of Accession; and

(c)

those which would be approved under the so-called
interim mechanism.

the measures

still applicable after

the date of
All
accession, which constitute State aid and do not
fall
within one of these three categories, are considered as
new aid upon accession; the Commission has therefore
full powers to prohibit the application of these measures
and to order
recovery of any sums unduly paid
thereunder after accession. This application of State aid
rules to the future effects of measures still applicable after
accession does not entail any retroactive application of
the EC State aid rules and is in any event mandated by
the Act of Accession.

(55) Annex IV.3.(2) of

the Act of Accession sets out

the
interim mechanism.
It provides a legal framework for
the assessment of aid schemes and individual aid
measures put into effect in a new Member State before
the date of accession and still applicable after accession.

5. ASSESSMENT

(56)

5.1. Applicability after accession

(53) As outlined above, the Czech Republic and GECB contest
the Commission’s power to review measures granted

(1) OJ C 288, 9.10.1999, p. 2.

For a measure to be considered applicable after accession
it must be liable to produce an additional benefit that
was not known, or not precisely known, when the aid
the Commission’s
was granted. On the other hand,
power of review under the interim mechanism is inap-
plicable as regards aid measures that have already been
finally and unconditionally granted for a given amount
before accession.

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(57) Guarantee

arrangements with

payments
occurring after accession are considered to fall outside
the definition of ‘applicability after’ to the extent that
the following conditions are met (1):

possible

(a)

the facts which give rise to the covered risks are
precisely defined and included in an exhaustive list
closed by the date of accession;

(61)

(b) there is an overall cap and a time-limit
payments that the State can effect; and

for the

(c)

the guarantee/indemnification relates to events that
had already occurred by the date of the granting of
this guarantee/indemnification and not for any future
events.

Assessment

(58) As

formal

set out

investigation procedure

in its decision of 14 July 2004,

the
Commission considers all Warranties and Indemnities
as well as the Put Option on which the Commission
opened the
to be
applicable after accession. As the Commission found all
the
these measures to be applicable after accession,
subsequent waiver concerning certain Warranties and
Indemnities made by GECIH and GECB therefore
cannot
these Warranties and
Indemnities as established by the Commission Decision
of 14 July 2004 for so long as they subsisted after
accession.

remove the effects of

finding on ‘applicability

(59) However, the Commission also reiterates and confirms
this
those
measures listed in the tables in recital (26). In response
to the arguments raised against the opening decision the
Commission first has the following general remarks:

after’

for

all

(60)

The Czech Republic and GECB state that the potential
claims are exhaustively listed in the notification and that
the maximum financial exposure of the Czech Republic
is defined therein. However, although the lists may
include all potential grounds for claims, these grounds
are — with few exceptions, as explained below —
described in abstract terms. In addition, the Commission
considers that a mere cap without listing (itemisation) of
the specific events which might give rise to indemnity
does not tie the payment of the indemnity after accession
to a specific event finally and unconditionally identified

(1) The criteria are listed in a letter to the Czech Republic dated
19 March 2004. The aim of
is providing further
guidance on the notion of ‘applicable after’ in relation to indemnities
and comparable measures.

the letter

prior to accession. The State has in some respects theo-
retically limited its financial exposure, but
it has not
clearly determined the specific facts directly giving rise
to payments.

Contrary to what the Czech Republic and GECB argue,
this is also the line taken in the cases concerning
Komercni banka (2) and Ceska sporitelna (3). The guarantees
in these cases, which were declared not to be applicable
after accession, satisfied the criteria listed above since the
guarantees concerned a well defined and closed number
of ring-fenced assets, precisely and exhaustively identified
prior to accession, whose value was guaranteed by the
State. Also, in the case of Slovenska sporitelna (4) the liti-
gation indemnification concerned specific pending or
threatened litigation that was included in an exhaustive
and legally binding list.

(62)

In addition, as explained below, the financial exposure of
the Czech Republic is not sufficiently capped with respect
to the indemnifications concerning the validity of the sale
in Clause 4.1 of the Indemnity Agreement as well as the
Put Option.

(63)

(64)

Specific remarks concerning certain individual measures

Indemnification for tax matters and customs and excise
liabilities (Table 2 Nos 1, 3 and 5)

tax matters meet
for

The Czech Republic and GECB argue that the indemni-
the Commission’s
for
fications
requirements
considering a measure not being
applicable after accession since the future plaintiff (the
Czech authorities) would be known due to the nature
of these claims.

The Commission considers that,
if this reasoning were
valid, it would apply not only to tax matters but also to
the indemnifications for customs and excise liabilities.
However, the indemnifications for tax matters as well
as
for customs and excise liabilities under Clauses
2.14(c), (d) and (e) as well as Clause 5.1(a)(iv) are not
sufficiently specified. A claim for indemnification is suf-
ficiently defined if
the
underlying event are specifically described. In the case
at hand an unlimited number of claims could be
these provisions
brought
cannot be regarded as identifying the exposure of the
Czech Republic. The Commission therefore considered
and still considers the indemnifications for tax matters
and customs and excise liabilities to be applicable after
accession.

indemnification so that

the potential plaintiff

and

for

(2) OJ C 72, 23.3.2004, p. 9. Corrigendum published in OJ C 104,

30.4.2004, p. 70.

(3) OJ C 195, 31.7.2004, p. 2.
(4) OJ C 137, 4.6.2005, p. 4.

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(65)

(66)

(67)

Claims under Clause 4.1 of the Indemnity Agreement
(Table 1 Nos 5-9)

The claims as described in Table 1, No 9 concern indem-
nifications in case the sale of AGB1 to GECB is found to
be void or invalid. The potential actions leading to this
result are described in general terms and therefore do not
limit the financial exposure of the Czech Republic. Even
if some of the groups of the potential claimants — like
the shareholders of AGB at a specific point in time —
were considered as representing a closed group of indi-
viduals; despite the fact that the groups are extremely
large and are supposed to cover also the legal successors
of the individuals, the claims brought by these groups of
individuals are not specified so that an unlimited number
of potential claims can be made. Due to this, the risk of
the Czech Republic cannot be qualified as precisely
defined.

(70)

(71)

Concerning the four claims under Clause 4.1 of
the
Indemnity Agreement listed in Nos 5, 6, 7 and 8 of
Table 1, the Commission considers that even if they
were sufficiently defined in the sense of
the first
criterion illustrated above as these claims refer to indi-
vidual actions brought by identified claimants,
the
requirement of an overall cap on the State’s liability is
not met. This is the case for all claims under Clause 4.1
of the Indemnity Agreement as listed in Table 1, Nos 5,
6, 7, 8 and 9.

financial exposure of

The potential
the CNB appears
limited to the amount of CZK 15 000 million for each
separately listed indemnification under Clause 4.1 of the
Indemnity Agreement. This
limitation is however
removed by the fact that GECIH may exercise the Put
Option in case the CNB refuses to make payments above
CZK 2 000 million. In the event that the CNB refuses to
make payments above this level, GECIH is entitled to
exercise the Put Option. This could force the CNB to
make payments even above the cap for a separately
listed indemnification foreseen under Clause 4.1 of the
Indemnity Agreement of CZK 15 000 million in order to
the Put Option is exercised. As will be
avoid that
described below, the Put Option is also not sufficiently
defined and capped in itself.

(68)

The Commission therefore considers Clause 4.1 of the
Indemnity Agreement as described in Nos 5, 6, 7, 8 and
9 of Table 1 being applicable after accession.

by the CNB to make payments above CZK 2 000 million
in relation to validity claims under Clause 4.1 of the
Indemnity Agreement.

These potential triggering events are in no way specified
by reference to a limited number of persons who could
bring such claims so as to identify in advance the court
proceedings potentially leading to a finding of invalidity
etc. of the sale of AGB1 to GECB. In consequence, the
risks of the Czech Republic are not sufficiently defined
and clearly identified.

the

exposure of

In addition, the exposure of the Czech Republic is not
capped. In the case of Ceska sporitelna the Commission
considered
the Czech Republic
concerning the compensation for social loans as suffici-
ently defined where the compensation was determined by
the difference between the ‘rate contracted for the social
loan’ and the Prague Interbank Offered Rate plus a fixed
percentage plus a fixed payment per account per year.
However,
in that case, the variables were limited to a
mere indexation to a single market benchmark and
could not be influenced by the beneficiary.

(72)

In the case at hand, the Put Price is determined by the
greatest of the following:

(a)

the adjusted unwind amount;

(b) the net asset value of GECB as of the date at which

the put price is determined;

(c)

the fair market value of GECB as of the date at which
the put price is determined.

(73)

The Czech Republic informed the Commission that in
any case the determination will be carried out by an
independent expert whose finding is binding on the
parties.

(74) Notwithstanding the involvement of an independent
expert, which could perhaps make for a more objective
assessment, the Commission considers that the method
as such for determining the price does not set a cap to
the Czech Republic’s financial exposure. The methods by
which the price would be determined refer to parameters
that are influenced by GECIH and GECB’s business
performance.

The Put Option

(69) As explained above,

in principle two kinds of events
remain under which the Put Option right can be
exercised. The first one is a decision or
judgment
which orders or declares the sale of AGB1 to GECB
void or invalid. The second triggering event is a refusal

(75)

In addition, the price payable under the Put Option is set
by way of a complex calculation,
including variables
which were uncertain at the time of the agreement of
the measures, uncertain at the time accession and which
would continue to change over time. Therefore the price
payable under the Put Option would depend on impon-
derables subject to future developments and could be
determined only at a specific date after accession.

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(76)

In view of the foregoing, the potential exposure of the
CNB is not sufficiently defined by way of a formula. In
consequence of all this, the Put Option is considered
applicable after accession.

the guarantee arrangements would represent a standard
commercial practice that was reflected in the price paid
for AGB1.

Conclusions on applicability after

(77) Accordingly, the Commission confirms its decision of
14 July 2004 concerning the applicability after of the
investigation
measures on which it opened the formal
procedure and considers that all
these measures are
applicable after accession. These are the Warranties and
Indemnities listed in Tables 1, 2, 3 and 4 as well as the
Put Option.

5.2. State aid character

(78) Article 87(1) EC Treaty declares any aid granted through
State resources to specific undertakings incompatible
with the common market
such aid distorts or
threatens to distort competition in so far as it affects
trade between Member States.

if

State resources

(79)

Through the Indemnity Agreement the CNB, as a public
entity, guarantees for the commitments made by AGB in
the Warranty Agreement vis-à-vis GECB and GECIH.
Therefore
involve State
resources. Also with respect
to the Put Option State
resources are involved since the CNB committed itself
to acquire all shares in GECB in case that GECIH
exercises the Put Option.

the guarantee arrangements

Economic advantage

(80)

The Czech Republic and GECB argue that the measures
do not constitute aid given that it would have been more
costly for the State to liquidate the bank than to sell it. In
particular, the CNB would have been obliged under the
Depositors’ Guarantee,
to
reimburse AGB’s
If AGB had not been
restructured, the Czech State would have had to bear
high costs under that guarantee. GECB also argues that
the CNB has to be seen as de facto owner of AGB since
under Czech law the forced administrator is appointed by
and must be an employee of the CNB. Apart from that,

referred to in recital

creditors.

(14),

(81)

(82)

The Commission considers that in acting as a forced
administrator the CNB cannot be considered a de facto
owner of the bank. Rather, AGB in forced administration
remained the owner of the banking business. A forced
administrator may have the power to sell the bank but
he is acting on behalf of the bank. The CNB therefore
acted to facilitate the sale of a private bank to another
private bank.

The Commission does not consider that taking over the
Depositors’ Guarantee by the purchaser could be a
to
sufficient ground for a rational market operator
enter into the Warranties and Indemnities and the Put
Option. The Czech Republic itself stated explicitly in the
Assessment provided along with the notification that ‘the
CNB never expected to pay under the Guarantee’. The
measure would have been intended only for the ‘psycho-
logical’ purpose of calming the public. Indeed, the Czech
Republic has stated that the Depositors’ Guarantee that
was granted by the CNB on 17 September 1996 was
never invoked and by the time AGB1 was sold to
GECB it must have seemed very unlikely that claims
could be brought under the Depositor’s Guarantee.

it

is

exercised. However,

(83) With respect to the Put Option the Czech Republic and
GECB argue that in any case it would not represent an
actual advantage but only could become an advantage
once
the Commission
considers that the Put Option already from the day it
was granted involves a right with a value to GECB.
Similarly to a guarantee the advantage of a Put Option
arises not only when the Put Option is exercised (the
guarantee is invoked) but already with the granting of
the measure (1).

(84)

The parties to the Indemnity Agreement were the CNB,
GECB and GECIH. The Parties to the Put Option Deed
were CNB and GECIH. GECB, GECIH as well as AGB as
the seller of AGB1 and the banking business of AGB1
owned by AGB before 22 June 1998 and by GECB
afterwards are therefore the potential beneficiaries of
the measures.

(1) For guarantees see point 2.1.2 of the Commission notice on the
application of Articles 87 and 88 of the EC Treaty to State aid in
the form of guarantees (OJ C 71, 11.3.2000, p. 14).

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Advantage to AGB

(85)

Even though AGB as the seller of AGB1 was not a party
to the two agreements, it benefited from them since they
allowed it to sell its banking business – to sell it at all or
at least for a purchase price that was higher than the one
it could have achieved without the guarantees and the
Put Option provided by the CNB. AGB did not pay any
remuneration and the CNB was in no way obliged vis-à-
vis the parties to enter into the Indemnity Agreement
and the Put Option Deed. Rather,
in the light of the
banking crisis in the Czech Republic, the purpose of
the CNB in providing the measures was to restructure
AGB’s banking business in order to avoid negative conse-
quences for the whole Czech economy.

(86)

The fact that certain guarantees and indemnities may be
standard in sale and purchase agreements does not alter
the advantageous nature of these measures. The Deed of
Warranties between the seller AGB and the purchaser
GECB/GECIH may be of
standard nature. The
Indemnity Agreement, which is a wide-ranging State
counter-guarantee, and the Put Option provided to ease
the sale of a private business are, however, not a standard
practice and involve financial benefits for the seller and
the business sold.

a

(87) With respect to the Put Option, the Czech Republic and
GECB argue that its particular nature would not allow an
assessment of
the State aid character now, since the
purchase price for which GECB may be sold to CNB
will only be determined in the future. This is however
merely a matter of quantification and does not detract
the Put Option represented an
from the fact
immediate
is not
for AGB.
necessary to exactly quantify this advantage which in
fact
the purchase price paid by
GECB and the price AGB would have achieved for the
sale of AGB1’s banking business without the Put Option
given by the CNB.

is the difference of

financial advantage

that

It

Advantage to the banking business of AGB1 and GECB and
GECIH

(88)

Concerning AGB’s banking business, AGB1,
sold in an asset deal

that was
the Commission

to GECB,

considers the guarantee arrangements and the Put Option
as beneficial since they allowed AGB1’s business to
continue. The fact that AGB1’s banking business was
sold in an open and unconditional tender procedure to
GECB did not remove the advantages since the purchase
price for AGB1 was negative in that the value of the aid
measures granted to AGB’s banking business exceeded
the amount realised by its sale.

(89)

The purchase price of CZK 304 million did not
compensate the CNB for the measure granted in the
the restructuring since the CNB is not
course of
AGB1’s owner and the purchase price was not paid to
the CNB but to the seller (AGB).

under

CNB’s

liabilities

Put Option since

(90) Also, the Counter Indemnity by which GECIH assumed
CNB’s obligations under the Depositors’ Guarantee did
the measures granted earlier by CNB to
not offset
In the Indemnity Agreement, GECB agreed to
AGB.
the Depositors’
assume
Guarantee. The Depositors’ Guarantee is a guarantee
that was issued by CNB upon the imposition of forced
administration on AGB on 17 September 1996 towards
the creditors and depositors of AGB in order to avoid a
run on the bank. The measure was notified by the Czech
Republic within the interim mechanism procedure and
was declared not being applicable after accession in the
Commission Decision of 14 July 2004. The Commission
considers that the assumption of CNB’s liabilities under
the Depositors Guarantee does not compensate the CNB
for the granting of the Warranties and Indemnities and
the
the
Depositors’ Guarantee revert to the CNB in the event
that GECIH exercises the Put Option. The Commission
therefore considers that GECIH’s commitment cannot be
considered as full assumption of CNB’s obligations under
the Depositors’ Guarantee. Moreover, by the time of the
sale of AGB1 in June 1998 CNB’s potential
financial
resulting from the Depositors’ Guarantee
exposure
(granted on 17 September 1996) was negligible since
the likelihood of a run on the bank was minimal since
the imposition of forced administration on AGB dated
back already almost two years. The Czech Republic itself
stated in the notification that the CNB never expected to
make any payments under the Depositors’ Guarantee. In
fact, up to the date GECB acquired the business of AGB1,
the Depositors’
no payments had been made under
Guarantee. As there was only a theoretical exposure of
the CNB, GECB cannot
they
compensated the CNB by way of taking over the obli-
gations under the Depositors’ Guarantee in exchange for
the Warranties and Indemnities and the Put Option.

the obligations under

reasonably argue that

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(91)

financial exposure under

The maximum amounts of the Warranties and Indem-
nities on which the Commission opened proceedings
alone sum up to CZK 126 000 million and thus by far
exceed any theoretical
the
Depositors’ Guarantee and also the purchase price of
CZK 304 million. The Court clarified in Germany v
Commission (1)
that an open transparent and uncondi-
tender procedure does not satisfy the private
tional
market
investor test and therefore entailed State aid
where a business is sold at a negative price and it
less to liquidate that business. The
would have cost
Commission therefore considers
in the present
that
sale by its owners of AGB1’s banking
case,
business for their own account did not remove the
economic advantages; those directly in issue here were
conferred to GECB on the sale of that business. GECB
and GECIH benefited from the Indemnity Agreement and
the Put Option Deed since they obtained rights under
they obtained these rights for the
those agreements;
purpose of allowing a restructuring of AGB1.

the

(95)

AGB1 that was sold to GECB. AGB1/GECB is active
throughout the Czech Republic and belongs to the GE-
group which is a global player. The Czech authorities
themselves state that banks from the EU were looking
closely at the Czech market for investment purposes at
the relevant time. If the banking business of AGB1 had
gone into liquidation, other European and non–European
banks would have been able to obtain the business GECB
retained. In view of all this the Commission considers
that the guarantee arrangements and the Put Option are
capable of distorting competition and have an effect on
the trade between the Member States (2).

In conclusion, all the elements of Article 87(1) EC being
met, the parts of the Warranties and Indemnities and the
accession
Put Option which are
constitute State aid within the meaning of the Treaty
to GECB, for the purpose of it taking over the banking
business of AGB1.

applicable

after

Result

(92) Accordingly, the Warranties and Indemnities and the Put
Option involve economic advantages for the seller (AGB)
and GECB and its parent company GECIH for
the
operation of the banking business of AGB1.

6. COMPATIBILITY OF THE STATE AID

6.1. Article 87(2)(b) and Article 87(3)(b) EC

(96) Article 87(2) and (3) EC sets out

the conditions
according to which aid is compatible or may be
considered compatible with the common market.

Selectivity

(93) GECB argues that the Warranties and Indemnities and the
Put Option were not selective within the meaning of
Article 87(1) EC since they were available to all bidders
for AGB1. This argument cannot be accepted;
the
measures in question were specifically limited to the
buyer of AGB1 and are thereby selective in their very
nature. Furthermore, the Indemnity Agreement and the
Put Option Deed were individually negotiated after GECB
had become the sole bidder for AGB1, the invitation to
tender making no mention of the availability of State
guarantees, far less that the same guarantees would be
available to any bidder. The measures are therefore
selective.

(97)

Contrary to what GECB argues,
it is not possible to
maintain that in the present case there existed excep-
tional occurrences or something ‘very close to a natural
disaster’ pursuant to Article 87(2)(b) EC. A possible loss
of confidence of the public in the banking system cannot
be regarded as a ‘natural disaster’ within the meaning of
that provision. Also, the notion of exceptional occur-
caused by
rences does not
commercial decisions of
economic operators. The
events which led to the granting of the aid cannot be
said to constitute unforeseeable and exceptional occur-
rences.

financial

losses

cover

Distortive effects on competition and trade between
Member States

(94)

the largest banks in the Czech Republic.

it was
Before AGB entered into forced administration,
one of
In
view of the fact that AGB is in the liquidation process
there is no longer a distortion of competition in respect
of the seller (AGB). However, there is a distortion of
the banking business of
competition in respect of

(1) Judgment of 28.1.2003, Case C-334/99 Germany v Commission

[2003] ECR I-1139, paragraph 142.

(98) Nor

can the

exempted on the basis of
aid be
Article 87(3)(b).
It was not part of a sectoral scheme
applied horizontally in the same way to all Czech
banks (3).

(2) On the effect on trade of State aid in the banking sector, see also the
judgment of the Court of Justice of 15.12.2006 in Case C-148/04
Unicredito Italiano SpA [2005] ECR I-11137 paragraphs 53-64.
(3) Compare the reasoning in the Commission Decision of 20 May
1998 concerning aid granted by France to the Crédit Lyonnais
group (OJ L 221, 8.8.1998, p. 28).

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6.2. Article 87(3)(c) EC and the Guidelines on
Rescue and Restructuring

the
raising
borrowing.

funds

it needs

from shareholders or

(99) As

the aid concerns

the primary objective of

the
restoration of the long-term viability of an undertaking
in difficulty, only the exemption of Article 87(3)(c) EC
Treaty provides for the authorisation of State aid that is
granted to promote the development of certain economic
sectors, where such aid does not adversely affect trading
conditions to an extent contrary to the common interest.

(100) For measures adopted before 9 October 1999, the 1994
Guidelines set out the conditions under which such aid is
considered compatible with the common market (1). The
agreements concerning the Warranties and Indemnities
and the Put Option were signed on 21 and 22 June
1998 (2). Although, as found above, those measures are
still applicable after accession, and the Czech Republic
may thereby yet grant aid whose nature and amount is
substantially undefined, this would be done pursuant to
measures adopted whilst the 1994 Guidelines were still
in force and it is therefore appropriate to consider them
in the light of the 1994 Guidelines (3).

(101)

In its Decision of 14 July 2004 the Commission
described its serious doubts that
the requirements of
the 1994 Guidelines were met. The Commission’s
serious doubts in particular with regard to the fulfilment
of the formal criteria of the Guidelines have not been
removed.

(102) The Commission has the power to review only those aid
measures
that are considered to be applicable after
accession. However, in order to assess the compatibility
of restructuring aid it is necessary to look at the full set
of restructuring measures. In the present case, there was a
set of interventions decided by the Czech authorities. All
these restructuring measures have to be taken into
account when assessing the compatibility of measures
still applicable after accession against
the criteria set
in the 1994 Guidelines, such as restoration of
out
viability, proportionality of
the aid and avoidance of
undue distortions of competition.

Eligibility of the firm

(103) The 1994 Guidelines consider a firm to be in difficulties
if it is unable to recover through its own resources or by

(1) In accordance with point 101(b) of the 1999 Guidelines.
(2) Also all other

that have been notified to the
Commission were adopted before 9.10.1999. The Amendment No
1 to the Indemnity Agreement only modified (and limited)
the
measures granted earlier.

interventions

(3) In any event, it should be noted that the 1999 Guidelines are based

on the same principles as the 1994 Guidelines.

(104)

this

In September 1996 AGB had losses of CZK 8 487
million and an equity balance of minus CZK 5 476
million. On the basis of
information AGB
(including the banking business which later became
AGB1) was not able to recover without State intervention
and was therefore in difficulties within the meaning of
point 2.1 of the 1994 Guidelines. However GECB and
in this respect
GECIH were not in financial difficulties;
the requirements of the 1994 Guidelines are thus not
fulfilled.

Rescue aid

facing a substantial deterioration in its

(105) The 1994 Guidelines describe rescue aid as measures
which temporarily maintain the position of a firm that
is
financial
position. The measures should generally not continue
for a period of more than six months. Since the
Warranties and Indemnities and the Put Option are not
temporary and exceed a period of six months, the aid
does not qualify as rescue aid under point 2.1 of the
1994 Guidelines.

Restructuring aid

Restoration of viability (point 3.2.2(i) of the 1994
Guidelines)

(106) According to the 1994 Guidelines restructuring aid must
be linked to a viable restructuring/recovery programme
submitted to the Commission.

(107) The Czech Republic

that

and GECB argue

the
Commission may not demand a complete and compre-
hensive restructuring plan since at the time the measures
were adopted it was not foreseeable that the EU State aid
rules would be applied. In addition, also in other cases,
notably in the former East Germany, this requirement
was not applied strictly.

(108) The restructuring plan submitted as part of the notifi-
In 1996, when the
cation is dated December 2003.
Czech authorities first started implementing interventions
with regard to AGB, a comprehensive concept for the
restructuring of AGB did not exist. The Commission
therefore concludes that this formal requirement of the
1994 Guidelines was not fulfilled.

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(109) At the same time it should be stressed that the aid on
which proceedings were opened relates to the sale of
AGB1 to GECB.
It should be recalled in this context
that the Commission traditionally regards the transfer
of an undertaking in difficulty under the control of a
private investor as a central element for solving the diffi-
culties of the past and enabling the positive economic
development of that undertaking (or its business). Indeed,
it can be assumed that a company is more likely to
become durably viable if it comes under the control of
a new, private owner with sufficient resources to make a
substantial contribution to its restructuring. Therefore,
although no restructuring plan in the strict sense was
available when the sale took place in June 1998 (and a
fortiori in 1996), it is clear that the forecasts made by GE
for
its own purpose and the restructuring measures
foreseen in this context were such as to ensure the
viability
run. Although
the
GECB/GECIH, as the ultimate owner of AGB1’s banking
business, was not itself an undertaking in difficulty, GECB
was not the owner of AGB1 when it encountered diffi-
culties and was not responsible for the deterioration of
AGB1; rather, GECB’s purchase of the business enabled it
to be restructured, but this would not have happened had
GECB’s/GECIH’s own restructuring efforts not also been
backed by the measures comprised in the Indemnity
Agreement and the Put Option.

of AGB

long

in

Aid in proportion to the restructuring costs and
benefits (point 3.2.2(iii) of the 1994 Guidelines)

(112) The amount and intensity of the aid must be limited to
the strict minimum needed to allow the restructuring of
the firm. Therefore, the aid beneficiaries are expected to
make a significant contribution to the restructuring from
their own resources or
commercial
financing.

from external

(113) The Czech Republic

submitted

that GECB

had
undertaken several investments and operational restruc-
turing steps. In particular, GECB paid CZK 206 million
mainly for redundancy costs. In addition, GECB directly
invested a total of CZK 2 040 million between 1998 and
2002. These investments related to the upgrading of
GECB’s information and banking systems and related
hardware costs, as well as the development of an ATM
and branch network. Also, GECB invested in the optimi-
sation of the branch network, staff training, management
support and transfer of know-how.

Avoiding undue distortions of
3.2.2(ii) of the 1994 Guidelines)

competition (point

(114) On the basis of the information provided by GECB, the
these costs relate to

Commission acknowledges that
AGB1’s restructuring.

competitors.

effects
consist

(110) Pursuant to the 1994 Guidelines it is a further condition
that measures are taken to offset, as far as possible,
These measures
adverse
closing of
normally
capacity. However,
that
state
where there is no structural excess of capacity on a
the
relevant market
Commission will normally not require a reduction of
capacity in return for the aid.

reduction or
the 1994 Guidelines

on
in the

aid recipient,

served by

the

(115)

is extremely difficult

to quantify the gross grant
It
equivalent of the aid measures contained in the Deed
of Warranties and the Indemnity Agreement, as well as
in the Put Option (especially taking into consideration
the triggering events). The probability of claims being
brought seems to be extremely low if not nil in some
cases (for instance environmental matters) and higher for
others (see for instance Table 1 Clause No 9).

the

allowed it

that AGB was not

(111) The Commission is satisfied that there was no structural
excess of capacity on the Czech banking market at the
aid was granted. The Commission also
time
left with a cash
acknowledges
surplus which would have
to expand
capacity except in so far as was essential for restoring
viability. The Commission notes that the Czech Republic
would have fully qualified as an assisted area at the time
the aid was granted which justifies a relaxation of the
criterion of the avoidance of undue distortions of compe-
tition. Finally the Commission observes that no compe-
titors made
the opening of
proceedings. The Commission therefore concludes that
no conditions and obligations were necessary in the
present case in order
to mitigate the distortions of
competition created by the aid.

comments

following

(116)

It should nevertheless be recalled that AGB1 was sold via
on open, unconditional and transparent tender procedure
which does not exclude in the present case the existence
of aid but which normally ensures that the aid granted
was the minimum necessary in order to allow the sale
and consequently the continuation of the business.
In
any event, GECIH was the only bidder to make an
offer
to
GECB/GECIH subject to the measures at issue appeared
to be the most sensible way of restructuring AGB1.

buying AGB1.

Therefore,

sale

for

a

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(117) The Commission also acknowledges that the high capital
adequacy ratios achieved by GECB are not caused by the
Warranties and Indemnities or the Put Option as these
measures do not have any effect on the bank’s own
capital.

context by the Czech Republic as compatible with the
common market. Nevertheless, it is a framework which,
in conjunction with all
legal and factual
elements of the case,
is relevant for the assessment of
the compatibility of the aid with the common market.

the other

Conclusion as regards the 1994 Guidelines

(118) The Commission concludes at this stage that although
the criteria of the 1994 Guidelines are not fulfilled, the
spirit of the 1994 Guidelines was substantially respected
in the present case: the sale to a private new owner
clearly aimed at restoring the long term viability of the
bank; there was no need to impose specific conditions
and obligations; the aid granted at the time of the sale
was indeed the minimum necessary in order to achieve
the restructuring in view that it took place within an
open, transparent and unconditional tender procedure.

(122)

It should be stressed in that regard that the present case
cannot be seen in isolation. In fact, when the aid was
granted, the Czech banking sector as a whole was facing
huge difficulties and most of the banks were close to
bankruptcy. The case at hand is indeed one of
the
sixteen cases, all notified under the interim mechanism
procedure (1), in which the Czech State had to intervene
in order to avoid a complete failure of the whole banking
sector in the Czech Republic. They cover all the major
Czech banks.

(119) Nevertheless,

in particular some formal criteria of the
1994 Guidelines, which are also reflected in the 1999
Guidelines, are not fulfilled. It is therefore appropriate to
the aid by reference to other provisions of
assess
Community law,
in order to conclude on its compati-
bility.

7. ARTICLE 87(3)(C) EC TREATY AND ARTICLE 46(2) OF
THE EUROPE AGREEMENT

(120) Article 46(2) of the Europe Agreement which was in
force when the aid was granted reads as follows:

‘In respect of financial services, described in Annex
XVIa, this Agreement does not prejudice the right of
the
the Parties to adopt measures necessary for
the Party’s monetary policy, or
conduct of
for
prudential grounds in order to ensure the protection
of investors, depositors, policy holders, or persons to
whom a fiduciary duty is owed, or to ensure the
integrity and stability of the financial system. These
shall not discriminate on grounds of
measures
nationality against companies and nationals of the
other Party in comparison to its own companies
and nationals.’

(121) This provision does not provide in itself a legal basis to
consider any measure in the form of State aid taken in its

(123)

In this context, the measures concerned clearly aimed at
ensuring the integrity and stability of the financial system
of the Czech Republic. They were also necessary for the
stability of the financial system of the Czech Republic
since, without them, the banks would have disappeared.
Indeed they were taken by the CNB in its role of super-
visory authority of the financial sector. They cover most
of the financial services mentioned in Annex XVIa of the
Europe Agreement. They did not result in discrimination
on the ground of nationality.

(1) CZ 15/2003 — Komerční banka, a.s., decision date: 16.12.2003, OJ
C 72, 23.3.2004, p. 9. Corrigendum published in OJ C 104,
30.4.2004, p. 70.
CZ 14/2003 — Česká spořitelna, a.s., decision date: 28.1.2004, OJ
C 195, 31.7.2004, p. 2.
CZ 47/2003 — eBanka, a.s., decision date: 3.3.2004, OJ C 115,
30.4.2004, p. 39.
CZ 48/2003 — J&T BANKA, a.s. (until 24 June 1998 Podnikatelská
banka, a.s.), decision date: 3.3.2004, OJ C 115, 30.4.2004, p. 39.
CZ 50/2003 — Ekoagrobanka, a.s. and Union banka, a.s., decision
date: 3.3.2004, OJ C 115, 30.4.2004, p. 40.
CZ 51/2003 — Pragobanka, a.s., decision date: 3.3.2004, OJ C 137,
4.6.2005, p. 4.
CZ 52/2003 — Universal banka, decision date: 3.3.2004, OJ C 115,
30.4.2004, p. 40.
CZ 53/2003 — Banka Haná, a.s., decision date: 3.3.2004, OJ C 242,
7.10.2006, p. 17.
CZ 54/2003 — Foresbank, a.s., decision date: 3.3.2004, OJ C 242,
7.10.2006, p. 17.
CZ 55/2003 — Moravia banka, a.s., decision date: 3.3.2004, OJ
C 86, 8.4.2005, p. 10.
CZ 56/2003 — COOP Banka, a.s., decision date: 3.3.2004, OJ
C 137, 4.6.2005, p. 4.
CZ 57/2003 — Bankovní dům Skala, a.s./Union Banka, a.s., decision
date: 3.3.2004, OJ C 100, 24.4.2004, p. 23.
CZ 58/2003 — Evrobanka, a.s., decision date: 3.3.2004, OJ C 115,
30.4.2004, p. 40.
CZ 80/2004 — První městská banka, a.s., decision date: 19.5.2004,
OJ C 137, 4.6.2005, p. 4.
CZ 46/2003 — Investiční a poštovní banka, a.s./Československá
(IPB/ČSOB), decision date: 14.7.2004, OJ
obchodní banka, a.s.
C 137, 4.6.2005, p. 4.

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8. CONCLUSION

HAS ADOPTED THIS DECISION:

(124)

It results from the above that the aid granted in the
course of
the wide
the sale of AGB1 forms part of
ranging measures systematically taken by the Czech
Republic in order to avoid the collapse of its banking
sector. In doing so, the Czech authorities, although not
complying with all the terms of the 1994 Guidelines,
fully respected the spirit and the underlying principles
the extreme
of
the
circumstances confronting the Czech Republic at
relevant
Europe
and Article 46(2) of
Agreement, the Commission has concluded that the aid
can
compatible with
Article 87(3)(c) EC as aid to facilitate the development
of certain economic activities.

these Guidelines. Taking account of

considered

therefore

time

the

be

Article 1

The State aid for GE Capital Bank a.s. and GE Capital Interna-
tional Holdings Corporation, USA as from 1 May 2004 in the
form of indemnification for the claims listed in Tables 1, 2, 3
and 4, which is based on the Indemnity Agreement concluded
between Česká národní banka and the GE Capital International
Holdings Corporation, USA on 22 June 1998, as amended by
the Amendment No 1 to Indemnity Agreement on 25 April
2004, and in the form of the Put Option based on the Put
Option Deed signed by Česká národní banka and the GE Capital
International Holdings Corporation, USA on 22 June 1998, is
compatible with the common market.

Article 2

This Decision is addressed to the Czech Republic.

Done at Brussels, 18 July 2007.

(125) On the basis of the foregoing, the Commission concludes
that the indemnification for claims listed in Tables 1 to 4
set out in recital (26) as well as the put option, are State
aid applicable after accession and compatible with the
common market,

For the Commission

Neelie KROES
Member of the Commission