A few words about corporate affiliations (and their impact on obtaining/losing funding).

Some time ago, I wrote an article on the issue of examining the links between companies and the impact of such links on the application for aid from EU funds. In this post, I would like to return to this topic, and an opportunity to do so is the judgment of the Court of Justice of 27 February this year in the case of HaTeFo GmbH v Finanzamt Haldensleben, ref. C-110/13.
The issue of links between enterprises runs through various branches of law. In a number of laws we can find definitions of affiliated/dominant/subsidiary undertakings which, sometimes only very subtly, differ from each other. A separate definition of links between enterprises also exists under state aid rules and consequently applies to EU funds, much of which is granted in the form of permitted state aid. It is to this definition that I would like to devote a few words.

The concept of 'linked enterprises’ under State aid rules (i.e. those treated as a single enterprise for the calculation of State aid thresholds) first appeared in Commission Recommendation 96/280/EC of 3.4.1996 concerning the definition of small and medium-sized enterprises (text with EEA relevance), OJ L 107, 30.4.1996, p. 4-9. Subsequently, on 6.5.2003. Commission adopted Commission Recommendation 2003/361/EC concerning the definition of micro, small and medium-sized enterprises (text with EEA relevance), (OJ L 124, 20.5.2003, pp. 36-41). Another act containing the definition of linked enterprises was Commission Regulation No. 800/2008 declaring certain types of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General Block Exemption Regulation) OJ L 214/3. And now, also in connection with the new financial perspective, Commission Regulation (EU) No. 651/2014 of 17.6.2014 was adopted. declaring certain types of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, which, like the previous Regulation 800/2008, defines the notion of enterprises, including associated enterprises, in Annex I „Definition of SMEs”, with the new regulation containing practically no significant changes to the definition of SMEs compared to the previous Regulation 800/2008 and the Commission Recommendation of 2003 preceding it.

The definition of connected undertakings, as set out in Article 3 para. 3 of the Annex to Regulation 651/2014 includes undertakings which have one of the following relationships:

(a) an enterprise has a majority of the voting rights in another enterprise as a shareholder or member;
(b) an enterprise has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another enterprise;
(c) an enterprise has the right to exercise a dominant influence over another enterprise by virtue of an agreement entered into with that enterprise or provisions in its memorandum or articles of association;

(d) an enterprise that is a shareholder in or member of another enterprise controls alone, by virtue of an agreement with other shareholders or members of that enterprise, a majority of the shareholders’ or members’ voting rights in that enterprise.

The rationale set out above is not in principle questionable and is reasonably clear. What is problematic, however, is the content of paragraph 4 of Article 3(3) of Annex I, according to which associated enterprises are also enterprises which have one of the relationships described in paragraph 3 through a natural person or a group of natural persons acting jointly, if they conduct their activity or a part of their activity on the same relevant market or on related markets.
It is precisely the imprecise content of this provision which causes numerous problems for entrepreneurs applying for support from EU funds. After all, how can it be determined whether one remains an enterprise which is linked to another enterprise 'through’ a natural person or a group of such persons acting jointly? After all, it is not unusual in business practice for one member of the board of directors or a member of his family to also be a member of an organ or shareholder of another entity. The same is true for entities with a largely identical but dispersed shareholding structure. In each of these situations, a doubt arises as to whether it is possible to speak here of „affiliation” within the meaning of the above-mentioned regulations.
In order to realise why this issue is so important, it should be remembered that the vast majority of programmes and activities of the European funds are addressed to the group of micro, small and medium-sized entrepreneurs. Connected enterprises applying for support must add up their mutual data concerning turnover, balance sheet total and number of employees, which may result in them not falling into the SME category and, consequently, either being excluded from applying for aid, or worse, being exposed to the obligation to return the aid, if such connections are found at the stage of contract implementation or in a situation where, due to the entry of a new investor into the company, the SME thresholds are exceeded.

Unfortunately, the interpretation of the provision of Article 3(3) of Annex I in both EU and national jurisprudence does not unequivocally resolve these doubts, „opening up” further the catalogue of cases in which one may speak of links between enterprises.

An example of another 'Solomon’ ruling discussing the issue of affiliation is the judgment of the Court of Justice of 27 Feb. C 110-13 in which the Court took the view that the fourth subparagraph of Article 3(3) of the Annex to the SME Recommendation is to be interpreted as meaning that undertakings may be considered to be „associated” within the meaning of that article if it is apparent from an analysis of the legal and economic relationships entered into between them that, through a single natural person or a group of natural persons acting jointly, they constitute a single economic entity even if they do not formally form one of the relationships referred to in the first subparagraph of Article 3(3) of that Annex. Natural persons acting jointly within the meaning of the fourth sub-paragraph of Article 3(3) of that Annex shall be regarded as acting jointly when they communicate with a view to influencing the commercial decisions of the undertakings concerned, which precludes those undertakings from being regarded as economically independent of each other. The implementation of this condition depends on the circumstances of the case and need not necessarily be subordinated to the existence of contractual ties between these persons or to a finding of their intention to circumvent the definition of an SME within the meaning of the above recommendation.
As can be seen from the above view, despite the explicit reference in the wording of the provision of Article 3(3) ak. 4 of Annex I to Regulation 800/2008 to the 'relations referred to in the first subparagraph of Article 3(3)’, i.e. to the typical conditions for a link, the Court points out that also other relations between natural persons acting in different roles in two undertakings may prove the existence of a link between those undertakings, which, importantly, does not have to be of a contractual nature, nor does the purpose of those persons have to be to circumvent the definition of an SME.
The Court’s view cannot be regarded as a fully unambiguous directive that can be applied to every factual situation. The Court itself recognises this, stipulating that each situation requires a separate examination. It is therefore worth taking a closer look at the facts in which the above judgment was delivered. The case concerned the links between HaTeFo and Company X. The personal and other links between these companies were as follows.
Personal links: X (Board of Directors: A, C; Shareholding: A – 50%, D – 50% (A’s mother)); Hatefo: (Board of Directors: A, C; Shareholding: A – 24.8%, B – 62.8% (spouse of A), C – 12.4%).
Additionally: (i) X, which had a presence in the market for plastic sheets, films, pipes and profiles, entered into an agency agreement with HaTeFo pursuant to which HaTeFo received all orders from X. Pursuant to this agreement, X’s representative handled HaTeFo’s technical management. (ii) X provided HaTeFo with financial guarantees during its establishment phase. (iii) HaTeFo transferred its research and development activities and electronic data processing to X. (iv) HaTeFo used one of X’s bank accounts.
Thus, as is clear from the above, in addition to the personal links, in the present case there were a number of other indications of deep cooperation between the two entities, on essentially preferential terms, where the economic partner of one of the entrepreneurs remained the other related entrepreneur on an exclusive basis. There is also no doubt that the very personal links in the shareholding structure of the two companies by person A were of such a nature that they allowed, in practice, one family to control both companies.

When one compares the facts of this case with analogous cases of interest to the Court and the Commission in the past, one cannot fail to notice a significant overlap between them. For example, in the Pollmeier case, the facts of the case were that Pollmeier Malchov Gmbh (applying for aid for the construction of a sawmill in Malchov,) in which Ralf Pollmeier was the indirect parent company (via Inland Woods Specialities) – three days after the application for financing was submitted, Ralf Pollmeier’s shareholding in IWS was reduced to 23% (below the 25% threshold – from a shareholding of 74.25%) by transferring the shares to Ralf Pollmeier’s sister and brother. With the inclusion of the IWS company data, Pollmeier Malchov Gmbh exceeded the thresholds stipulated for SME. Furthermore, the companies belonging to the Ralf Pollmeier group shared the same website. The European Commission, which investigated the case, also found that the companies in which Ralf Pollmeier held shares carried out identical or similar economic activities, which made it possible to assume that they were economically integrated. Similarly, in the Nordbrandenburger Umesterungs Werke case, the recovery decision was taken with respect to the beneficiary of the aid, which was Nordbrandenburger Umesterungs Werke GmbH & Co. KG. Daniela Sauter was the majority shareholder in this company, with members of her family (brothers, parents, sister-in-law) holding majority stakes in several other companies. The Commission considered that the cooperation between the companies controlled by the Sauter family, particularly in the fields of transport, management, personnel and clientele, showed that the activities of the individual companies were complementary and that they deliberately sought to act together. In doing so, the Commission pointed out that there were advertisements of another company on vehicles belonging to one of the group’s companies. In addition, one of the companies owns a helicopter which was used by all members of the family in the course of their business activities. The links, according to the Commission, were also evidenced by the fact that one of the companies would service and repair vehicles belonging to the other companies. Finally, the European Commission noted that on the Internet the group’s companies had a common website on which they present themselves as the Sauter group.

In the examples presented above, it is impossible not to agree with the opinion of the Court and the Commission that, the affiliation of companies by natural persons (family members), as well as acting in the same common market or a related market by executing all or a decisive part of the orders for the benefit of the other entrepreneur, prove the existence of an affiliation between these companies. Does this mean, however, that every time a member of our family is at the same time a shareholder/management board member in another of the companies, we should treat the other company as connected? In my view, however, no. In the cases cited above, the facts provide a number of arguments that personal links and other economic ties justify the suspicion that apparently independent enterprises should be treated as a single economic organism. However, when it is proven that the cooperation between such personally linked enterprises takes place under market conditions without any preference (e.g. by awarding contracts in tender procedures) and at the same time they are not the main customers/suppliers of our services, the likelihood of distortion of competition on the market by the improperly granted aid is minimised. Indeed, when assessing the existence of a link, one should not forget about the purpose of singling out a group of SME enterprises. The essence of the exemption of aid granted to SMEs from the notification obligation is the assumption that these enterprises have certain barriers to development (related, for example, to access to capital, market, know-how, technology), which large enterprises do not have. Summing up the discussed issue, it is worth referring to the judgment of the Supreme Administrative Court (NSA) II GSK 896/13, which approved the view of the WSA in Gorzów Wielkopolski according to which the existence of a relationship within the meaning of Article 3 para. 3 ak. 4 of Annex I is determined not only by the mere functional link between undertakings (through natural persons), but also by the conduct of activities on the same or related market. It was only the latter factor that finally determined (both undertakings operated on the same geographic market – one province and at the same time on a product market – overlapping PKD codes) that the undertakings were considered to be related. Therefore, if the two undertakings suspected of being associated do not operate in the same or a related market, a link between them through natural persons, even acting jointly, cannot be established, as there is no threat of market distortion if aid is granted in such a case.