By adopting the Act on the Establishment of the Economic Stabilization Fund of March 27, 2020, the German Parliament and the Federal Council established the Economic Stabilization Fund (“ESF”) as a special fund to stabilize the real economy in times of the COVID-19 pandemic. In addition, the legislature expanded and in part amended the Financial Market Stabilization Act and the Financial Market Stabilization Acceleration Act (now renamed the Economic Stabilization Acceleration Act) as a result of the financial crisis, including numerous amendments to corporate law rules for stabilization measures by the ESF.
Stabilization measures under the ESF are possible until the end of 2021 and should be ultima ratio according to the legislator’s intent.
The ESF has two objectives:
ESF instruments are
The Federal Ministry of Finance may issue implementing regulations for all three instruments, which govern the instruments in more detail, including consideration, caps, safeguarding of the funding purpose, and subsequent reversal of the funding. After the European Commission extended the Temporary Framework for State Aid Measures on May 8, 2020 to include detailed rules for recapitalization measures by the Member States and allowed subordinated debt, hybrid bonds, profit participation certificates, silent partnerships, convertible bonds, and share acquisitions as instruments, the implementing regulations of the ESF, which are still being coordinated at this time (May 11, 2020), are expected to be approved soon, so that the ESF can start its activities. It should also be noted that regulations approved by the EU Commission above the threshold value of EUR 250 million will also require individual notification, which is expected to take at least four weeks.
Eligible companies are those, which
Companies must also meet the following conditions:
Due to the risk of distortions of competition, the EU Commission also imposes (additional) strict requirements for the granting of recapitalization measures. Those conditions are:
Further conditions for recapitalization of companies by Member States are
The application for a grant under the ESF must be submitted to the Federal Ministry for Economic Affairs and Energy. The above-mentioned application requirements must be justified in detail and accompanied by supporting documents, where required, to enable a positive decision to be taken. In particular, it must be explained why a funding measure intended to be the ultima ratio is necessary. The company must demonstrate that other instruments that are normally available to the company are excluded. It is advisable to proactively contact the Federal Ministry for Economic Affairs and Energy. Applications may be accessed and submitted at www.bmwi.de/Redaktion/DE/Coronavirus/ESF/wirtschaftsstabilisierungsfonds.html once the EU Commission has agreed to the implementing regulations of the ESF.
The Federal Ministry of Finance decides on the application for ESF funding by mutual agreement with the Federal Ministry for Economic Affairs and Energy. Decision criteria are:
ESF funding is at the discretion of the federal government; there is no entitlement to funding. The federal government must have an important interest in stabilizing the company.
Decisions of the federal government may be provided with conditions and obligations, which may also include restraints in entrepreneurial freedom (e.g., conditions on the use of the financial resources, obligation to maintain jobs for a period to be determined, requirements for dividend payments by the company or for remuneration, etc.).
In addition to the establishment of the ESF, the Economic Stabilization Acceleration Act provides for numerous facilitations, including of the Stock Corporation Act or the Securities Acquisition and Takeover Act. These apply in part to companies in general and in part only in the context of a specific stabilization measure by the ESF. The Act does not only cover stock corporations, but is also applicable to other legal entities. The simplifications concern (not exhaustively):
The devil is in the details. With its requirement for a “clear independent continuation perspective,” for instance, the legislator has selected an undefined legal concept. It is unlear how this term relates to the insolvency law concept of a positive going concern prognosis. The “clear independent continuation perspective” is likely to be a minus to the positive going concern prognosis; at the very least, however, it will be necessary for a stabilization measure to be successful (when considered ex ante and taking into account the current developments of the COVID-19 pandemic). The application may therefore also have to be updated during coordination with the Federal Ministry for Economic Affairs and Energy in line with current developments. It might also be helpful to include various scenarios in the application regarding the duration and extent of the measures to contain the pandemic and to link the level of the requested measure to these scenarios.
Many fields of law come together when applying for ESF measures. State aid law, corporate and capital market law, financing and tax law, the interplay of which has become even more complex as a result of the adopted simplifications. For a measure to be implemented in conformity with the law, all these fields of law must be kept in view to rule out later legal implications (invalidity of measures taken by a company, repayment due to violation of State aid law, retroactive taxation, etc.). The federal government has notified the the implementing regulations with the EU Commission (as measures under the ESF), so that in principle (after approval by the EU Commission) individual notifications are no longer required. It cannot be ruled out, however, that individual measures with a large scope may nevertheless be notified individually to the EU Commission to obtain legal certainty. This circumstance must be taken into account when scheduling individual applications for funding from the ESF.