The High Court has issued a judgment offering useful guidance on the application of the Market Economy Investor Principle (“MEIP”) in State aid cases, which will be of particular interest to local authorities and other public bodies looking to protect their investments by way of some form of financial or other assistance.
The case concerned a £14.4 million loan made by Coventry City Council (the “Council”) to its 50% subsidiary, Arena Coventry Limited (“ACL”), the long lessee and operator of the arena used by Coventry City Football Club (“CCFC”), at a time when CCFC had not paid rent to ACL in over nine months and ACL was facing insolvency.
The legal challenge to the loan was made by SISU, the owners of CCFC, principally on the basis that it amounted to unlawful State aid. The key issue for the court was whether the Council had acted in accordance with the MEIP (i.e. as a rational private market investor would have done) in granting the loan. Provided this was the case, the loan would not amount to State aid.
Consideration of the MEIP
In finding that the Council had acted in accordance with the MEIP, Mr Justice Hickinbottom made a number of noteworthy points of wider application:
- If the transaction in question is a loan by a public authority with a shareholding in the relevant undertaking, then the appropriate comparator for the purposes of the MEIP is not a new incoming private investor but a private investor with a similar shareholding. In this case, the fact that a private investor with no shareholding in ACL would not have made a loan of £14.4 million was irrelevant.
- Not all private investors have the same objectives and consequently a public authority has a wide margin of judgment when making investment decisions. State aid will only be found where it is clear that the relevant transaction would not have been entered into, on the relevant terms, by any rational private market operator in the circumstances of the case. Here, a rational private market operator in the position of the Council might well have considered that the refinancing of ACL on the terms in fact agreed was commercially preferable to allowing ACL to become insolvent.
- Whilst useful, contemporaneous evidence as to whether the MEIP applies must be considered in its broader context. In this case, statements made by the Council to ACL’s bank as to the value of ACL around the time of the loan did not carry great weight as the Council had every reason to play down the company’s true value to the bank.
- It may be too much to expect for independent advice to be obtained as to precisely what a hypothetical private investor in the position of the public body would do. In this case, the Judge was satisfied that Council had obtained advice as to the value of the arena from Pricewaterhouse Coopers some four months prior to granting the loan.
- When assessing whether the interest rate charged on a loan is in accordance with the MEIP, the European Commission’s Communication on the Revision of the Method for Setting the Reference and Discount Rates is “clearly worthy of note” and the Commission and the European Court appear to accord it considerable weight. Here, the rate was in the same range as that set out in the Communication.
- Finally, the fact that a local authority takes into account its political agenda when deciding whether to enter into a transaction will not preclude the application of the MEIP.