Playing by the rules

In a key state aid case involving a loan made by a city council, the Court of Appeal recently considered the Market Economy Investor Principle. Angelica Hymers analyses its ruling.

On 13 May 2016 the Court of Appeal handed down its judgment in the long running saga involving a loan made by Coventry City Council to support one of its wholly owned companies, Arena Coventry Limited.

At first instance, the judge held that the council had acted in accordance with the Market Economy Investor Principle (MEIP). This is the principle established in European jurisprudence that where a public body acts as a commercial investor (or operator or vendor, as the case may be) would have done in the same circumstances when it enters into a transaction, the transaction cannot be regarded as State aid.

SISU, the owners of Coventry City Football Club, sought to appeal the judgment on the basis that the judge came to conclusions which were not supported by the evidence or that he was wrong in law to conclude that the loan did not amount to State aid.

The Court of Appeal agreed with the High Court’s assessment of the relevant legal principles (and the judgement is a very useful source of guidance on the European principles relating to the MEIP) and noted in particular that:

• in relation to the MEIP, the test is whether “a rational private investor…might have entered into the transaction in question on the same terms, having regard to the foreseeability of obtaining a return and leaving aside all social and policy considerations”;
• this is a question for the court to consider objectively, and to decide on the basis of the information available at the time and the developments which were foreseeable;
• all policy considerations must be ignored by the public body;
• the hypothetical private investor must have the same characteristics as the relevant public body;
• public bodies do not have to act speculatively or for short term profit – it is permissible to be “guided by a longer term view of profitability”;
• Of particular interest is the fact that the court recognised that “although the test is an objective one, the law recognises that there is a wide spectrum of reasonable reaction to commercial circumstances in the private market. Consequently, a public authority has a wide margin of judgment” and that “State aid will only be found where it is clear that the relevant transaction would not have been entered into, on such terms as the State in fact entered into it, by any rational private market operator in the circumstances”.

The court went on to say that the European position led them to believe that “it is not enough…to conduct an economic analysis which appears to indicate that the terms of the transaction in question are out of line with what ordinarily would be expected to be available in the market…it is only when [entering into the transaction] can be entirely ruled out as inconceivable that the only remaining plausible explanation for the provision of the [public] funds is that it must be regarded as State aid”.

The Court of Appeal affirmed the “impressive” judgment of the High Court, agreeing with the findings of the judge and his analysis of the relevant European law.

Whilst this is an extremely favourable view of the MEIP test from the perspective of public bodies, it is worth exercising a note of caution – it is often difficult for public bodies to assess whether a transaction would be on market terms and although the European Commission has confirmed that “a wide margin of judgment must come into entrepreneurial investment decisions” public bodies should not be fooled into thinking that this is necessarily easy to demonstrate.

Whether or not a transaction will be viewed by the courts as being on market terms is likely to require a great deal of analysis and consideration of the position of the provider of the support and the recipient. For example, the position of the council in these cases was heavily favoured by the fact that they were a significant shareholder in the company which gave them the ability to influence the commercial activities of the company. In addition the approach that Yorkshire Bank had taken to valuing ACL and its ability to pay off the loan, indicated to the judge that in fact a commercial party in the same circumstances as the council may have made the loan. The council didn’t appear to be aware of the relevance of the Bank’s approach at the time they made their decision, and had that approach not been taken, it may well be that the outcome could have been very different.

It is also worth noting that it has been suggested that SISU will appeal this judgment. There may still be time for the position to change if the Supreme Court, or even the ECJ are the ultimate decision makers in this matter.

Angelica Hymers is a solicitor in the government and infrastructure team at Browne Jacobson. She can be contacted on 0115 976 6092 or This email address is being protected from spambots. You need JavaScript enabled to view it..