Commission Decision

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

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.

(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(7).

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

The Put Price

(31)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:

the adjusted unwind amount;

the net asset value of GECB as of the date at which the put price is determined;

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.

(32)The Czech Republic informed the Commission that it was CNB’s and GECB’s understanding that for the determination 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.

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

4.1.Comments from the Czech Republic

(33)The Czech Republic considers that the measures under assessment are not applicable after accession. The 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. In particular, 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 a measure not being applicable 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.

(34)With respect to the Put Option, the Czech Republic believes that the particular nature of the Put Option means that it is not susceptible to assessment under 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.

(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 the measures it did to facilitate its sale. Also, the measures in question represent 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.

(36)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(8) (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.

(38)With respect to the 1994 Guidelines, the Czech Republic points out that there was a general concept for the 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 prohibition 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)The Czech Republic also considers that Article 46(2) of the Europe Agreement (EA) applies in the present 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.

(40)Should the Commission nonetheless come to the conclusion that the measures are applicable after the 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.

(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 obligations 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:

Table 1, No 1 (Indemnification for any litigation adversely affecting the banking business);

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

Table 1, No 3 (Indemnification in respect of employment litigation);

(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.

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 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 they list all potential grounds for claims. The wording ‘not exhaustive’ only means that they do not mirror the text of the underlying agreements. In addition, the Put Option would not overcome the maximum amounts specified in the Indemnity Agreement since it relates only to specific claims of the Indemnity Agreement and is itself capped.

(46)The Commission’s concept of ‘applicability after’ as applied in its decision of 14 July 2004 would mean that only pending or threatened litigation could be considered being not applicable after accession. However, even if this narrow interpretation is applied, GECB considers that four individual claims arising under Clause 4.1 of the Indemnity Agreement fully satisfy the Commission’s test. In addition, 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.

(47)Also, the Put Option would be ‘not applicable after accession’ since the triggering events were 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 specifically 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.

(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.

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

(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(9) (1999 Guidelines) mentioned this explicitly.

(52)GECB further states that the Commission could not require a full restructuring plan in the present case since it was not possible to foresee this requirement when the measures were granted. In addition, there would be no undue distortion of competition in view of the fact that the 1999 Guidelines explicitly mention that in assisted areas, like the Czech Republic, 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 problems. Finally, GECB states that GECB’s capital adequacy ratio would not in itself allow for 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.

5. ASSESSMENT

5.1.Applicability after accession

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

(54)Annex IV.3(1) of the Act of Accession defines as existing aid only three categories of measures:

those put into effect before 10 December 1994;

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

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

All the measures still applicable after the date of 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.

(56)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 was granted. On the other hand, the Commission’s power of review under the interim mechanism is inapplicable as regards aid measures that have already been finally and unconditionally granted for a given amount before accession.

(57)Guarantee arrangements with possible payments occurring after accession are considered to fall outside the definition of ‘applicability after’ to the extent that the following conditions are met(10):

(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;

(b)

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

(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 set out 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 formal investigation procedure to be applicable after accession. As the Commission found all these measures to be applicable after accession, the subsequent waiver concerning certain Warranties and Indemnities made by GECIH and GECB therefore cannot remove the effects of these Warranties and Indemnities as established by the Commission Decision of 14 July 2004 for so long as they subsisted after accession.

(59)However, the Commission also reiterates and confirms this finding on ‘applicability after’ for all 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:

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

(61)Contrary to what the Czech Republic and GECB argue, this is also the line taken in the cases concerning Komercni banka (11) and Ceska sporitelna (12). 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 (13) the litigation 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.

Specific remarks concerning certain individual measures

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

(63)The Czech Republic and GECB argue that the indemnifications for tax matters meet the Commission’s requirements for 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.

(64)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 sufficiently defined if the potential plaintiff and the underlying event are specifically described. In the case at hand an unlimited number of claims could be brought for indemnification so that these provisions 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.

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

(65)The claims as described in Table 1, No 9 concern indemnifications 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 individuals; 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.

(66)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 individual 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.

(67)The potential financial exposure of 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 avoid that the Put Option is exercised. As will be 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.

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

(70)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.

(71)In addition, the exposure of the Czech Republic is not capped. In the case of Ceska sporitelna the Commission considered the exposure of the Czech Republic concerning the compensation for social loans as sufficiently 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:

the adjusted unwind amount;

the net asset value of GECB as of the date at which the put price is determined;