1999/508/EC: Commission Decision of 14 October 1998 conditionally approving aid granted by France to Société Marseillaise de Crédit (notified under document number C(1998) 3210) (Only the French text is authentic) (Text with EEA relevance)
30. 7. 1999 EN Official Journal of the European Communities L 198/1 II (Acts whose publication is not obligatory) COMMISSION COMMISSION DECISION of 14 October 1998 conditionally approving aid granted by France to SociØtØ Marseillaise de CrØdit (notified under document number C(1998) 3210) (Only the French text is authentic) (Text with EEA relevance) (1999/508/EC) THE COMMISSION OF THE EUROPEAN COMMUNITIES, plan for the bank, the Commission concluded that no State aid was involved (letter of 13 October 1993, D/9462). Having regard to the Treaty establishing the European Community, and in particular subparagraph of Article 93(2) thereof, the first Having regard to the Agreement on the European Economic Area, and in particular point (a) of Article 62(1) thereof, Having given the parties concerned the opportunity to submit in accordance with the abovementioned their comments, Articles, Whereas: 1. INTRODUCTION In July 1993 the French authorities informed the Commission that between August 1993 and the beginning of 1994 SociØtØ Marseillaise de CrØdit (SMC), a bank in which the French State was the sole shareholder, was to receive a capital injection from the State amounting to some FRF 860 million, in two instalments. By letter of 3 October 1996 the Commission notified the French authorities that on 18 September it had decided to initiate proceedings under Article 93(2) of the Treaty in respect of other State measures in support of SMC (1). The Commission took the view that the following measures might contain State aid components caught by Article 92(1) of the Treaty: (i) capital increases totalling FRF 1 241 million in 1994 and of FRF 858 million in 1996. projected increase capital 1995; and (ii) a The Commission also said that it might re-examine the capital increases which had been notified in 1993, totalling FRF 860 million, if the information assembled in the course of the proceedings it was now initiating showed that the assessment in 1993 was based on incorrect which it had made there had been material changes in the information, or if circumstances which had led it to form a favourable opinion of the aid. By letter of 23 July 1998 the Commission informed the French authorities that on 14 July it had decided to extend the Article 93(2) proceedings to include a fresh injection of capital into SMC amounting to FRF 2 909 million, and a guarantee to cover possible claims of up to about FRF 400 million (2). After examining the case on the basis of the information provided by the French authorities, including the restructuring (1) OJ C 49, 19. 2. 1997, p. 10. (2) OJ C 249, 8. 8. 1998, p. 11. L 198/2 EN Official Journal of the European Communities 30. 7. 1999 2. DESCRIPTION OF THE MEASURES 2. 1. Background SMC has been a publicly-owned bank since its nationalisation in 1982. Its legal form is that of a public limited company governed by the Law of 24 July 1966 on commercial companies, the Nationalisation Law of 11 February 1982, and the Banking Law of 24 January 1984. It is also subject to the its Law of 26 July 1983 on public-sector democratisation: five board is made up of five representatives of the State, employee and five government-appointed figures selected for their expertise. As a deposit bank its object is to carry out banking, financial and commission-based operations of all kinds both inside and It operates mainly in the south of France, outside France. where its clientele is made up principally of small and medium-sized enterprises operating in the region, traders, and private individuals. Large companies established in the south and real estate firms are also important customers. elected by the representatives staff, The bank has 156 branches in the south and altogether six offices in Paris. It has a number of specialised subsidiaries in banking-related areas, such as property financing. It has no foreign subsidiaries. At the end of 1997 its balance-sheet total was about FRF 23 000 million. It had a total of 2 054 employees at that time. SMC was profitable up to 1990, though at a low and its profitability, from 1987 to 1990, decreasing level: expressed as the ratio between net profits and consolidated own funds, fell from 5 % to 1 %. In the 1990s SMC entered the property financing market, both on its own account and through its specialised subsidiaries. These activities, which were embarked on too rapidly just before the property market fell, and often with insufficient selectivity and risk assessment, resulted in heavy losses. In addition, operating costs, and in particular staff costs, have remained at too high a level, both In terms of the various in absolute terms and individually. productivity ratios (number of staff/net receipts from banking, number of staff costs/staff), SMC is well above the average for banks belonging to the Association Française des Banques (hereinafter: AFBí). and executives/total senior staff, staff As from 1991 SMC began to register losses, which have today reached a total of FRF 6 110 million (1991: FRF 11 million; 1992: FRF 451 million; 1993: FRF 317 million; 1994: FRF 1 257 million; 1995: FRF 952 million; 1996: FRF 22 million; 1997: FRF 3 100 million). The State as shareholder has thus had to recapitalise SMC on several occasions so as to enable it to comply with the European solvency requirements for banks. The loss in 1994, which was almost equal to total own funds, to provisions was due to the magnitude of allocations requested by the French banking supervisory authority, the Commission Bancaire, following an inquiry which it had carried out into SMC (3). In 1995 SMC recorded a consolidated loss of FRF 952 million. This was linked to FRF 330 million in provisions for real-estate subsidiaries, to which must be added FRF 400 million in provisions for bad or doubtful debts (including FRF 80 million in respect of real estate). According to the French authorities, such provisions were due to the continuing economic crisis in 1995, which was particularly serious in the south, and to SMC’s continuing failure to monitor commitments sufficiently. In addition, operating costs remained too high as compared with those of competitors. Despite the financial reorganisation carried out in 1994 and 1995, SMC has continued to record losses. Its results for 1996 are once again weighed down with a heavy burden of provisions. Substantial provisions had to be set aside for leasing doubtful debts, operations, Excluding and subsidiaries, total allocations to provisions and write-downs on doubtful claims on customers and in respect of leased property came to FRF 246 million; of this figure, claims on property developers accounted for FRF 48 million, and other loans and advances to customers for FRF 198 million. claims on customers, including losses property claims. on Despite the effort at retrenchment, reflected in the sell-off of selection of customers, and a non-strategic assets, better reduction in charges, SMC did not succeed in balancing its accounts in the first half of 1997, when it made a consolidated loss of FRF 1,8 million. New management was appointed in December 1997, with a brief to put forward proposals to ensure the bank’s future, and it proceeded to analyse this result exhaustively. Audits were independent consultants; the further provisions required would exceed the bank’s remaining own funds, and would leave it in a position incompatible with the prudential and regulatory constraints to which it was subject (4). it became clear carried out that by (3) Provisions for real-estate transactions amounted to a total value of FRF 555 million. (This includes FRF 320 million for the building in rue Auber in Paris alone. It should be pointed out that in 1990 a capital gain of FRF 570,5 million on real-estate promotion transactions involving the Paris branch enabled SMC to offset the current losses for the financial year with exceptional income of some FRF 400 million. However, at that time the speculative boom on the property market was at its peak. ) Losses on swaps and a capital loss on reclassification of a block of long-term securities amounted to FRF 294 million. To this amount must be added FRF 191 million by way of backdated provisions for long-standing bad debts and FRF 240 million by way of provisions specific to 1994 for loans to SMEs. (4) The total additional provisions recommended by the independent outside auditor amount to about FRF 2,2 billion, broken down as lending portfolio, FRF 757 million; bad debts, FRF follows: 368 million; subsidiaries, FRF 230; million social liabilities, FRF 416 million; real-estate assets or claims, FRF 227 million; other, FRF 245 million. 30. 7. 1999 EN Official Journal of the European Communities L 198/3 In those circumstances, SMC’s shareholder took the view that the only way to ensure that SMC had a future was to recapitalise it and to associate it with a partner capable of successfully completing its restructuring. The process of selling off SMC was set in motion on 22 April 1998, when a notice was published in the Journal officiel de la RØpublique française announcing that it would be sold by private treaty without any conditions being attached. 16 banks were contacted (5), four were allowed to inspect the documentation (6), and just one, Banque Chaix, made a firm offer. Banque Chaix is a subsidiary of CrØdit Commercial de France, a private French banking group which owns a nationwide network of retail branches and a number of regional banks; on 12 June 1998 Banque Chaix signed the contract for the purchase of the shares in SMC. On the same day SMC’s board approved the accounts for 1997, showing a consolidated loss of FRF 3 100 million, fresh capital of FRF 2 909 million was which meant needed in order to reconstitute the minimum own funds required by the prudential rules. Before transferring ownership, the State decided to inject FRF 2 909 million by way of final recapitalisation of the bank, and to give the buyer an additional guarantee of up to FRF 423 million. that Table 1 SMC: main financial indicators (million FRF) 1992 1993 1994 1995 1996 1997 1 240 1 344 ﬂ 104 ﬂ 451 1 353 1 334 18 1 023 1 262 ﬂ 239 ﬂ 317 ﬂ 1 257 977 1 204 ﬂ 228 ﬂ 952 1 442 1 170 272 ﬂ 22 1 211 1 158 53 ﬂ 3 100 27 587 26 100 26 812 25 634 23 860 23 149 1 106 1 300 (1) 2 147 (1) 1 755 (1) 835 797 Overall operating income Overheads and depreciation Gross operating profit or loss Net profit or loss Balance-sheet total Equity capital (1) Including capital injections in 1993, 1994 and 1995. Source: SMC annual reports 1992 to 1997 2. 2. Grounds for initiating and later extending the proceedings the Commission took the view that When it decided to initiate proceedings, on 18 September 1996, there might be elements of State aid within the meaning of Article 92(3) of the Treaty, in the capital increases in 1994 and 1995, totalling FRF 1 241 million (both operations being entered in the accounts for 1994), and the projected capital increase of FRF 858 million in 1996. The Commission pointed out injections, which between them amounted to FRF 2 099 million, had become necessary to SMC’s survival because the recovery plan drawn up in 1993 had failed. There was no restructuring plan these capital that available which would return the company to long-term viability within a reasonable time. It had not been shown that a controlled liquidation would have been more costly than recapitalisation, as the French authorities believed. Nor had it been shown that the aid was proportionate and confined to the minimum strictly necessary. its Lastly, although the Commission had approved the FRF 860 million in fresh capital notified in 1993, it had to check whether assessment had been based on incorrect information, or whether there had been any material changes in circumstances that might affect its previous assessment. In either case the FRF 860 million notified in 1993 might also be considered State aid. (5) ABN AMRO; Argentaria, Spain; Banco de Santander, Spain; Banque Chaix, Banque Nationale de Paris; BBV, Spain; BCH, Spain; Caisse d’ pargne Provence-Alpes-Corse; Carron & Cie (Korkmaz Yigit Holding, Turkey); Cie FinanciŁre Edmond de Rothschild; CrØdit Agricole; CrØdit Mutuel; Groupe Banques Populaires; La Caixa, Spain; San Paolo, Italy; and SociØtØ GØnØrale. (6) Banque Chaix, Banque Nationale de Paris, Caisse dá pargne Provence-Alpes-Corse, and SociØtØ GØnØrale. It was for the same reasons that the Commission decided on 14 July 1998 that the new measures to assist SMC, consisting of a capital injection of FRF 2 909 million and an additional guarantee of some FRF 400 million, might likewise contain elements of State aid. In the course of the proceedings the Commission also wished to check whether the terms of the involve aid to SMC, and privatisation procedure might L 198/4 EN Official Journal of the European Communities 30. 7. 1999 whether, in the light of the privatisation procedure followed, the selling price might involve aid to the buyer. They supplemented these observations in letters dated 7, 16 and 21 April, 26 August, and 10 December 1997, and 19 and 25 June 1998. In response to these letters the Commission extended the proceedings, and the French authorities then put forward further observations in letters dated 28 July, 12 August and 11 September 1998. 3. OBSERVATIONS SUBMITTED BY INTERESTED PARTIES In response to the notice announcing the decision to initiate proceedings which was published in the Official Journal of the European Communities, the Commission received the following observations. 4. 1. The capital injections the principle of SociØtØ GØnØrale, in a letter of 25 February 1997, comments specificially on the Commission’s view regarding the costs in its capacity as which the State would have to bear shareholder in the event that SMC were to be wound up. SociØtØ GØnØrale argues that the limited liability of a shareholder does not apply to the main shareholder in a bank, who has an added responsibility to safeguard the confidence of depositors and markets. SociØtØ GØnØrale cites the first paragraph of Article 52 of the French Banking Law of 24 January 1984, which requires the Governor of the Banque de France to ask the shareholders in an ailing bank to provide the support it needs. According to áin the event of difficulty a majority SociØtØ GØnØrale, shareholder clearly cannot evade the obligation to guarantee the outstanding liabilities of a bankí. is substantially by in a letter of 5 March 1997, supports SociØtØ The AFB, the principle of GØnØrale’s view, arguing in particular that limited liability the tempered very aforementioned first paragraph of Article 52 of the Banking Law. If it were accepted that the shareholder was liable only to the and shareholding, reorganisational measures taken in respect of credit institutions would be deprived of the essential part of their effectiveness; this could lead to failures and compulsory windings up, which would not be conducive to creditor confidence or to the sound operation of the economy (7). preventive extent the his of Following the extension of the proceedings decided on 14 July 1997 the Commission received no observations from interested third parties. In their letter of 3 December 1996 the French authorities stated that the recovery plan for SMC notified in July 1993 had been complied with in all essentials, in particular with respect to the reduction of staff costs. SMC’s poor results in 1994 could be attributed to a slower than anticipated increase in net receipts from banking, and an increase, rather than the hoped-for reduction, in provisions and in the cost of bad debts. In their letter of 26 August 1997 the French authorities stated that the injections of capital into SMC by the State apparently had not distorted or threatened to distort competition. SMC had not applied a pricing policy which distorted competition between banks: its rates on loans to customers were higher than those offered by its competitors, and its charges for services were at, or above, the average for banks in the same area. SMC had not strengthened its competitive position at the expense of other banks: since 1994 there had been a slow erosion of its market share and a stagnation in the number of its customers. In their letters of 10 December 1997 and 18 and 25 June 1998 the French authorities stated that despite the effort at retrenchment, reflected in the sell-off of non-strategic assets, better selection of customers, and a reduction in charges, SMC had not succeeded in balancing its accounts in the first half of 1997. Following in-depth analysis and exhaustive audits carried out by the new management and by independent the only consultants, solution capable of ensuring SMC’s future was to associate it with a partner with the know-how needed to complete its reorganisation. The authorities took the view that the decision to recapitalise SMC for time, by injecting FRF the last 2,9 billion and providing a guarantee of some FRF 400 million, would allow the bank to be sold to a private buyer prepared to restructure it. the French authorities concluded that 4. OBSERVATIONS SUBMITTED BY THE FRENCH AUTHORITIES the Commission observations The French authorities defending the measures at issue by letter of 3 December 1996. sent 4. 2. Costs of winding up (7) The Governor of the Banque de France also sent a letter, at the beginning of August 1997, which was outside the time properly allowed in these proceedings. In the course of the proceedings and by letter of 16 April 1997 the French authorities and the AFB supported SociØtØ GØnØrale’s position, arguing in particular that there were three 30. 7. 1999 EN Official Journal of the European Communities L 198/5 legislative provisions which substantially qualified the principle of the limited liability of a shareholder in a bank: the first paragraph of Article 52 of the Banking Law, already referred to, Article 180 of the Law of 25 January 1985 on company recovery and compulsory winding up, under which directors in law or in fact who have mismanaged a company may be required to make good all or part of its liabilities, and Article 1382 of the Civil Code, under which a person who by a wrongful act causes injury to another person is liable for that injury (8). which in the past was more likely to be confined to the domestic market of the particular Member State. the survival of a domestic credit Aid measures like the measures to assist SMC, designed to institution which permit operates on a regional basis and which is suffering from insufficient profitability and from an incapacity to meet competitive challenges, are consequently liable to distort competition in the Community, because they make it more difficult for foreign banks to enter the French regional banking markets. In their letter of 21 April 1997 the French authorities supplied a valuation of the costs of a voluntary winding up. They stated that if instead of injecting fresh capital the State had decided to wind SMC up on a voluntary basis at the beginning of 1995, the cost of the liquidation would have been around FRF 4,7 billion. If the measures do contain an aid component, therefore, it must be concluded that they are caught by Article 92(1) of the Treaty, because they constitute State aid which distorts competition in a manner trade between Member States. liable to affect 5. ASSESSMENT OF THE AID MEASURES 5. 2. Do the measures constitute aid? 5. 2. 1. The procedure for the sale of SMC 5. 1. Distortion of trade between Member States regard to frontiers, but The liberalisation of financial services and the development of the common market in such services are making trade between Member States more and more sensitive to distortion of competition. In principle, banks carry on their business, based mainly on the taking of deposits and the granting of they do loans, without encounter obstacles to expansion abroad (9). These obstacles are frequently due to the roots that domestic banks have in their own areas, which make entry to the market more capital banks. expensive movements will make it easier for banks to offer their services in other Member States, as CrØdit Lyonnais, Deutsche Bank and Westdeutsche Landesbank have done, for example; and any aid given to a local bank will obstruct this development. Liberalisation in fact foreign for of Competition between financial institutions in different Member the background of States is growing more intense against economic and monetary union. With the creation of the single currency, trade will be able to develop within the Community free of exchange risks and exchange costs, and this will render more acute the distortion of competition caused by State aid, (8) See footnote 7. (9) The entry of foreign banks into the French market is a relatively recent phenomenon; they reached 8 % of the whole in 1993, but fell back to 7,7 % in 1994. When it extended the present proceedings, on 14 July 1998, the Commission said it would have to check whether the terms of the privatisation procedure that had been followed might involve aid to SMC or to the buyer. In its Twenty-third report on competition policy, covering the year 1993, the Commission set out its position on privatisation, indicating when it might consider that a privatisation did not involve State aid and when the privatisation procedure to be followed could be presumed to include a State aid component, so that the measure would have to be notified (10). According to these principles there is no State aid, and no notification is necessary, if the following conditions are met: - an unconditional competitive tender is held, - the tender is open to all comers and transparent, - the company is sold to the highest bidder, and - bidders are given enough time and information to carry out a proper valuation of the assets as the basis for their bid. (10) Point 403, p. 255. The Director-General already informed the French authorities of position, by letter of 14 July 1993. for Competition had the Commission’s L 198/6 EN Official Journal of the European Communities 30. 7. 1999 On the other hand, a transfer may entail elements of State aid in the following cases: - sale after negotiation with a single prospective purchaser, or a number of selected bidders, in which case there may be aid to the buyer if the price is not a market price and is underestimated, - sale preceded by the writing-off of debt by the State, another public enterprise or any public body, in which case there is aid to the enterprise receiving the injection of capital, - sale preceded by the conversion of debt into equity or by capital increases, in which case aid is likewise given to the enterprise receiving the injection of capital, and - sale on conditions that are not customary in comparable in a market investors transactions between private economy. guarantee it required against any injury arising out of a liability whose origin had not been revealed or a tax liability which was identified but uncertain. The independent auditor had evaluated the guarantee for the tax risk at FRF 123 million, and this shown to those who inspected the documentation. figure was Banque Chaix, the only prospective buyer to make a firm offer, asked for a guarantee against unrevealed liabilities and inaccurate statements amounting to FRF 300 million. On 12 June 1998 Banque Chaix signed the contract to take over SMC, subject to the condition that the Commission approve the aid given to SMC by the State. available from those banks; The Commission has examined the letters that the Treasury’s consultant bank sent to the banks contacted with a view to the privatisation of SMC; the the replies valuation report on SMC drawn up by the consultant bank, which was the sale given to those documentation; prospective buyers; and the contract for the transfer of the shares in SMC signed by the buyer. On the basis of the information in its possession the Commission is satisfied that the procedure followed ensured the necessary impartiality and transparency for the sale. to those the draft contract of allowed to inspect In SMC’s case, it appears at first sight that the sale might involve aid both to the buyer and to SMC, because the company is being sold by private treaty and because the sale was preceded by an increase in capital; but a more thorough examination of it did provide the necessary transparency and impartiality. the procedure followed shows that In addition, the State has imposed no obligations on the buyer which might entail additional costs justifying a reduction in the price of privatisation, other than those linked to the implementation of the recovery plan. The French Minister in charge, Mr Strauss-Kahn, issued a press release announcing the sale on 21 April 1998, and on 22 April a notice appeared in the Journal officiel de la RØpublique française stating that SMC would be sold by private treaty without any special conditions attached; the bank acting as consultant to the Treasury, Lazard FrŁres et Compagnie, then contacted 16 banks, both French and foreign, namely ABN AMRO; Argentaria, Spain; Banco de Santander, Spain; Banque Chaix; Banque Nationale de Paris; BBV, Spain; BCH, Spain; Caisse d’ pargne Provence-Alpes-Corse; Carron & Cie (Korkmaz Yigit Holding, Turkey); Cie FinanciŁre Edmond de Rothschild; CrØdit Agricole; CrØdit Mutuel; Groupe Banques Populaires; La Caixa, Spain; San Paolo, Italy; and SG. Four of these asked to inspect the documentation: Banque Chaix, Banque Nationale de Paris, Caisse d’ pargne Provence-Alpes-Corse, and SG. Only Banque Chaix made a firm offer to buy SMC, on 3 June 1998. Of the banks contacted all those that manifested an interest in acquiring SMC were informed that before the handover, and after allowance for the consolidated net profit or loss for 1997, SMC would be recapitalised so as to comply with the European prudential and solvency ratios. The banks permitted to inspect the documentation were given a draft contract for the the recapitalisation and asked the prospective buyer to state what SMC, which showed the sale of figure for The Commission is accordingly satisfied that element of aid either privatisation procedure followed. to SMC or to the buyer there is no in the 5. 2. 2. The capital injections and the guarantee the capital In its decisions to initiate these proceedings and then to extend them the Commission indicated that injections might include a State aid component caught by Article 92(1) of the Treaty. SMC is a publicly-owned bank set up by the State and controlled by the authorities, so that any injection of in funds into it by the authorities constitutes State aid if ordinary market conditions a private investor would not have done the same (11). there is aid the Commission has to determine whether it is compatible with the Treaty. If (11) In order to determine whether injections of public money into an enterprise constitute State aid, the principle of the private investor in a market economy: see the Commission communication to the Member States (OJ C 307, 13. 11. 1993, p. 3). the Commission applies 30. 7. 1999 EN Official Journal of the European Communities L 198/7 the capital the capital The recapitalisation measures which may contain elements of totalling FRF State aid are: 860 million; in 1994 and 1995, amounting to a total FRF 1 241 million, entered in the accounts for 1994; the capital injections in 1996, amounting to FRF 858 million, entered in the accounts for 1995; and the increases in 1993, injections injection announced in 1998, capital to be entered in the accounts for 1997, amounting to FRF 2 909 million; this gives an unadjusted total of FRF 5 868 million. The State guarantee of FRF 423 million may likewise include a State aid component. Injections of capital by the State into SMC considered in these proceedings Table 2 Date Funds provided (million FRF) Observations 1993 First instalment Second instalment 1994 First instalment (1) Second instalment 1995 (1) 1996 (1) 1998 (1) 460 160 95 326 On 13 October 1993, the Commission concluded that the contributions of funds planned for 1993 to 1994, totalling FRF 860 million, were outside the scope of Article 92. The first instalment, FRF 95 million, and FRF 145 million of the second instalment, giving a total amount of FRF 240 million, are to be regarded as included in the contributions proposed in 1993 which were approved by the Commission on 13 October 1993. The amount on which the Commission did not take a decision is FRF 181 million. 1 060 Information supplied at the end of April 1995 858 Information supplied at the beginning of June 1996 2 909 Information supplied in June 1998 Total at current prices 5 868 (1) In respect of the previous financial year. the Commission concluded on the On 13 October 1993, injection basis of the information available that the capital proposed in 1993 for the period 1993 to 1994, totalling FRF 860 million, was outside the scope of Article 92 of the Treaty. the did not plan 1993 recovery In the course of the proceedings, the Commission has been shown observations made by the Commission Bancaire in a letter of 27 December 1994 to the chairman of SMC’s board of directors: the Commission gathers from these observations follow the that recommendations of the Commission Bancaire, which had drawn attention to weaknesses in the bank’s system of risk assessment. The Commission Bancaire emphasises that the development of new activities such as market operations and property financing and of specialised subsidiaries has not always been accompanied by the introduction of measurement and monitoring machinery, with the result that management and directors have sometimes not been aware or have had the risks being taken. The only an incomplete picture of Commission Bancaire indicates that some of these weaknesses had already been pointed out in an earlier report in 1992, and nevertheless still existed in 1994. The Commission Bancaire takes the view that in 1993 and 1994 no progress was made with supervision of assistance to property developers or of market operations, or with headquarters control over network of branches and subsidiaries. the from factors Thus, SMC’s negative results derive in part to the bank which were foreseeable but which internal apparently were not taken into account when the 1993 restructuring plan was drawn up. These factors were not brought to the Commission’s attention when it assessed the first capital for 1993, which amounted to FRF 860 million. injection, that therefore, The Commission now takes the view, the injection of capital by the State in respect of the year 1993 does constitute aid caught by Article 92: the State, as the shareholder, ought the capital injection would not produce a normal return; and indeed rather than being able to anticipate an appropriate return on its investment, without having to provide further financing, the State actually had to inject additional capital which amounted to even more than what had been decided in 1993. to have been aware that injections in 1994, 1995 and 1997 The successive capital became the for SMC’s comprehensive restructuring measures applied since 1993 necessary survival because L 198/8 EN Official Journal of the European Communities 30. 7. 1999 failed to achieve some of their objectives and were not sufficient to restore the bank to viability. Under the plan, the bank ought to have made a loss of about FRF 190 million in 1993 and become profitable from 1994 onward. In fact the loss in 1993 turned out worse than forecast, at about FRF 317 million, and 1994 ended in a loss of FRF 1 257 million. SMC had to turn to its shareholder in order to comply with the minimum solvency ratio of 8 %. The same thing happened in 1995. Given the worsening in the bank’s financial situation in 1997, the State decided to launch the procedure for the sale of SMC, because it had concluded that the only possible way to ensure that the bank had any future was to associate it with a solid partner with the know-how needed to complete its restructuring. At the same time the State would recapitalise the company for the last time in order to cover losses made and risks incurred by the bank in the past. Without the injection of State capital the bank would have been obliged to seek bankruptcy proceedings. SMC is being sold to a private buyer, who undertakes to restructure it; the price to be paid is FRF 10 million, so that the State has not recovered its investment nor obtained a return in proportion to the risk of the operation. The State has not acted as a private investor in a market economy would have done, and the measures it has taken to assist SMC must be considered State aid. State Turning now to the scale of the aid, it must be borne in mind that all the increases in capital were intended to cover losses. The entirely non-refundable. the State aid It must be concluded that component in the capital injections is equal to the whole sum of FRF 5 868 million. financing was therefore almost The Commission has also to evaluate the aid component in the guarantee of FRF 423 million given by the State. The State here undertakes to indemnify the buyer for any injury caused by a liability whose origin was not revealed to it, or by a tax liability which is precisely identified but uncertain. Whether or this guarantee will be invoked is not clear, because not essentially it covers identified and risks which are not hypothetical events internal to SMC. The independent auditor evaluated the guarantee against tax risks at FRF 123 million, and this figure was given to those allowed to inspect the documentation. The draft contract given to those prospective buyers asked each of them to indicate the amount of required against unrevealed liabilities and inaccurate statements. The buyer who made a firm offer evaluated the guarantee for unrevealed liabilities and inaccurate statements at FRF 300 million. the guarantee it evaluated by past, it is reasonable for a buyer seeking to determine the amount that should be covered by a guarantee of this kind to be particularly prudent. The Commission considers, therefore, that this valuation of the guarantee is justified, and that the aid component is equal to the amount guaranteed. The tax risk FRF was at the uncertainty of 123 million; the precise determination of there should be a margin of variation of 10 % up or down in the value of the guarantee covering it. The Commission should accordingly set the maximum State aid authorised by way of guarantee at FRF 435,3 million. in view of the risk, independent consultant the letter of 21 April 1997, In their the French authorities observed that these capital injections were the solution least costly to the State as shareholder. that indeed it is convinced, The Commission accepts, the confidence of depositors and markets in the sound operation and stability of credit institutions must be maintained. Respect for market discipline, with the possibility that structurally unprofitable credit institutions may be penalised and in some cases pushed out of the market, is one of the foundations of that confidence. To keep alive institutions which have no of provokes prospect competition, raises a problem of moral hazard, and ultimately renders the rest of the banking system more fragile. It also seriously distorts the allocation of funds, and thus leads to lopsided development in the economy as a whole. distortion recovery serious of In a market economy, shareholders will as a rule support an economic activity if it has sufficient prospect of profitability in the long term. Conduct of that kind will usually be compatible with the private investor principle. In exceptional cases a shareholder may judge it advisable to provide support even though there is no sufficient prospect of the business becoming profitable, in order to safeguard his own reputation. In order to establish that the conduct of the State in its capacity as shareholder does not constitute State aid, therefore, it must first be shown that its reputation is at stake in the particular case in the same way as the reputation of a private shareholder might be. But even if that test is the State still cannot escape the application of satisfied, Article 92 of the Treaty without contravening Article 222. If that were possible, public enterprises, whose shareholders have unlimited powers of intervention, would all be outside the scope of Article 92. Where the shareholder is the State, therefore, any contribution on its part that goes beyond what a private shareholder would normally provide in similar circumstances can be considered State aid liable to cause distortion of competition. In view of SMC’s financial position, and the fact that its real provisioning requirements have been underestimated in the The Commission takes the view that, in the event of a liquidation, it is only exceptionally that a shareholder will be liable beyond the amount of his shareholding. He may have a 30. 7. 1999 EN Official Journal of the European Communities L 198/9 in the fraud, or liability in cases of specific case of mismanagement or wrongful conduct of the kind cited by the French authorities here, if he can be shown to have committed the financial the offence, and then only to the extent of consequences of his actions (12). But even if it were to be shown that the State as shareholder could be deemed to be a director or manager of the business, in law or in fact, or that it had committed acts of mismanagement or other wrongful acts causing injury to others, and that the financial injury for which it was liable was equal to the amount of the aid, such rules could not allow the State to escape the application of Article 92 without breaching the principle of law according to which one is not entitled to base a claim on one’s own wrongdoing (nemo auditur propriam turpitudinem allegans). The Commission takes the general principle of the limited liability of a shareholder in a limited company applies here as elsewhere. the view, therefore, that finds itself in difficulty, but it would point out The French authorities have cited the first paragraph of Article 52 of the French Banking Law; the Commission does not contest the validity of this provision in the light of the that European Banking Directives. But under this rule shareholders are to be asked to support a credit institution that they are not required to do so. Neither the French authorities nor the other interested parties have referred to any obligation on the part of shareholders to provide support. In some French bank failures the shareholders have been asked to support the bank by the Governor of the Banque de France, and have refused; and in the recent Compagnie du BTP case the Paris Court of Appeal confirmed that Article 52 of the Banking Law was not be interpreted as binding on the shareholders (13). Where the main shareholders in banks have indeed provided support, they have done so either to safeguard their interests as owners of other businesses or to avoid graver legal consequences. This cannot be taken to mean that a shareholder in a bank is always and everywhere under a general obligation to meet the bank’s liabilities. Such an obligation would de facto run counter to the principle that the liability of the shareholders is to be borne by them in proportion to the capital they have contributed to the company. And if such an obligation existed it would constitute discrimination between privately- and publicly-owned banks, because a private investor does not have access to the same unlimited resources as the State. In practice, it would make it impossible for a private shareholder to have majority control of a privately-owned bank of any size, because of the colossal sums it might be called on to find, and would thus further discriminate between privately- and publicly-owned banks. the in its capacity as in particular constitutes State aid, a distinction has to be drawn between the State may have to bear in its capacity as costs that it may have to bear for other shareholder and costs that reasons, authority responsible for monetary and financial stability. The argument that the State as shareholder is liable for outstanding liabilities on liquidation, over and above its contribution to the capital, has already been rejected by the Commission and by the Court of Justice of the European Communities, on the grounds that to extend its liability in this way would blur the distinction between the roles of the State as shareholder and the State as guardian of public welfare (14). When the costs of the course chosen are to be compared to the costs of alternatives, then, the only costs that are relevant are those borne by the State in its capacity as shareholder, because the answer to the question whether there is State aid depends on how the State behaves as compared with how a private investor would behave. It will be obvious that other irrelevant costs, such as social costs or taxes, may not be included in the comparison either, because in ordinary circumstances the company or the shareholders would have to bear these costs out of their own resources, and in the event of liquidation the shareholders would not be liable for them beyond the value of the capital or guarantees they have subscribed (15). In SMC’s case, the Commission would point out first of all that the cost of the reorganisation to the State would have been lower if an in-depth analysis had been carried out and drastic restructuring measures taken earlier - certainly no later than the first report by the Commission Bancaire in 1992. A private investor might have been expected to intervene following the poor results at the beginning of the 1990s, rather than waiting until the company had made losses for seven consecutive years before taking the necessary restructuring measures. In taking this passive stance, the State was not acting as a prudent shareholder would. Thus, the French authorities’ argument that the cost of winding up would have been heavier than the cost of recapitalisation cannot be accepted. Secondly, the Commission rejects the argument seeking to extend the liability of the State as shareholder to include any outstanding liabilities on liquidation beyond its contributions to the capital of the company for the following reasons: The French authorities argue that in its capacity as shareholder the State ought to bear the company’s liabilities by reason of a responsiblity for a lack of supervision or for negligence on its own part the authority it has over institutions of this kind; the Commission would point out that when seeking to determine whether or not State action in the exercise of (12) See Articles 179 and 180 of the French Law of 25 January 1985 on company recovery and compulsory winding up, Journal officiel de la RØpublique française, 26. 1. 1985. (13) Judgment delivered on 13 January 1998. - the argument for extending liability has not made any distinction between the State’s obligations as shareholder and the obligations it considers itself bound by in other capacities, as guardian of the public welfare with a duty to preserve social stability, for example, or as the monetary authority, (14) See in particular the Commission Decisions in Bull (OJ L 386, 31. 12. 1994, p. 1), CrØdit Lyonnais (OJ L 308, 21. 12. 1995, p. 92), and Efim (OJ C 349, 29. 12. 1993, p. 2), and the judgment of the Court of Justice in Hytasa (Joined Cases C-278/92, C-279/92 and C-280/92 [1994] ECR I-4103). (15) Always provided these are guarantees subscribed on commercial terms and do not constitute State aid measures. L 198/10 EN Official Journal of the European Communities 30. 7. 1999 - the of has been liability extension presented In particular, the 1985 Act. as unconditional and unlimited, rather than in the restrictive framework of the French authorities have not shown that the State as shareholder was in law or in fact responsible for the management of SMC, and that by virtue of that position it was under an obligation to grant issue, by reason of a responsibility for fraud, or mismanagement, or wrongful acts causing injury to others. Nor have they shown that the financial consequences of any such responsibility were equal to the amount of the aid, the aid at - even if all these factors had been proven, which they have the State to escape the not, they could not permit application of Article 92 without contradicting the principle of law, already mentioned, that one may not base a claim on one’s own wrongdoing, - the authorities have not argued that the reputation of the State is at stake here in the way that a private shareholder’s reputation might be. But even if this argument had been invoked, the State to escape the application of Article 92 without infringing Article 222. it could not permit Accordingly, a private investor would not have carried out such recapitalisation or given such a guarantee; and as the measures are liable to affect trade between Member States, they do contain elements of State aid within the meaning of Article 92(1). As the Commission made clear at the outset of the proceedings, the measures may be held to be compatible with the common market only under Article 92(3)(c), on the basis of the new restructuring plan put forward by the buyer, which must in particular show that the company can become viable. 5. 2. 3. The possibility that the selling price might involve aid to the buyer When it extended the proceedings on 14 July 1998, the Commission said it would have to check whether, in the light of the privatisation procedure pursued, the selling price might involve aid to the buyer. At recital 5. 2. 1, privatisation procedure transferred with the necessary impartiality and transparency. the Commission concluded ensured that SMC’s the that shares were The bank acting as consultant to the Treasury has estimated the value of the company; if the buyer, Banque Chaix, bought the shares at a price below their value, there would be a presumption that it had received State aid. The value of SMC as estimated by the Treasury’s consultant bank, after recapitalisation by the State and before deduction of the costs of any redundancy programme, varies between FRF 50 million and FRF 250 million. The consultant bank used several methods ordinarily applied in the valuation of stock businesses, based on revalued net exchange value, and current the own funds. The consultant bank’s valuation clearly specifies that it takes no account of restructuring costs deriving from a it has been estimated that a restructuring reduction in staff: plan costing between FRF [ ] (*) million and FRF [ ] (*) million is needed, which would have to be paid for by the buyer. transaction value of current assets, On the basis of this valuation, and once the restructuring costs deriving from a reduction in staff are taken into account, the value of the bank is negative. procedure followed, which the privatisation Under is considered to be impartial and transparent, the only firm offer for the acquisition of SMC was that made by Banque Chaix, which offered FRF 10 million. The recovery plan, to be paid for by the buyer, will cost Banque Chaix a total of some FRF 950 million, equal to the accumulated losses forecast for the three years 1998, 1999 and 2000: in order to comply with the regulatory solvency ratios it will have to offset these losses by recapitalising the company. The total cost to be borne by the buyer includes the cost of implementing the redundancy programme, which has been estimated at around FRF [ ] (*) million. Even allowing for the possibility that the buyer might invoke the State guarantee of FRF 423 million for any unidentified risks, the price paid is a positive price, and exceeds the value estimated by the consultant. The Commission concludes that the selling price agreed by the parties is a market price and does not involve aid to the buyer. 5. 3. The compatibility of the aid granted In considering the compatibility of the aid the Commission in the will be following the general principles set out (*) Some parts of this text have been edited so as not to disclose those parts are contained in square information; confidential brackets and asterisked. 30. 7. 1999 EN Official Journal of the European Communities L 198/11 aid for rescuing Community Guidelines on State and restructuring firms in difficulty (16), which clarify the tests which must be satisfied if aid of this kind is to be considered compatible with the Treaty. The measures at issue here are not árescueí measures within the meaning of the Guidelines, because they are not temporary measures taken pending a restructuring operation, so that it remains to be considered whether they constitute restructuring aid, and if so whether they satisfy the tests for the compatibility of restructuring aid. The Commission believes that restructuring aid can áfacilitate the development of certain economic activitiesí and ádoes not adversely affect trading conditions to an extent contrary to the common interestí where the following conditions are met. 1. There must be full implementation of a restructuring plan which within a reasonable time restores the requisite minimum return on capital invested, and thus ensures the long-term viability of the business. 2. There must be a quid pro quo sufficient the distortive effect of the aid on competition, so that it can be concluded that the aid is not contrary to the common interest. to offset 3. The aid must be in proportion to the objectives pursued, and limited to the strict minimum necessary to enable restructuring to be undertaken, the effort of recovery is as far as possible borne by the firm itself. so that The Commission accordingly takes the view that in these proceedings all the measures in support of SMC that constitute State aid should be considered for their compatibility with the Treaty together, in the light of the most recent restructuring plan, which was drawn up by the buyer. 5. 3. 1. The restructuring and viability measures few years. The restructuring plan submitted is based primarily on a continuation of the rationalisation already undertaken in the last In the period 1994 to 1996 non-strategic holdings were sold off for FRF 221 million. Steps were also taken to reduce operating costs; these included staff reductions of about 1 000 (772 between 1990 and 1994, and 210 between 1994 and 1997), and out-sourcing of financial and administrative skills within the retail banking business. SMC’s commercial position declined by 20 % between 1995 and 1997. In the area it covers, its share of total funds employed fell by 20 %, from 2,55 % in December 1995 to 2,02 % in the second half of 1997. Banque Chaix proposes to make SMC into a profitable regional bank able to finance its own development; this will require further efforts in a number of areas: - the remaining non-core businesses will have to be abandoned, and wound up or sold off, 4. The restructuring plan must be implemented in full, and laid down by the Commission any other obligations decision must be discharged. - there will have to be a significant and lasting reduction in operating costs, 5. Arrangements must be made for monitoring compliance with the preceding condition. - organisation and working methods will have to be modernised and simplified. The information supplied by the French authorities at the time of the injections of capital into SMC in respect of 1993, 1994 and 1995 did not enable the Commission to make a proper assessment of the viability of the bank. The plan put forward by Banque Chaix covers the period 1997 to 2002; the main points are as follows. The new State measures to be taken in respect of 1997 are the attempts at thus partly the result of comprehensive restructuring undertaken since 1993 have failed. the fact that (16) OJ C 368, 23. 12. 1994, p. 12. (a) SMC is to concentrate entirely on its core business as a Its balance sheet will contract by FRF local bank. 2 910 million, equal to 12,6 % of its 1997 figure, as a result of the closure of its banking subsidiary Soficim (5 % of the 1997 balance sheet), the abandonment of assistance to property developers (2 % of the 1997 balance sheet), the ending of other property business (3 % of the 1997 L 198/12 EN Official Journal of the European Communities 30. 7. 1999 balance sheet), the ending of venture capital business (0,7 % of the 1997 balance sheet), the sale of GP Banque, and the abandonment of lending to local authorities. redundancy programme comes on top of the two earlier redundancy programmes, which cost a total of FRF 256 million and achieved a saving of about 10 % in staff costs. (b) A redundancy programme is to be implemented, paid for by Banque Chaix, costing some FRF [ ] (*). million, and saving 28 % of staff expenditure in 2002 by comparison in 2002 the staff will with 1997. in 1997. This number [ ] (*), as compared with[ ] (*) is planned that It (c) Overheads other than staff costs are to be reduced by 26 % in 2002 as compared with 1997, as a result of administrative rationalisation and simpler and slimmer structures. Table 3 Business plan for SMC submitted by the buyer 1997 1998 1999 2000 2001 2002 (million FRF) Net receipts from banking Staff costs Severance payments 1 211 ﬂ 691 ﬂ30 947 907 948 1 004 1 083 ﬂ 676 ﬂ 684 ﬂ 595 ﬂ 510 ﬂ 520 ﬂ30 0 Other overheads and depreciation ﬂ 437 ﬂ 390 ﬂ 347 Total charges ﬂ 1 158 ﬂ 1 096 ﬂ 1 031 Gross operating profit or loss 53 ﬂ 149 ﬂ 124 0 ﬂ 342 ﬂ 937 11 0 ﬂ 338 ﬂ 848 156 0 ﬂ 325 ﬂ 845 238 Operating ratio Provisions 95,6 % 115,7 % 113,7 % 98,8 % 84,5 % 78,0 % ﬂ 3 153 [ ] (*) [ ] (*) [ ] (*) [ ] (*) [ ] (*) Profit or loss after provisioning ﬂ 3 100 [ ] (*) [ ] (*) [ ] (*) [ ] (*) [ ] (*) Cost of restructuring plan (1) 0 [ ] (*) 0 0 0 0 Profit or loss ﬂ 3 100 [ ] (*) [ ] (*) [ ] (*) [ ] (*) [ ] (*) Accumulated profit or loss 1998, 1999, 2000 ﬂ 950 Own funds after recapitalisation 487 [ ] (*) [ ] (*) [ ] (*) [ ] (*) [ ] (*) (1) Cost of social restructuring, including all spending linked directly or indirectly to the redundancy programme. In the first phase of As a result of these measures the decline in the company’s business should stop in 2000. the restructuring plan (1998 to 2000), it is expected that operating results will worsen significantly once again; the correction of assets and the reduction of exposures will lead to a big drop in net receipts from banking; at the same time reorganisation and the slimming down of the bank will bring major extra costs. The total amount of losses over the period 1998 to 2000 will be about FRF 950 million. The bank is expected to be profitable once again in 2002, with a return on own funds of about 20 % and a return on the buyer’s investment (ROI) of about 11 %. This would be the result of an appreciable recovery in the operating ratio, brought about by the redundancy programme and the synergies achieved in cooperation with the buyer’s own group, and a return to a normal pattern with regard to the cost of risk. These new operating losses will necessitate one or more injections of capital by the buyer, totalling FRF 950 million. This recapitalisation will cover only the fresh operating losses recorded between 1998 and 2000, and will not increase the amount of SMC’s own funds after profit or loss, or its overall financial capacity. Banque Chaix’s intention is to hold SMC’s own funds to the regulatory minimum of 4 %. Given the changes the exposures concentration on core business and the reduction in capacity, the level of SMC’s áhardí own funds will remain below FRF 500 million throughout the period 1998 to 2001. associated with in weighted The Commission concludes that the first test laid down in the Guidelines, namely that the firm must be restored to viability within a reasonable time, is satisfied. 5. 3. 2 The quid pro quo In order to ensure that the aid does not have the effect of restoring to the market a firm which is excessively strong and 30. 7. 1999 EN Official Journal of the European Communities L 198/13 in a position revert to an unreasonably aggressive policy, the firm receiving the aid must finance a significant part of the costs of restructuring out of its own resources. Under the principle laid down in the Guidelines, the recipient firm must not merely sell off subsidiaries and lines of business which are a burden on its accounts, but must also dispose of quality assets and subsidiaries, thus securing the resources necessary to finance restructuring, minimising the demands made on the public purse, keeping the amount of new aid to a minimum, and forcing the firm to make a significant contribution to its own restructuring. Since 1992, SMC’s balance-sheet total has been falling from FRF 24 597 million in 1992 to FRF continuously, 23 149 million in 1997, a drop of 16 %. This decline is the result primarily of a reduction in loans and advances to customers, reflecting the fall in funds employed (a drop of 18,9 % between 1994 and 1997), and of a 40 % reduction in the gradual decline in the leasing business as a result of volume of business of SMC’s subsidiary PBS. (ii) Reduction of retail banking business Over the two years 1998 and 1999 SMC’s net receipts from banking are to fall by 25 % by comparison with 1997, which was itself 15 % down on 1996. Over the same period exposures on customer business and on securities portfolios will fall by the same proportion. This reduction in the retail banking business will result from deliberate action undertaken to regain control of credit policy and from the options for the targeting of customers set out in the buyer’s plan. (iii) Out-sourcing of specialised financial and administrative skills Within the retail banking business SMC intends to hive off specialised activities, especially: these But management. reductions are in part due simply to poor - safekeeping of securities, The further action taken by SMC, and the business plan proposed by the private buyer, make provision for additional offsetting measures of three kinds. - management on behalf of third parties: SMC will no longer itself produce the financial products it sells to customers, where billion there was outstanding on 31 December 1997, FRF 5,5 (i) The immediate and definitive abandonment of five lines of business - cash and market activities, - the closure of Soficim, one of the last French institutions specialised in real-estate loans direct to its own clientele (which is separate from the clientele of the network), - handling of cheques. - the sale of GP Banque, which was to have been the in the international vehicle of SMC’s development sphere, - an end to the property-leasing business centred on the subsidiary PBS, which is to be sold, - the abandonment of lending to local authorities, and sale of the portfolio, - an end to the venture capital business, which had been built up via several specialised subsidiaries. In view of the considerations regarding the viability of SMC and the quid pro quo required which are set out above, the Commission the condition laid down in the takes distortion of Guidelines competition is met. in particular at point 5. 3. 2(i), the view that that there be no undue 5. 3. 3. Other conditions There are other conditions that must be met under Guidelines. the This will involve a further reduction of FRF 2 910 million in SMC’s balance sheet, equal the 1997 balance sheet and 10 % of net receipts from banking in 1997. to 12,6 % of The principle that aid must be limited to the strict minimum means that SMC’s own funds must be sufficient to meet its regulatory obligations but must not be increased beyond what is strictly necessary. The Commission observes that the scale of the recapitalisation being carried out by the State is dictated by L 198/14 EN Official Journal of the European Communities 30. 7. 1999 its obligation as the shareholder to comply with the rules on minimum own funds, unless it decides instead to wind up the bank. The buyer is left free to inject what further capital it considers appropriate in view of the SMC’s activities and portfolio; so that it can be concluded that after State aid has been granted SMC’s level of capitalisation will not be such as to strengthen it beyond what is strictly necessary for its restructuring. In accordance with the Guidelines, the losses offset by the capital increases must not be carried over for tax purposes. HAS ADOPTED THIS DECISION: Article 1 The measures taken by France to support SMC, taking the form of capital increases of FRF 5 868 million and a State guarantee of FRF 423 million, constitute State aid within the meaning of Article 92(1) of the Treaty. They are hereby declared compatible with the common market and with the EEA Agreement the Treaty and Article 61(3)(c) of the Agreement, subject to the conditions in Article 2. The aid hereby authorised is limited to FRF 6,3033 billion. in accordance with Article 92(3)(c) of Lastly, it must be established that the restructuring plan has been properly implemented. The French authorities should submit six-monthly reports to the Commission from the date of the Commission decision and until the date of performance of the commitments in the restructuring plan. France 1. implement Commission, therein. Article 2 confirm that restructuring fully shall the the including the reductions in activity proposed company will to submitted the plan 6. CONCLUSIONS The Commission concludes that the capital increases in 1993, 1994, 1995 and 1997, which totalled FRF 5 868 million, and the guarantee of FRF 423 million contain elements of State aid within the meaning of Article 92(1) of the Treaty. Given the uncertainty of the precise value of the tax risk, the guarantee covering that risk can be considered subject to a margin of variation of 10 % on either side. The total estimate of the aid authorised is accordingly FRF 6,3033 billion. Consideration has been given to the measures in the light of Article 92(3)(c) of the Treaty to establish whether they can be considered compatible with the common market. The Commission is satisfied that the aid given to SMC meets the conditions laid down in the Community Guidelines on State aid for rescuing and restructuring firms in difficulty. The aid accordingly qualifies for exemption from the prohibition in Article 92(1) of the EEA Agreement, because it may be considered compatible with the common market under Article 92(3)(c) of the Treaty and Article 61(3)(c) of the EEA Agreement, the Treaty and Article 61(1) of France shall submit to the Commission detailed six-monthly reports containing all the information the Commission needs to be able to verify that the restructuring plan is proceeding properly. France shall ensure that SMC cannot carry forward for 2. tax purposes the losses offset by the capital increases. Article 3 Within two months of notification of this Decision France shall inform the Commission of the measures taken to comply with it. Article 4 This Decision is addressed to the French Republic. Done at Brussels, 14 October 1998. For the Commission Karel VAN MIERT Member of the Commission