After a decade of financial misery,
it appears that Valencia CF’s problems are finally over. The foreign takeover by
Singaporean billionaire Peter Lim will be concluded in the upcoming weeks, and
the construction on the new stadium will resume after five years on hold due to
a lack of money. On 3 June Bankia, the Spanish bank that “saved” Valencia CF in
2009 by providing a loan of €81 million, gave the green light for the takeover. However, appearances can be
deceiving. Indeed, Valencia CF has been the subject of numerous Spanish Court
decisions since March 2013, the latest dating from 22 May 2014. The cases concern a guarantee given by the
local authorities and whether this guarantee should be relied upon since
Valencia CF is incapable of repaying its debt. Meanwhile, the European
Commission announced that it will soon reach a final decision
regarding the formal investigations into alleged State aid measures granted to the
club. Strangely enough, the Spanish Courts are showing little interest in the
pending Commission Decision and Mr Lim seems to be ignoring it as well. True,
EU institutions have so far never sanctioned public authorities of Member
States for granting aid to football clubs, but the evidence in this case is so damning
that it will be difficult to overlook. Our aim in this blog-post is to
disentangle the legal complexity of a case fought both at the national and the
European level.
Saving
Valencia CF with public money
The aid measure has its origins in 2009, when
Valencia CF, aiming to reduce the clubs total debt of €596 million and continue the construction works on a new
stadium, decided to sell new shares for a total capital injection of €92
million. Unfortunately, club members only subscribed €18 million in shares. The
majority of the shares were acquired by La
Fundación del Valencia Club de Fútbol, (a foundation especially created by
the club for this purpose) becoming majority shareholder of the club (70%) for
the sum of €75 million. The money was loaned by BANCAJA, the largest financial
institution of the autonomous region of Valencia. The loan was later increased
to €81 million in November 2010. The Fundación and BANCAJA also agreed that the revenues for the old “Mestalla” stadium,
which was for sale, would go to the bank. Furthermore, on 26 August 2009, the Instituto
Valenciano de Finanzas (hereafter: IVF[1]) had issued a guarantee on the controversial loan.[2] In case of a default by the Fundación,
the IVF was to pay back to the bank the outstanding amount. In return, the IVF
would receive an annual premium of 0.5% and the Fundación is prevented to selling shares
without the previous consent by the IVF.[3]
In September 2012, Bankia (the new
name of the bank following a merger in 2010) was forced to restructure the deal
it had with the Fundación. Bankia was suffering heavily from the
financial crisis and, after being rescued by the Spanish Government, was forced to decrease its financial debt by increasing
its liquidity and reducing its real estate portfolio. Thus, Valencia CF was to
negotiate the refinancing of its debt, given that the Fundación was
unable to repay the loan to Bankia.
By February 2013 the total of
Valencia’s debts reached €387 million owed to different creditors, including
the €81 million it owed to Bankia. In light of the guarantee issued,
the Consell de la Generalitat de la Comunidad Autónoma de Valencia (the
local government of the autonomous region of Valencia, also known as the
Generalitat) was asked to transfer €4.8 million to Bankia to cover
interest payments. Even worse, the Generalitat might have to bear the
full debt of €81 million the Fundación owed to Bankia. As a result, the Generalitat
would hold 70% of the shares in Valencia CF, thereby making the football club
state-owned.[4]
Claiming that the guarantee breached both
Spanish and EU law and should therefore be declared void, two club shareholders
lodged a complaint against the local government of Valencia.[5] In
its judgment, dating from 8 March 2013, the Administrative
Court of Valencia annulled the guarantee, arguing inter alia that the
operation would not generate benefits for the IVF and that the restrictions
placed by the public authorities on the selling of shares by Valencia CF will
distort competition.[6] Finally, the duty to evaluate whether the
operation was subject to EU State aid rules had not been complied with.[7]
This last argument by the Administrative Court is
no surprise, in light of the blatant State aid. Indeed, both the press and Members of the European Parliament quickly jumped onto the allegations that State
aid in the form of loan guarantees was granted by Spanish public authorities. The
European Commission forced by this judgment, press reports and a flood of
information sent by Spanish citizens officially asked Spain to comment on these
reports on 8 April 2013.[8] After
analysing all the information the Commission decided to initiate the procedure laid down in Article
108(2) TFEU on alleged illegal State aid on 18 December 2013. Now that the
Commission has announced in its Management Plan 2014 that the final decision will be published in
2014, one can reasonably expect the case to draw to its close.
The strategy of the Spanish Courts: Let’s ignore State
aid rules and the Commission
The judgment by the
Administrative Court of Valencia was only the first in a whole string of
judgments by the Spanish Courts. The most important ones date from 15 November
2013, 19 December 2013, and 22 May 2014.
Bankia appealed the
judgment of 8 March 2013, claiming it should have been invited as a party at
the trial. At first, the Administrative Court of Valencia upheld the previous
decision annulling the guarantee, but Bankia’s second appeal, this time in
front of the Tribunal Superior de Justicia de la Comunidad Valenciana, sala
de lo Contencioso (the High Administrative Court of the autonomous region
of Valencia) was successful. On 15 November 2013, the High Court, found the
judgments by the Administrative Court to be void due to a procedural
deficiency. Indeed, as Bankia was not provided the opportunity to present its views
at the first trial, the tribunal violated Bankia’s right to be heard. More
precisely the High Court considered that the IVF had not informed Bankia
adequately when, as a public authority, it had the obligation to do so; Bankia’s
own financial troubles and instability were too important for it to be left out
of the procedure; and the fate of the football club would be at stake if the
guarantee is revoked.[9]
Hence, the guarantee provided by the local authorities on the loan was considered
legally valid and Valencia CF’s bankruptcy risk dismissed. That the guarantee probably
is in breach of EU State aid rules was irrelevant to the High Court.
In response to this latest judgment the same
shareholders demanded an injunction that consisted in suspending the
execution of the guarantee since it could constitute illegal State aid. Once again the demanding parties won the day
and the execution of the guarantee was suspended in a decision dating from 19
December 2013. The timing by the Administrative Court to suspend the execution
could not have been better. Indeed, the decision occurred only 24 hours after
the Commission announced a formal investigation into the Valencia F.C case,
thus, the alleged state aid could have been used as a fitting legal justification
to suspend the guarantee. However, strangely enough, the Administrative Court
did not refer to the State aid constellation. In the fourth paragraph of its
judgment, the Court did recognize that procedural rules were breached including
the European procedural rules on State aid[10],
but the reasoning used to freeze the guarantee was based on national law.
Peter Lim appears on stage: the end of all the trouble?
By January of this
year, the IVF received a formal offer from Mr Lim to invest €210 million in the
club. Mr Lim would, thus, take over IVF’s debt with Bankia. The Valencian
government must have hoped for the end of their troubles. Indeed, it appeared
that it was only the Commission decision it had to worry about.
But, Bankia, on the
other hand, still believed it had a right to compensation by the Valencian
government for refusing to execute the guarantee and launched a new civil
procedure. In a ruling dating from 22 May 2014, the high Civil Court in
Valencia sided with the bank and upheld the validity of the guarantee (yet
again). Furthermore, the judge ordered the local government to pay €4.2 million
as a compensation for loss of opportunities.[11]
To make the legal uncertainty certain, the Valencian government quickly reaffirmed
its refusal to pay any compensation to Bankia since it considered the execution
of the guarantee as suspended by the Administrative Court.[12]
The ball in the Commission’s Court
From a substantive perspective,
the Valencia State aid case seems quite straightforward. Valencia CF is a
professional football club engaged in economic activities and should therefore be considered an undertaking under EU State aid
rules. The guarantee provided by the local government constitutes an economic
advantage for the football club over its competitors, as it is technically
shield from the possibility of going bankrupt. The measure is selective,
distorts competition towards clubs not enjoying a similar guarantee and is
funded by State (more precisely the regional governments) resources. In other
words, the criteria of article 107(1) TFEU can be considered as fulfilled. Finally,
the measure does not appear to fall under any of the exemptions of articles
107(2) and 107(3) nor under any provisions of the General Block Exemption
Regulation.
It remains to be seen, however, whether the
Commission will take an unprecedented action and sanction the local authorities
of a Member State for supporting financially a professional football club. The
Valencia case certainly provides an outstanding opportunity to do so. First of
all, the facts of the case cast little doubt as to whether or not the measure
breached EU State aid law. Second, even though the Commission cannot decide the
matter in place of the Spanish Courts, any decision will create a guiding precedent
hopefully putting a final point to the prevailing legal uncertainty of a
long-lasting and protracted legal saga.
[1] The IVF is the Public Entity that performs the public credit policy of the
government of the autonomous region of Valencia
[2] Memoria de Actividades: Institut Valencià de Finances, Informe Anual 2009,
page 48
[3] Sentencia N° 103/2013, N° de Recurso 239/2010, 8 March 2013, §5
[4] Ibid
[5] J. M. Bortvalencia, “Creo que Bankia no puede recurrir esta sentencia”, Levante – EMV,
21 March 2013
[6] Supra Nº3, §7
[7] Ibid
[8] Commission Decision State aid SA.36387 – Spain: Alleged aid in
favour of three Valencia football clubs
[9] Las Provincias, El Valencia gana tranquilidad al decretar el TSJ que la Generalitat
vuelve a ser avalista, 16 November 213
[10] Auto N° 239/2010, 19 December 2013, §4
[11] Iusport, Bankia levanta el hacha de guerra y ejecuta parte del aval del Valencia,
27 May 2014
[12] Las Provincias, La Generalitat «no se plantea pagar nada» por el aval a la Fundación
del Valencia CF, 27 May 2014