As I have written before with respect to golden shares, within the context of the free movement of capital, Advocate General Colomer perhaps best summarized the state of golden share jurisprudence and its general principles:
a) The Court examines the various national rules on intervention, essentially, in the light of the principles relating to free movement of capital: failure to observe those principles may, as an ancillary matter, give rise to an infringement of the principle of freedom of establishment.
(b) In so far as such rules are capable of impeding the acquisition of shares in the companies concerned and of deterring investors from other Member States, they amount to restrictions on the free movement of capital.
(c) Article 295 EC has no practical effect in this sphere.
(d) The free movement of capital may lawfully be restricted only by measures which, without being discriminatory on grounds of nationality, are a response to overriding requirements relating to the general interest and are suitable and proportionate to the objective which they pursue. Such measures, which must be adopted ex post facto, must be based on objective criteria which are known in advance to those concerned, to whom a legal remedy must be available.
Joined Cases C-463/00, Comm’n v. Spain & Case C-98/01, Comm’n v. United Kingdom, 2003 E.C.R. I-4584, I-4593 (Opinion of Advocate General Ruiz-Jarabo Colomer). The focus is on the special character of Member States’ interventions in their own economies. The object is to reduce all possible transaction costs to the free movement of capital that might be based on the “nationality” of that capital. Investors may be deterred by rules that discriminate on the basis of nationality, as well as other rules that make investment less attractive, for example, rules privileging state investment. The form of that privileging is immaterial. All state intervention that is accompanied by regulation, the threat of regulation, or indirectly supported by special regulation, constitutes an impediment to free movement. Derogations in the public interest are narrowly construed. This was the case, for example, in Case C-503/99, Comm’n v. Belgium, 2002 E.C.R. I-4809, paras. 46-47, where it was noted that the “Court has also held that the requirements of public security, as a derogation from the fundamental principle of free movement of capital, must be interpreted strictly.” In a general sense, then, a sovereign regulates even when it appears to be participating in the market—if it participates in the market that is the subject of its regulation. It is the regulatory character of the action that is key, along with the power to implement it within its territory. In that context, the private law offers no cover.
With respect to the application of the discipline of the competition law rules to dstate investment activity in their domestic enterprises, the European Court of Justice has long held that the purchase by a Member State of equity interests in a company might be characterized as a “state aid” (Art. 87(1) EC) under the competition provisions of the EC Treaty. (e.g., Case 323/82, Intermills SA v. Commission ECR 3809). In Case T-198/01 Technische Glaswerke Ilmenau GmbH v. Commission  ECR II-2717 the Court explained that
“In order to determine whether the reduction of some of the applicant’s debts to the BvS constitutes State aid, it is appropriate, in the present case, to apply the test of a private creditor in a market economy, which was referred to in the contested decision and which, moreover, was not challenged by the applicant. . . . By granting the price reduction, the BvS did not act as a public investor acting in a manner comparable to that of a private investor pursuing a structural policy – whether general or sectoral – and guided by the longer-term prospects of profitability of the capital invested. That public body had in fact to be compared to a private creditor seeking to obtain payment of sums owed to it by a debtor in financial difficulties”Id., at ¶¶ 98-99.
The Commission has applied a private investor test to gauge the validity of state aid. In a case involving the acquisition by Belgium of shares of a domestic company, and thereafter its efforts to increase the capital of that company, the Court agreed with the Commission that those actions were subject to review and the constraints of Article 87 EC as state aids. “In order to determine whether such measures are in the nature of State aid, the relevant criteria is. . . whether the undertaking could have obtained the amounts in question on the capital market.” (Case C-142/87 Re Tubemeuse (Belgium v. Commission  ECR I-959). This approach is consistent with an application of private law standards to state participatory activity.
The framework is parity between state and private investors. In an early case, the Court explained:
“19 The Commission showed itself to be aware of the implications of the principle of equal treatment as between public and private undertakings in its communication to the Member States of 17 September 1984 on public authorities' holdings in company capital (published in the Bulletin of the European Communities, September 1984). In that statement it correctly observes that its action may neither penalize nor favour public authorities which provide companies with equity capital.Case C-303/88 Italy v. Commission  ECR I-1433 at ¶19, available at . From the principle of equal treatment, it fell to the Commission to determine whether the State’s investment programs corresponded to normal market conditions. If so, such investments “cannot be regarded as State aid. In the present case it must therefore be determined whether, in similar circumstances, a private industrial group might also have made up the operating losses of the four subsidiaries between 1983 and 1987.” Id., at ¶ 20.
The touchstone of the state aid cases appears to be some sort of idealized private investor, a metaphor serving a purpose similar to the Common Law’s reasonable person. The distinction is between action that can be characterized as private and that which is sovereign and regulatory, albeit indirectly. As such, all motives other than an interest in profitability are suspect. “[W]hen injections of capital by a public investor disregard any prospect of profitability, even in the long term, such provision of capital must be regarded as aid within the meaning of Article  of the Treaty, and its compatibility with the common market must be assessed on the basis solely of the criteria laid down in that provision.” (Italy v. Commission, supra, at ¶ 22.).
However, the “dividing line between general measures of economic policy and state aids may . . . be a fine one.” (Paul Craig and Gráinne de Búrca, EU Law: Text, Cases and Materials 1088 (Oxford: Oxford University Press, 4th ed., 2008)). Even if the state activity does not constitute state aid, investment activity of this sort would require pre-approval under the rules implementing the State aid limits, at least in companies within their jurisdiction, to comply with the notice requirements of the state aid provisions. This distinguishes state investment from private investment, at least with respect to timing. This distinction made sense in the context in which many of the state aid cases arose, which were similar to those of the golden share cases—involving state owned or controlled enterprises. Indeed, privatization of the sort that gave rise to the golden share cases may have implications under the state aid rules as well. For a discussion of the Commission’s position, see Andrew Evans, EC Law of State Aid 70-76 (Oxford: Clarendon Press, 1997).
The State aid jurisprudence might suggest congruence between standards of state interventions in economic activity when undertaken in a sovereign capacity under Art. 56 EC, and where undertaken in a private capacity under Article 87 EC. Still, this congruence might extend only to activities within the territory of a Member State. Both European Court of Justice (in the golden share cases) and Commission (in its elaboration of state aid through shareholding) were concerned with the effects of privatization and the creation of a European private market in place of the old controlled economies of the Member States. The Commission made its position clear in the 1980s. See Application of Articles 92 and 93 of the EEC Treaties to Public Authorities’’ Holdings, Bulletin EC 91984 (1984). The Commission noted, for example, four situations
“in which public authorities may have occasion to acquire a holding in the capital of companies: (a) the setting up of a company,(b) partial or total transfer of ownership from the private to the public sector, (c) in an existing public enterprise, injection of fresh capital or conversion of endowment funds into capital,(d) in an existing private sector company, participation in an increase in share capital.”
Id. At ¶ 2. All suggest the privatization or internal economic management context in which the golden share cases arose.
The application of these rules have become more complicated as the EU Member States move from privatization of state enterprises to engagement with globalized economies. In that context, states might seek to participate in global economic activities to some extent. The rise of sovereign wealth funds represents one aspect of this change. See Larry Catá Backer, Brazil Builds a Sovereign Wealth Fund and Norway Flexes Its Muscles: Private Participation in the Market or Regulation by Other Means, Law at the End of the Day, March 24, 2008. The willingness of states to invest in the enterprises of other states is another. See Larry Catá Backer, Missing the Point of the Ports Problem—Getting Foreign Governments Out of U.S. Security Related Business, Law at the End of the Day, March 26, 2006. The character of that activity remains highly contested. But the framework within which that will be decided is well elaborated—just tangentially applied.
Slowly, though, the Europeans are coming to grips with the reality of states acting in capacities substantially incomprehensible even thirty years ago. One great testing ground for the relationship between state-economic enterprises and law has been EADS, the parent of Airbus, the European aircraft manufacturer. EADS is governed by Dutch corporate law. (EADS, Business, Legal and Corporate Responsibility, General Description of the Company and Its Share Capital, 2007, at para. 3.1.3. A number of European states have a direct or indirect interest in EADS, including the French, Spanish and German states. (Id., General Description of the Company and Its Share Capital, 2007 at para. 3.3). The relationship between the company and its principal shareholders are based on a series of complex agreements that substantially shape the corporate governance of the entity and the way in which shareholder power is dispersed. (Id., at 3.3.2, pages 100-105).
“Airbus S.A.S. has been a wholly-owned subsidiary of EADS since the purchase of BAE Systems’ 20% stake in October 2006.” EADS, Annual Repòrt and Registraiton Document 2006, Airbus, Introduction and Overview, 2006. The European Commission has been quick to warn the public shareholders of EADS against seeking to alter shareholder agreements affecting governance as a potential violation of the free movement of capital principle. See Larry Catá Backer, The End of Golden Shares in the EU: The EU Commission Takes a Step in its Abolition, It Ought to Harmonize the Rules of Sovereign Investments Instead, Law at the End of the Day, March 9, 2008. Though this is a context that stretches the developing concepts of state ownership in the golden share cases, the European Commission’s position is consistent with a view that presumes that states can rarely act as market participants. This view is being extended even to cases where the object of investment is not domiciled in the country seeking to invest. I have suggested that this conception of the state in the market is neither inevitable nor necessarily the “right” one, even in the European context. (Larry Catá Backer, "The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law," Tulane Law Review, Vol. 82, 2008 Available at SSRN: ).
As recently reported (Mark Landler, Aircraft Subsidies Battle Revived Over Airbus Aid, International Herald Tribune, May 29, 2008), the other shoe has dropped as well—this time relating to the state aid provisions restraining state investment in private enterprises. In the wake of reversals at Airbus over the development and sale of its new aircraft, “European officials have reviewed the issue of subsidies, suggesting this week that their governments would chip in for the development of the Airbus A350, the rival to the Boeing 787.” Id. This is an interesting turn, especially in light of the ongoing battles centered on rival complaints by the Europeans ands Americans over the legitimacy of such subsidies under the WTO system. See Id. The Americans, apparently reading the European Court of Justice’s “state aid” cases better than the Europeans, have suggested, “’Airbus should fund its operations in the commercial market.’” (Id., quoting Ted Austell, Boeing’s vice president for international policy).
The combatants understand the WTO decision for what it is, merely a point of reference for a much larger battle, and with only limited (though cumulatively potentially great) effect. Commentators have argued that “whatever the WTO decides, governments will always find ways to funnel money to expensive, but politically popular civil aviation programs.” (Id.). Yet, there may well be a difference between loaning money to a company in which a state has an interest as a shareholder, and as the Americans have done with Boeing, provide “Pentagon research and development grants, tax incentives from states like Washington, and subsidies to suppliers of aircraft parts from the Japanese government.” (Id.). Private shareholders constantly loan corporations in which they have an interest money and other things. Why not in this case, especially where the corporation at issue is operated outside the states of investment. Perhaps, the loans might be capitalized, but prohibited?
Yet there is also something that makes these “loans” more like the American handouts than market transactions. It is exactly the absence of market transactions for the loans. The European Union itself has been quite clear of the sort of lending that would not constitute a state aid—loans that would be equivalent to those available in the private markets. It is not clear that easy loans to EADS would meet the requirements of Art. 87EC. And, indeed, why would it be impossible for EADS to seek public debt financing for its Airbus unit, and then permits the state shareholders to participate like other private investors? The answer might be easy, though troubling for the development of a private law of public investment. And it is the same reason that corporations seek loans form heavily invested shareholders—the terms will be that much better, and certainly better than market—that is, less costly to the corporation and the interests of shareholders in the enterprise. It is precisely because the government investors prefer to avoid the market that they are seeking to extend favorable private financing. And they should bump right into the state aid jurisprudence of the EU.
On the other hand, one is tempted to retort—so what? Private shareholders do this all the time. It is a perfectly rational reaction and designed to protect a financial investment, like a private investor would. This, ironically enough, mimics the presumption overturning rationale of the golden share cases. But in the state aid context, this is not enough. And again, the problem is not the act but the actor. In this case the argument might be buttressed because none of the government shareholder/stakeholders are in a position to affect the Dutch corporate regulatory context in which EADS operates. This argument is weakened, of course, because at the European level, all of those governments are free to try to change the regulatory framework for EADS. Yet it is not the same thing for a government to be able to regulate directly and to participate in a wider regulatory project where its direct power is limited (even in concert with other states).
Still, this may hardly be the way to make a case for application of private law. The law of under market and market questionable loans from shareholders, at least in the United States, has not had a stellar history. Such loans tend to be viewed with suspicion, as a corruption of the corporate governance framework, as a potential fraud on third parties and a potential interference with the property rights of stakeholders whose rights are superior to those of shareholders. The better case would touch on the application of the state aid rules where states purchase debentures in market transactions along with private shareholders. Even where states purchase the majority of the issue, it should be possible to make a stronger case that this is the sort of activity in which the public law of the EU ought not to apply.