The term "privatization" refers to the sale of a state-owned business to private investors. In the 1980s and 1990s, there was a wave of privatizations in the European Union. Although views are divided as to whether these privatizations helped the economies of the respective countries, it is commonly accepted that they gave rise to a number of efficiency gains for consumers, such as lower prices, innovation and better sector regulation.

Recently, privatizations have come back into the spotlight following announcement of Greece's controversial privatization program, under which the nation is expecting to raise EUR 50 billion from the sale of state assets in order to fund its sovereign debt and to fuel domestic economic growth.

Privatizations are complex transactions involving an array of legal disciplines that need to be coordinated in a timely, orderly and efficient manner in order to achieve the desired end result. This article focuses on the most important privatization issues that are likely to arise under EU competition law and that both states and private investors should keep in mind.

Preliminary Remarks

Privatizations are driven by political decisions that are generally based on financial or policy considerations. For example, the state may wish to reduce spending by saving on maintenance and operational costs of the business, or to improve and modernize services by introducing new investors. In cases of state-owned monopolies, moreover, the state may decide to open and liberalize the relevant sector to competition in order to collect profits from the sale of the business.

Privatization of a state business can have a dramatic impact on the state's social and economic structures if not done appropriately. For example, in the United Kingdom, where privatizations were a crucial element of Prime Minister Margaret Thatcher's government, it was later accepted that privatization of the railway sector was badly done and was criticized by commentators as a disaster. In part, this was because the structure of the government's privatization efforts did not take into consideration the highly complex nature of the business, and the UK government was later accused of having the sole objective of privatizing the sector at all costs.

There are several elements that will shape the current privatization process. First, the objectives pursued by the state will determine the structure of the privatization. For example, the state may wish to sell the business but may want to retain ownership or some degree of post-privatization control. It may wish to put the business into the hands of one or more strategic investors, or to limit foreign ownership or control over it. The state may also want to keep the business as a single entity or to restructure or split it up.

Second, the nature of the business can also have an impact on the privatization strategy. For example, certain limitations on the state's agreement with the buyer may be imposed, depending upon elements such as the position of the business on the market (e.g., it may be a monopoly provider), whether the business holds special or exclusive rights, or whether it is considered an essential facility or a service of general economic interest.

The objectives and the nature of the business will determine the substantive assessment of the privatization under EU competition law and, consequently, the relevant process. Substantive and process issues under competition law will be considered under the EU's merger control regime, state aid frameworks and the overall rules for anti-competitive agreements.

The procedural complications of privatization under EU competition law consist mostly of timing issues and of the implications of any conditions agreed upon between the state and the buyer. Furthermore, if a transaction is implemented in breach of EU competition law, this may later bring heavy fines and may also render the relevant agreements unenforceable.

Merger Control Rules

Under EU merger regulation rules (EUMR), authorization is required prior to completion of the privatizing transaction. If a transaction does not meet the EUMR thresholds, it may have to be assessed by the competent authorities under the national laws of each country in which the parties have activities. Authorization will be granted only if a transaction "would not significantly impede effective competition" in the European Union, "in particular as a result of the creation or strengthening of a dominant position."

Privatizations are treated as transactions between private parties. They can take many forms and fall under the EUMR as long as there is a lasting change of control of the privatized business and certain turnover thresholds are satisfied.

The concept of control under the EUMR encompasses the "possibility of exercising decisive influence" over the business's activities, even without this possibility actually being realized. In the context of privatizations, decisive influence can be exercised by the prospective buyer over all or part of the privatized business on the basis of rights, contracts or other means and can be exercised by one (sole control) or more (joint control) entities. For joint control to exist after the transaction, there must be an agreement between the state and the buyer(s) on the strategic decisions of the privatized business, and the state must have a real possibility of contesting decisions taken by the buyer(s). If the state merely retains a minority shareholding with a view to exercise its prerogatives not as a shareholder but as a public authority in order to protect the public interest (i.e., "golden shares"), then the state will not be deemed to exercise joint control over the privatized business.

The change of control over a state business can be effected in one or more successive stages. It is often the case that the state will gradually transfer minority stakes to the buyer(s) prior to transferring all or part of its control over the privatized business. In such cases, it is important to determine the point at which the change of control occurs, since control can also be conferred by the acquisition of a minority shareholding, provided there are specific rights attached to it.

In terms of substantive analysis, it is often the case that privatized entities have the position of a legal monopoly or hold a dominant position on the market as a result of special or exclusive rights granted to them by the state. Under the EUMR, such cases call for special attention because of the possibly adverse effects they may have on the market. The substantive assessment in such instances will require that the privatization of such entities is accompanied by liberalization of the markets in order to avoid the replacement of a public monopoly with a private one. Competition concerns in such cases could also mean that the state should break up the business under privatization. Such remedies can be either considered voluntarily by the parties or imposed by the European Commission (Commission) in the form of structural remedies (e.g., divestments).

State Aid Rules

Privatizations often give rise to state aid concerns, mostly because of the inevitable involvement of the state in the process. EU competition law prohibits "any aid granted by the Member States or through State resources, in any form whatsoever, which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods" and that affects or is likely to affect trade between EU Member States.

It follows that for a measure to qualify as state aid under EU competition law, it must be financed from state resources. The form in which the aid is granted is not important. It can be a positive contribution (e.g., a direct grant) from the state to an individual operator, or it may take the form of a failure by the state to receive payment to which it is entitled (e.g., sale of a state asset at a lower-than-market price). In the latter case, the state foregoes revenues to the benefit of the buyer.

It is also necessary that the state aid confers an economic advantage to the beneficiary of the aid (e.g., in a privatization, this would be either the business to be privatized or the buyer) that could not have been obtained under normal market conditions. Also, state aid can only be found where the advantage grantedis selective; that is, the aid is attributed to a single operator or a distinct group of operators, as opposed to other similar or competing operators. Such measures can lead to unlawful discrimination between operators. Finally, a thorough competitive assessment needs to be undertaken to determine whether the state aid distorts competition in the European Union.

EU Member States are obliged to notify the Commission of their plans to grant state aid. The Commission will first examine whether there is state aid, and if so, whether such aid distorts competition in the European Union. If an instance of state aid is found to be unlawful, then the Member State will be ordered not to implement the aid. State aid will also be deemed unlawful if it is implemented without prior authorization by the Commission (save in cases where an exemption applies). In such cases, the state will be ordered to recover the aid from the beneficiary (i.e., the privatized business or the buyer), with the political, financial and practical difficulties this usually implies. The procedure before the Commission may take several years to complete.

In terms of substance, if the state, in granting its resources, behaves in accordance with the conduct expected of a rational private investor, then there is no state aid involved (the "market economy investor" principle). This is because the state aid requires an advantage to the beneficiary, and the fact that the same resources could have been obtained through normal market conditions suggests the absence of such advantage.

It is also understood that when the privatisation of a state business is effected by the sale of shares on the stock exchange, the privatization is generally assumed to be shaped by market conditions and not to involve aid. However, if the privatization takes place by means of a trade sale (i.e., by sale of the business as a whole or in parts to other companies), the following conditions should be cumulatively met:

  • A competitive tender (procurement) that is open to all interested parties must be held.
  • The tender process must be transparent and unconditional.
  • Bidders must be given enough time and information to carry out a proper valuation of the assets as the basis for their bids.
  • The company must be sold to the highest bidder.

If these conditions are met, then it is presumed that no state aid is involved in the privatization process and no notification to the Commission will be required. Conversely, state aid implications are likely—and a notification to the Commission will be required—if the state sells the business after negotiations with a single buyer or a number of selected buyers, even if the state and/or the buyer obtain independent expert evaluations of the business being privatized to set the correct price (the Commission considers these valuations only as second-best indicators of the market price of a privatized business). Similarly, concerns will arise when the sale is preceded by the writing-off of debt of the privatized business to the state; by the conversion of such debt into equity or capital increases; or when a sale is achieved under conditions that would not be customary in comparable situations between private parties.

Furthermore, the state may seek to impose non-economic conditions on the buyer (e.g., related to industrial policy considerations, employment requirements, maintenance of production targets or regional development objectives) that a private seller would not normally consider. Under state aid rules, such conditions are prohibited. More precisely, it is considered that such conditions are capable of distorting the competitive environment of the tender by leading to a tender process with fewer bidders and/or a lower sale price. This, in its turn, can cause the state to lose privatization revenue. In such cases, the Commission will likely find that there is state aid involved, conferring an advantage not to the buyer but to the privatized business. The aid to be recovered (if the privatization process is already completed) is calculated as the difference between the market value of the business and the price paid by the buyer to the state. Hence the privatized entity (and, consequently, the buyer after completion of the sale) will have to pay back the part of the aid that is deemed unlawful.

The state, moreover, cannot agree to liability clauses that, in case an unlawful instance of state aid is found, will allow the buyer to avoid repaying the aid to the state. However, where state aid has been authorized by the Commission, such a clause is permissible to protect the buyer in the event that the initial Commission decision approving the aid is overturned by the European Court of Justice. Consequently, the buyer must conduct comprehensive due diligence of the privatized business to determine whether there exists any state aid that might expose the buyer to risk.

Other Competition Law Considerations Applicable to the Privatized Business

Competition law prohibits agreements between independent entities that have as their object or effect the restriction of competition in the European Union. Similarly, it also prohibits entities that hold a dominant position on the market from abusing such position. Both these restrictions are relevant to the privatization process, which may involve long-term concession agreements or other commercial arrangements between the parties

Such concerns, although they will not impede the completion of the privatization process, may lead to an investigation by the Commission or by a national competition authority. Any agreement found to be anticompetitive is unenforceable, and any detected abuses will be stopped. Significant fines may also be imposed on competition law violators by the competent authority.

In the context of a privatization, for example, a state may agree with a buyer on specific commercial arrangements, such as an exclusive concession for several years. If the Commission determines that the concession is anticompetitive, then it may order the parties to reduce its duration, require that the exclusive character of the arrangement be curtailed in scope, or demand that the whole arrangement be abandoned. Such a decision will influence the buyer's interest in the business and, may also limit the value of the business from the buyer's perspective.

Another concern arises when a business is restructured and sold separately to multiple buyers. Following privatization, these new businesses must operate independently on the market and must maintain arm's-length relationships with one another. That may not be obvious, however, since these new businesses previously formed a single entity and shared a common corporate culture. In this case, the potential for information exchanges among the post-privatized businesses may give rise to concerns of collusion and other anticompetitive conduct.

Finally, if the privatized business can be deemed to be dominant on the market, then the state and the buyer should reconsider any special or exclusive rights granted to it, if these can be found capable of excluding competitors or exploiting customers. Furthermore, if the privatized entity is considered an essential facility, then access rights to third parties may also need to be considered. Failure to do so creates the risk of abuse of dominance, thus forcing the buyer to make major changes to the business and negatively affecting its value.


Privatizations are, in general, considered beneficial for the markets and consumers. However, due to their particular characteristics, they may also easily lead to situations where competition is significantly restricted. Competition law constitutes an important tool to ensure that the privatization will serve its beneficial role and secure consumer welfare. Competition law implications should not be underestimated, because they can lead to serious impediments to the completion of the agreed transaction in terms of timing and substance. Such complications may also mean that the expectations set prior to the privatization for both the state and the buyer cannot be met. Therefore, the parties should diligently ensure that all aspects of competition law are duly considered in advance.