We promised to provide updates on the saga involving Spain’s public funding of certain Spanish football clubs when we covered the first successful appeal of the European Commission (“EC”)’s decision on the subject.  This first update comes in favour of Hercules Football Club (“Hercules FC”) and annuls another aspect of the EC’s 2016 decisionOn 20 March 2019, the European General Court annulled the EC’s finding that the guarantee given by Valencia Institute of Finance (“VIF”) to Hercules FC constituted unlawful State aid pursuant to Article 107 of the Treaty on the Functioning of the European Union (“TFEU”).

You will recall that the EC decision’s first successful appeal rested on the fact that the EC had not taken all the available information into account. The EC could not therefore establish whether the Spanish tax scheme for non-profit entities gave FC Barcelona an advantage which distorted or potentially distorted competition and affected trade between Member States under Article 107(1) TFEU.  In this second successful appeal, the General Court found that the EC did not uphold its duty to state reasons for its decision and therefore infringed essential procedural requirements.

VIF, a State-owned financial entity, had given a guarantee for a loan granted to Hercules FC’s non-profit entity, Fundacion Hercules, for EUR 18 million.  As a counter-guarantee, VIF would have a pledge over the shares in Hercules FC.  Provisionally, VIF received a guarantee from the owner of Hercules FC’s stadium, Aligestion Integral SA (“Aligestion”).  VIF eventually fulfilled its legal obligation as a guarantor, repaid the loan, replaced Fundacion Hercules as creditor of the loan and subsequently initiated proceedings against Fundacion Hercules in order to recover the amount.  The EC submitted that it should be inferred from: (i) the reference to the provisional nature of the counter-guarantee; and (ii) the fact that the loan was not repaid by Fundacion Hercules, that the counter-guarantee granted by Aligestion was not effective, and therefore not relevant for the purpose of characterising the existence of unlawful State aid granted by VIF to Fundacion Hercules.

The General Court stated that the EC’s observations above did not provide sufficient reasoning as regards the impact of the counter-guarantee by Aligestion on the finding of unlawful State aid because:

  • the EC had not provided any information on the security rights (if any) activated by VIF or any other information which would lead to the conclusion that the counter-guarantee provided by Aligestion was not effective, but instead only relied on its provisional nature; and
  • the EC had also omitted to mention whether the provisional nature of the counter-guarantee alone had led it to disregard it for the purposes of assessing the existence of unlawful State aid.

As a result, the General Court annulled the EC’s decision as regards its application to Hercules FC as the EC should have explained how it took into account the counter-guarantee and, if it did, why it was not relevant to the legal characterisation of VIF’s guarantee as unlawful State aid.

This marks the second successful appeal of the EC’s decision which, once again, turns on the EC decision’s procedural limitations (ineffective use of all available information and lack of sufficient justification).