Member Article

Many companies know that the Public Procurement Act (Sw. abbr. LOU) regulates how contracting authorities act when purchasing supplies, services and public works. However, something less well known is that the provisions in LOU can also be of significant importance for how a public contract is handled after the procurement has ended and that the provisions in LOU can apply in completely different contexts, e.g. in conjunction with mergers, acquisitions and similar transactions. In this article Kristian Pedersen, partner, and Sara-Li Olovsson, associate, provide some examples of what you should watch out for in transactions which concern contracts subject to LOU.

LOU is based on EU directives and regulates contracting authorities’ purchases of supplies, services and public works. Simply put, LOU contains rules for how contracting authorities can act when choosing suppliers to enter into contract with.

What many people are unaware of is that LOU can also be of significant importance in other contexts, e.g. in conjunction with mergers, acquisitions and similar transactions.

In this article, we will provide two examples of this. The first example concerns mixed contracts, i.e. contracts which contain both aspects subject to LOU and aspects which are not. It shows that the procurement rules, in some cases, may apply to, e.g., share transfers. The other example concerns amendments to procured contracts, and shows that procurement issues can arise in, e.g., transfers of procured contracts or companies awarded contracts by participation in public procurements.

Mixed contracts

It is evident from EU case law on mixed contracts, whose various aspects are inseparably linked (and thus form an indivisible whole), that the transaction at issue must be examined as a whole, and be assessed based on the provisions which govern the aspect which constitutes the contract’s main object. In other words, procurement shall be conducted if the contract’s main object is something which is subject to LOU – otherwise the transaction constitutes an illegal direct award of contract. However, if the main object of the contract is not subject to LOU, no procurement has to be conducted.

The issue of mixed contracts has been tried by the ECJ in its judgment in the joined cases C-145/08 and C- 149/08, Club Hotel Loutraki and others. The background to these cases was, in brief, that the Greek government had decided to privatize the company EKP which was owned by the Greek government through the company

ETA, and which carried out casino business. ETA was to sell 49 percent of the shares in EKP to a new company, AEAS, which would be responsible for the casino business and which would be set up by the private party which submitted the best tender regarding the contract.

Thus, the contract which was subject to the ECJ’s review was a mixed contract. One part of the contract concerned ETA’s sale of shares to the private party (such a sale is not in itself subject to the directives on public procurement or to LOU). Another part of the contract concerned the fact that the private party, through AEAS, would take over the management of the casino in return for compensation from ETA. Yet another part of the contract concerned certain works which the private party would carry out as partial payment for the sold shares.

In its judgment, the ECJ concluded that the contract in question was a mixed contract which formed part of a partial privatization of a public casino business. The ECJ also deemed it necessary that the contract was concluded with a single partner, which both had the financial capacity to purchase the shares and professional experience in operating a casino. Therefore, the contract was an indivisible whole according to the ECJ. The ECJ also stated that there could be no doubt that the sale of shares constituted the contract’s main object, inter alia, because the income which AEAS would obtain in its capacity as shareholder was significantly greater than the remuneration which it would obtain as service provider. In addition, the income which AEAS would obtain in its capacity as shareholder was not limited in time, while the management of the casino company would cease after ten years.

Since the contract’s main object, i.e. the sale of shares, was something which did not fall within the scope of the directives on public contracts, the ECJ concluded that the contract in question was not subject to a procurement obligation.

In our opinion, there is no doubt that a sale of public property, e.g. sale of shares in a publicly owned company, is not subject to LOU. It is, however, common that the authority owning the shares, in conjunction with the sale of shares, commissions the sold company to provide supplies or services to the authority, not least since this can be a way of increasing the value of the shares before the sale. The practice of “including a contract” in conjunction with the sale of shares is, however, risky, because it can mean that a procurement obligation arises.

As set forth in the above-mentioned case from the ECJ, there are, however, situations where the fact that the buyer of the shares in a publicly owned company provides supplies or services post-sale to the authority which has sold the shares, does not entail a procurement obligation.

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