BRUSSELS (Reuters) - Companies bailed out by European Union governments taking stakes as a result of the coronavirus crisis will be barred from paying dividends or share buybacks under proposed rules, sources said.

FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels, Belgium, February 19, 2020. REUTERS/Yves Herman

A recapitalisation proposal was put forward by the European Commission last week which it said was part of a strategy to prevent hostile takeovers of strategic firms by foreign buyers.

The EU proposal is the latest loosening of the bloc’s state aid rules and is targeted at companies whose market values have tumbled as a result of the coronavirus outbreak and lockdowns, making it difficult for them to borrow on the public markets.

Any company recapitalised by the state which has undue market power will have to promise structural and behaviour commitments under the proposed rules, sources with direct knowledge of the matter told Reuters.

In normal circumstances such pledges typically mean companies selling assets and commitments on future conduct.

And those companies which do not meet a deadline for the state’s holding to shrink below a certain level once the coronavirus crisis is behind them will be penalised with a mechanism whereby the state stake will rise and they will also be forced to adopt a restructuring plan, the sources said.

Companies which are recapitalised by the state will not be permitted to make acquisitions, unless their targets are small- and medium-sized enterprises and the purchase is being made to maintain their viability, the sources added.

The proposal got some pushback from EU countries during a conference call on Monday, with some asking for greater flexibility in the terms and conditions, the sources said.

A two-year deadline for governments to exit from companies they bail out was one sticking point, with some countries saying that this could lead to ‘fire sales’, where assets are sold on under pressure on the cheap and dampen the value of shares.

Companies eligible for the scheme are those whose failure is likely to cause social hardship and market disruption and those unable to find any finance from private markets or investors.

The Commission, which may modify its proposal following feedback from EU governments, said state injections of equity or hybrid capital instruments should only be seen as a last resort.

The recapitalisation plan is similar to one adopted during the 2008 banking crisis, but is broader in scope as it covers the entire economy and not just a sector.