The recently applicable EU Foreign Subsidies Regulation requires mandatory notifications in respect of certain mergers and acquisitions and public procurements falling within its scope. Its objective is to address distortions and ensuring a level playing field for all corporate entities operating in the EU’s single market.
1. Implementation & Application
The EU Foreign Subsidies Regulation (the ‘FSR’) becomes applicable on 12th July 2023. The filing obligation applies from 12th October 2023. However, reportable transactions signed on or after 12th July 2023 which have not closed before 12th October 2023 are subject to the filing obligation. Parties subject to the filing obligation will need to disclose information to the European Commission (the ‘Commission’) relating to ‘financial contributions’ they have received as detailed hereunder.
The Commission is particularly interested in financial contributions that (i) confer a benefit on their recipient (if the support measure could not have been obtained under normal market conditions) and (ii) are selective (limited in law or in fact to one company, certain companies or industries). Financial contributions that meet these tests are deemed subsidies as defined in Section 3 hereunder.
The rationale behind the FSR is to address distortions of the EU's internal market caused by foreign subsidies granted by non-EU governments to private and public companies as well as sovereign funds active in the EU, thereby ensuring a level playing fields for all corporate entities operating in the EU’s single market.
The FSR further empowers the Commission to investigate financial contributions granted by non-EU authorities to companies active in the EU.
3. Concept of ‘Foreign Subsidy’
The definition as to what constitutes a "foreign subsidy" is broad and indeed catches both direct and indirect financial contributions made by non-EU governments. Tax credits, government grants, capital injections, aid received as part of Covid support packages, as well as interest free loans could all potentially be caught by the FSR.
4. Introduction of New Tools against Distortive Foreign Subsidies
The FSR introduced the following three (3) new tools to the Commission’s regulatory arsenal;
- A compulsory notification system for M&A transactions that meet specified turnover and financial contribution thresholds (vide Section A hereunder).
- A compulsory notification system for companies bidding to obtain large public tenders where those companies have received foreign financial contributions (vide Section B hereunder).
- Powers that enable the Commission to conduct ex officio investigations into other foreign subsidies (vide Section C hereunder).
These tools are accompanied by sweeping powers to request information, sanction companies for non-compliance, and impose redressive measures to resolve any distortions of competition.
5. Merger Notifications
The FSR introduces a system of mandatory pre-closing notification and review for mergers, acquisitions and the creation of joint ventures that meet the following thresholds:
- the target, joint venture, or a merging party is established in the EU and has an EU turnover of at least €500m; and
- the companies involved in the operation received aggregate foreign financial contributions of more than €50m from non-EU countries in the three financial years prior to notification.
Notifiable transactions cannot be implemented until they have been approved. The Commission has 25 working days from receipt of a complete notification to conduct a preliminary assessment and decide whether to do so or to open an in-depth investigation in which case the standstill period is extended by 90 working days (which can be extended by a maximum of 20 working days and an extra 15 working days if the parties offer remedies). The Commission can, however, suspend those timelines if companies fail to provide requested information or submit to an inspection.
6. Public Procurement Notifications
The FSR also requires bidders for public contracts to notify foreign financial contributions where the following thresholds are met:
- The estimated value of the public procurement or framework contract is at least €250m;
- Where the tender is divided into lots, the aggregate value of the lots applied for is at least €125m; and
- Aggregate foreign contributions of at least €4m per third country in the three financial years prior to notification are granted to the bidder involved in the tender (including subsidiaries, holding companies and, where applicable, main contractors and suppliers).
Companies that meet these criteria must notify the contracting authority of any foreign financial contribution received in the preceding three years or confirm that they have not received any such foreign financial contributions. In turn, the contracting authority will transfer the notification to the Commission.
7. Ex Officio Investigation Tools
The FSR empowers the Commission to launch reviews of its own initiative to assess potentially distortive subsidies. These ex officio investigations will, amongst other things, allow the Commission to investigate foreign subsidies in transactions and public procurement procedures that fall below the notification thresholds described above. That said, the FSR does provide that foreign subsidies are not distortive if the total amount received does not exceed €200,000 per non-EU country in any three-year period, and are unlikely to raise concerns if the total amount received by the beneficiary does not exceed €4m.
If, after a preliminary review, the Commission has sufficient indications that a company has been granted foreign subsidies, it can open an in-depth investigation.
8. Conclusions – Way Forward
The FSR filing obligation imposes burdensome requirements on parties to M&A transactions with respect to financial contributions granted by non-EU countries to companies active in the EU. The relevant information is not typically readily available or collated within companies. Therefore, companies involved in M&A transactions, public procurement transactions, joint venture set-ups etc will need to keep track of financial contributions received from non-EU countries.
In addition, the FRS adds a further layer of ex ante regulation of M&A transactions to the already increasingly complex regulatory landscape resulting from antitrust and foreign investment laws.
 Foreign Subsidies Regulation (Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market)
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