New EU foreign subsidies regime will increase costs and complexity in M&A deals

The Foreign Subsidies Regulation (FSR) entered into force on 12 January and will start applying from 12 July 2023, although the notification regime will commence three months later. The FSR allows the Commission to investigate financial contributions granted by non-EU countries to companies operating in the EU. If the Commission finds that the foreign contributions in question constitute subsidies which distort the EU market, it can adopt remedial measures.

For the purposes of carrying out an investigation, the new regime requires companies involved in M&A transactions to notify these to the Commission when one of them is the recipient of a foreign financial contribution where certain jurisdictional thresholds are met.

Aim of the new FSR regime

Subsidies granted by EU member states have for many years been subject to EU rules on state aid however, until now, no EU laws existed to regulate comparable subsidies granted by third countries outside the EU and which might, nonetheless, distort the EU internal market. The FSR aims at closing this regulatory gap by providing the Commission with powers to screen foreign subsidies in any economic sector.

The FSR complements existing merger control rules under competition law and foreign direct investment screening regimes that may apply to M&A transactions. Specific rules in the FSR also apply to public procurement procedures involving the EU – these are outside the scope of this note.

According to the Commission, this new set of rules will allow the EU to remain open to trade and investment, while ensuring a level playing field for all companies operating in the single market.

New control tools for the Commission

The FSR gives the Commission the power to review foreign subsidies in all sectors of the economy. There will be three different types of review:

• Review of M&A transactions, which must be notified to the Commission when certain turnover and foreign financial contribution thresholds are reached.
• Review in the context of public procurement procedures that reach certain contract value and foreign financial contribution thresholds.
• Review in the case of mergers and acquisitions that have already been completed, completed public procurement procedures, and other market situations (here, the Commission can still initiate an ‘ex officio’ review within ten years of a foreign subsidy being granted if it suspects distortions of competition). However, the Commission will only be able to look at subsidies granted five years prior to the start of application of the FSR when these subsidies distort the EU single market after the start of application.

New notification requirement

Under the FSR, M&A transactions must be notified to the Commission from 12 October 2023 if they involve the acquisition of sole or joint control, merger of companies, or the creation of a joint venture.

Transactions are only subject to prior notification if the acquired company, at least one of the merging parties, or the joint venture, is based in the EU, has a total turnover in the EU of at least €500 million in the last financial year and, in addition, the companies involved in the transaction (i.e., target and buyer(s), merging parties, or joint venture parties and joint venture company – depending on whether the deal is an acquisition, merger, or joint venture) have received combined aggregate financial contributions from non-EU countries of more than €50m in the last three years.

A standstill obligation applies to notifiable transactions. If a transaction is completed before the Commission has concluded its review and approved the transaction, substantial ‘gun jumping’ fines may be imposed - up to 10% of the parties’ aggregate annual turnover. Likewise, companies may face substantial fines for failing to comply with the Commission’s decision or for breaching procedural rules.

Broad definition of foreign subsidies

A foreign subsidy is deemed to exist where a third country provides, directly or indirectly, a financial contribution to a company or companies which confers them with a benefit which is not otherwise available on the market. “Financial contribution” is broadly defined in the FSR and includes the transfer of funds or liabilities; the foregoing of revenue that is otherwise due; or the provision or purchase of goods or services. Financial contribution can be provided by a government or public authority, or a public or private entity if the financial contribution is attributed to a third country.

Draft FSR Implementing Regulation

The draft Implementing Regulation (IR), published on 6 February, clarifies practical and procedural aspects related to the application of the new FSR regime. Among other things, the draft IR clarifies the information required in the notification forms for M&A deals, and separately in relation to public procurement procedures.

The draft IR includes a notification form for M&A transactions in Annex 1. The notifying party will have to inform the Commission about the transaction and the parties involved as well as any financial contributions received by them from non-EU countries within the last three years. It will also have to provide additional information that will help the Commission to assess if the foreign financial contributions are likely to distort competition in the EU’s internal market.

The draft IR, as currently proposed, requires a substantial volume of detailed information to be provided as part of the M&A notification procedure and will likely prove a complex, lengthy, and burdensome exercise for businesses. For example, all foreign financial contributions received in the last three years will need to be listed where: the individual amount of the contribution is €200,000 or more; and the total amount of contributions per third country and per year is €4m or more. Detailed information will also have to be provided for every financial contribution that is a type of foreign subsidy considered under the FSR as most likely to distort the internal market (e.g. corporate bailouts, unlimited guarantees, export financing, payments directly facilitating M&A deals). Although the parties may request an exemption from submitting certain information (waiver), this will only slightly relieve the burden.

According to the draft IR, the notifying party may voluntarily provide information on possible positive effects of the foreign subsidies on the EU’s internal market as well, but there are no examples given on what this could look like.

The draft IR also clarifies what happens after the Commission has been notified. After the notification has been submitted, the Commission has the opportunity to initiate a so-called in-depth investigation. In this case, it publishes a summary of its decision in the EU’s Official Journal. During its investigation, the Commission can, among other things, interview companies or natural persons, and conduct inspections within or outside the EU – although, in the latter case, inspections may only be conducted with prior notice and if the government of the non-EU country does not object.

The draft IR explains that a company may submit remedy proposals within 65 working days after the Commission has launched an in-depth investigation to the M&A transaction. The Commission can accept these remedies if it considers them “appropriate and sufficient to fully and effectively eliminate the distortion” of the internal market.

The draft IR also contains provisions on the treatment of confidential information, the right of access to the Commission’s files, the calculation of time limits (including suspension of time limits during the review process) and the formal transmission of documents and final provisions. Notably, the draft IR allows specified legal, economic, and technical advisers engaged by a party to access unredacted versions of certain confidential material on the Commission’s file. Such access is subject to strict conditions to prevent disclosure outside the confidentiality ring.

However, the draft IR and its annexes do not yet contain any statement on how the Commission intends to proceed in interpreting substantive aspects of the FSR. The Commission is not legally obliged to issue FSR guidelines until 12 January 2026, however it is hoped that draft guidelines will be published for consultation in the coming months.

Next steps and practical takeaways:

Following the public consultation on the draft IR, the Commission will adopt a final IR before the FSR starts applying on 12 July.

The notification obligations for the companies will be effective as of 12 October 2023. In the period between 12 July and 12 October, there is no notification obligation.

Given the FSR’s broad scope, and the extent of information required under the proposed notification forms (if unchanged), companies should start preparing now for the application of the FSR and gather information on the financial contributions they have received from non-EU countries in the last three years.

As identifying and quantifying foreign financial contributions over a rolling three-year period will be time-consuming, it would be prudent to start designing and implementing new systems and tools as soon as possible.

Companies operating in higher risk/specific sectors or having received financial contributions from certain non-EU countries should be prepared for potential ex-officio investigations by the Commission. This includes consideration of the negative and positive effects on the EU Single Market of the financial contributions/subsidies that have been granted. This requires preparing the relevant (complex) legal and economic analysis. The Commission may use its ex officio power to investigate deals that were signed or announced after 12 July 2023.

According to commissioner Margrethe Vestager, the Commission will first focus its enforcement on foreign subsidies most likely to create major distortions in the internal market.

Co-written by Tadeusz Gielas of Pinsent Masons.