EU Foreign Subsidies Regulation mandatory notification rules start to apply

From 12 October, mergers, acquisitions or joint ventures, and public procurement tenders submitted in procurements, with an estimated value above a certain threshold will be subject to mandatory and suspensory prior notification and approval requirements under the Foreign Subsidies Regulation (FSR).

Under the new regime, M&A transactions are 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 the companies involved in the transaction – depending on the nature of the deal this may be the target and buyer(s), merging parties, or joint venture parties and joint venture company – were granted combined aggregate financial contributions from non-EU countries, known as foreign financial contributions (FFCs), of more than €50 million in the last three years.

A so-called standstill obligation applies to notifiable transactions. This means the transaction must not close without prior Commission approval. 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 could face substantial fines for failing to comply with the Commission’s decision or for breaching procedural rules.

Qualifying M&A transactions signed on or after 12 July 2023 which are not implemented before 12 October, and which meet the notification thresholds, must be notified and are subject to the standstill obligation. However, M&A transactions for which the agreement was concluded on or after 12 July 2023 but which are implemented before 12 October are not notifiable.

The Commission can also request prior notification of M&A deals that do not trigger the notification thresholds, if it suspects that any one of the parties involved has been granted foreign subsidies in the previous three years. 

The FSR procedure for review of M&A notifications is closely modelled on the EU merger control procedure under competition law. After receipt of the notification, a preliminary investigation will take place within 25 working days, during which the Commission will examine whether the respective grant constitutes a foreign subsidy within the meaning of the FSR and whether it could distort competition in the internal market. If this is the case, the Commission will initiate an in-depth investigation that takes a further 90 working days. This period is extendable by 15 working days where the parties offer remedies, and by another 20 working days with the parties’ consent.

In relation to public procurements in the EU, notification is required where the estimated value of the procurement, excluding VAT, is €250 million or more; and the bidder – including certain subsidiaries, holding companies and main subcontractors – was granted aggregate FFCs of €4 million or more per third country over the previous three years. If the procurement is subdivided into lots, notification is only required from bidders that apply for an aggregate value of lots of at least €125 million. If the estimated value threshold for notification is met but the FFCs threshold for notification is not, a “declaration” instead of a notification is required.

The notification requirements in relation to public procurements can be more complex than in relation to M&A transactions, as they may involve an “initial” and an “updated” notification that have to be submitted at the start of the procurement process and with the submission of a tender, respectively. 

The timelines and review process for public procurements differ, depending on the contract award procedure.

For open procedure cases, the Commission’s preliminary investigation must be completed within 20 working days from receipt of the completed notification, extendable by 10 working days in “duly justified cases”. In-depth investigations must be completed within 110 working days from receipt of the completed notification – which includes the period spent on preliminary investigation. The in-depth review period is extendable by 20 working days in “duly justified exceptional cases”.

For multi-stage procedures, the preliminary investigation commences following receipt of the notification submitted with request to participate in the procurement. The review is suspended after 20 working days and then resumes after submission of the updated notification with the final tender. The Commission then has 20 working days to decide if it has concerns about distortive foreign subsidies and, if it does, it will open an in-depth review which must be completed within 90 working days from the submission of the completed updated notification.

Alongside the mandatory prior notification and approval rules, the Commission can also use its ‘ex officio’ powers under the FSR to investigate foreign subsidies that have been granted to businesses involved in certain M&A transactions, concluded public procurement procedures, and other “market situations” that were concluded on or after 12 July 2023, if it suspects that these might have distorted competition in the EU.

Dr. Totis Kotsonis of Pinsent Masons said: “Businesses need to plan carefully and monitor closely compliance with the new complex FSR regime. This will involve businesses identifying and tracking all FFCs irrespective of their value or distortive potential. The potential impact of the new regime on businesses should not be underestimated. It is quite telling that, already, the European Commission has been involved in FSR pre-notification discussions on 17 M&A deals. Indeed, for corporate transactions in particular, the FSR creates a third layer of regulatory compliance that businesses must now navigate – in addition to existing merger control rules and national security/foreign investment control regimes.”