EU FSR 100-day briefing provides valuable insights for firms

The figures are contained in a policy briefing by the European Commission (6 pages/ 165 KB) marking the first 100 days that the FSR has been in effect, covering the period from 12 October 2023 to 20 January 2024.

The FSR is a new set of EU competition rules seeking to address distortions of competition caused by foreign subsidies in the EU’s internal market. The rules apply to subsidies received by businesses from non-EU member states. These subsidies can provide recipients with an unfair advantage in acquiring companies or securing public procurement contracts within the EU. The legislation creates notification obligations on businesses operating in the internal market and grants the Commission powers of investigation potential distortions of competition caused by foreign subsidies in relation to mergers and acquisitions (M&A), public procurements and other market transactions.

Prior notification of certain M&A transactions and participation in public procurement procedures is a pivotal feature of the FSR. Where the Commission opens an investigation, a business must obtain regulatory approval before completing and implementing an M&A transaction or concluding a public contract, if the proposed deal or public contract award triggers specific turnover and foreign financial contribution (FFC) thresholds stipulated in the FSR. This notification requirement applies as of 12 October 2023.

“The brief provides for some interesting reading and comes hot on the heels of the Commission's launch of its first FSR in-depth investigation,” said Totis Kotsonis, a subsidy control, procurement, and trade expert at Pinsent Masons

The Commission’s brief “contains some useful statistics about the number and type of M&A deals that are caught by the new FSR regime in the first 100 days of its operation”, said Tadeusz Gielas, competition expert at Pinsent Masons. Unlike the EU Merger Regulation (EUMR), the FSR does not require the Commission to publish information about all M&A transactions notified under the FSR. Instead, information may only be published where a notified transaction is referred for in-depth review. “Consequently, the European Commission’s briefing gives valuable insights that are not otherwise publicly available about its caseload to date,” Gielas added.

“What is quite clear from the brief is that the Commission has underestimated the number of additional work that the FSR will generate both for businesses with reporting obligations as well as the Commission itself,” Kotsonis said. The statistics suggest that the number of M&A deals that will need to be notified on an annual basis is likely to exceed the estimate of 33 per year – which was the Commission’s original estimate.

The Commission has already engaged in pre-notification discussions in 53 cases. Of these, 14 had been formally notified, nine cleared and one withdrawn. The remainder were still in the pre-notification stage during the 100-day period covered by the briefing.

So far, none of the notified M&A transactions has given rise to concerns about the possible presence of distortive foreign subsidies and, consequently, the Commission has not yet opened a second-phase in-depth investigation into any of the notified M&A deals.

Of the 53 pre-notified cases, 33 involved cross-border EU to non-EU transactions, seven involved cross-border transactions within the EU, seven involved a cross-border transaction outside of the EU, and six involved transactions within the same EU member state. Most cases notified (79%) were also subject to assessment under the EUMR with five cases subject to additional national merger control procedures. Around one third of the total cases involved an investment fund as a notifying party.

So far, the most commonly assessed FFCs relate to sources for financing the notified M&A deals. For example, capital injections and equity contributions, as well as loans from financial institutions that could be linked to a non-EU third country. Other types of FFCs observed by the Commission include state guarantees, direct grants for specific projects, and tax benefits, notably for R&D expenses and investment projects.

Parties must consider all FFCs when deciding whether notification is required, regardless of market conditions or availability, disclose all FFCs specifically relating to an acquisition, and determine carefully whether their transaction is an acquisition, a merger, or a joint venture, as this will have an impact on whose turnover and which FFCs should be taken into account. Additionally, parties should explain in the notification why, in certain cases, information about FFCs is not reported even though the notification threshold has been triggered, to avoid the need for additional information requests and potential delays.

Kotsonis said: “The Commission’s observations in the brief suggest that it has identified cases where reporting was not fully compliant with FSR requirements. At the same time, it would appear that, for the moment, the Commission is treating such instances as teething issues, mindful of the complexity of FSR compliance. However, it might not be long before the Commission considers it appropriate to impose a financial penalty, as it can, for failure to comply fully with FSR reporting obligations.”

Gielas said that, in the FSR brief, the Commission “provides important insights and further practical guidance for parties notifying M&A deals.” “For example, it clarifies how certain FFCs should be categorised, and the Commission’s conceptual distinction between the “notification” threshold – which determines if the legal obligation to notify a deal under the FSR is triggered – and the “reporting” threshold – where FFCs below a certain value can be reported in the notification in summary form or not at all,” he said.

“The brief also explains how investment funds can limit the amount of FFC information they report in their FSR notification if they satisfy three cumulative conditions, specified by the Commission, designed to prevent cross-subsidisation between the acquiring fund - particularly the merging entity – and other funds or their portfolio companies within the same investment fund group,” Gielas said.

To address the unexpected number of FSR notifications, the Commission is increasing personnel numbers. As of 1 March, a new ‘Directorate K’ consisting of three dedicated FSR enforcement teams has been created.

“It is crucial to assess the applicability of the FSR from the outset,” said Arkadius Strohoff, an antitrust expert at Pinsent Masons. “Conducting a FSR analysis should be part of the process, alongside evaluations for merger control and foreign investment control. If a filing is necessary, it is essential to integrate suitable conditions into transaction documents, while also factoring in the Commission's review period into the deal timeline.”