New EU regulation on foreign subsidy control in M&A transactions enters into force

Today, the EU regulation on foreign subsidies distorting the internal market (Foreign Subsidies Regulation/FSR) has entered into force. Its provisions will apply from 12 July 2023. The new rules will have a significant impact on the planning and execution of M&A transactions.

According to the new regulation, M&A transactions must be notified to the European Commission as of 12 October 2023 if they are aimed at the acquisition of sole or joint control of the business or the creation of a joint venture.

However, transactions are only notifiable if the acquired company, one of the acquiring companies, 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 have received “financial contributions” from non-EU countries totaling more than €50 million in the last three years.

"The new notification requirement is another example of the ongoing trend towards increased scrutiny of non-EU investments in the EU," said Arkadius Strohoff, an antitrust expert at Pinsent Masons.

The foreign subsidy control procedure is closely modelled on the EU merger control procedure under competition law. Under the new foreign subsidy control regime, the Commission examines transactions in two phases. After receipt of the notification, a so-called preliminary examination takes place within 25 working days, in which the authority examines whether the respective grant constitutes a third state subsidy within the meaning of the regulation and whether it could distort competition in the internal market. If this is the case, the Commission initiates an in-depth investigation. A further 90 working days are provided for this in-depth procedure, but the Commission can extend this period by 15 working days where the parties offer remedies.

Therefore, Strohoff recommends companies planning a transaction that could fall under the subsidy control regime to allow sufficient time for the authority's review. "Special attention should be paid to subsidy control when planning M&A deals in the future," he said. "Once the relevant thresholds are reached, the transaction must be notified to the European Commission. The deal will then also be subject to a standstill obligation, preventing completion prior to receiving the Commission’s clearance. This in turn will affect the timing of the transaction. In addition to the regulatory deadlines themselves, capacity for transaction planning in particular needs to be factored in on the corporate side."

Transactions where the contract is signed before 12 October 2023 do not have to be notified to the Commission, but may still be subject to a subsidy review. This is because the new regulation also allows the Commission to investigate potential distortions of competition at its own discretion, even if the transaction does not meet the turnover or subsidy threshold. Accordingly, the Commission can even review third-state subsidies granted in the last three to five years before the regulation applies. Within this framework, it could also reverse mergers that have already taken place, if they have led to serious distortions of competition.

The Commission will be able to fine parties up to 10% of their combined global annual turnover for: failing to notify a notifiable transaction; ‘gun jumping’ in breach of the standstill obligation; or attempting to circumvent notification requirements. Procedural breaches, such as providing incorrect or misleading information to the Commission, or refusing to cooperate with an investigation, can attract maximum fines of 1% of a party’s aggregate global annual turnover or periodic penalty payments up to 5% of a party’s average daily aggregate turnover for ongoing breaches. A party that fails to comply with a Commission decision can be fined up to 10% of its global annual turnover or face maximum periodic penalty payments as for procedural breaches.

According to the Commission, the new regulation is intended to close a regulatory gap. Up to now subsidies granted by member states have been subject to EU rules on state aid, which are intended to protect the internal market from distortions of competition, however there was no EU instrument for the control of comparable subsidies by third countries. The FSR aims to change this and thus prevent any distortions of competition in the EU's internal market that could arise from subsidies by third countries.

The new subsidy control regime complements the existing EU merger control rules, which include the review by competent antitrust authorities of the competitive impact of M&A transactions, as well as investment review from a public policy or national security perspective. "Subsidy control represents another legal and bureaucratic hurdle in M&A transactions in addition to investment and competition-focused merger control," said Strohoff. "Companies should include any subsidy review procedure before the European Commission in their transaction planning." 

The Commission has already announced guidelines and an implementing regulation to regulate the subsidy review procedure in detail. It is also expected to publish the form in which a transaction must be notified to the Commission.