The EU recently adopted the Foreign Subsidies Regulation (FSR), giving the European Commission (EC) powers to intervene to tackle foreign subsidies that distort competition in the EU internal market.
The FSR, which goes into effect on July 12, 2023 will have a major impact on companies that have received financial contributions from non-EU countries, and in particular those that engage in M&A and public tenders in the EU.
With less than six months until the regulation starts to apply, what is its purpose and how should companies in both the EU and the US prepare?
INTENTION OF THE FOREIGN SUBSIDIES REGULATION
The EU Council adopted the FSR on November 28, 2022 to address the issue of subsidies granted by non-EU countries, which have so far escaped the control of the EC. The EC believes the regulation closes an important enforcement gap in its toolbox, as it will gain the power to investigate and assess whether companies operating in the EU have been backed by foreign subsidies, and whether these impact competition in the internal market.
If such subsidies are deemed to create market distortions, the EC will now have wide-ranging powers to impose redressive measures, block deals or public awards and even dissolve previously concluded concentrations.
The FSR targets all companies that are active in the EU and have received any form of direct or indirect financial contribution from a non-EU country. This is particularly the case with those companies that engage in M&A transactions or public tenders in the EU.
Financial contributions are defined very broadly and include any transfer of state funds, foregoing of state revenues as well as any provision or purchase of goods or services, which until further guidance from the EC is issued may be interpreted to include all the contracts of companies with non-EU public bodies (or entities entrusted with public function). These financial contributions may come from a central government, but also any public or private entity whose actions can be attributed to a third country.
A key factor in the analysis will be whether such financial contributions or contracts with public bodies have been entered at market terms.
Both private and public companies will be covered by the FSR, including sovereign wealth funds. It applies to foreign companies operating in the EU, as well as EU-based multinational companies that have received foreign financial contributions.
ROLE OF THE EC
Unlike the EU’s Foreign Direct Investment (FDI) rules, which have remained within the competence of EU member states, the EC will be the sole enforcer of the FSR. It will have far-reaching investigative powers under two regimes: the ex-ante mandatory filing regime and the ex officio investigation regime.
For M&A deals, the FSR imposes on the parties filing and standstill obligations for transactions when certain thresholds are met, namely if:
- At least one of the merging companies (in a full merger)/the target (in an acquisition)/a joint venture is established in the EU and has generated an EU-wide turnover of at least €500 mn ($536 mn) in the previous financial year, and
- The parties to the transaction have received combined foreign financial contributions exceeding €50 mn in the three years prior to the conclusion of the M&A deal.
For EU public tenders, the filing obligation arises where the contract value is equal to or more than €250 mn (or €125 mn if the tender is divided into lots) and if the bidding party or its holding or subsidiaries, or its main suppliers or subcontractors, have received foreign financial contributions equal to or more than €4 mn per third country in the three years before the filing.
No notifiable M&A deal or EU public tender may be concluded before it is approved by the EC. The EC may also request that it be notified of M&A deals and EU tenders falling below the filing thresholds before they are concluded if the EC suspects that these transactions may be backed by distortive foreign subsidies. The EC’s assessment related to the foreign subsidies will run in parallel with the merger control and the public tender proceedings.
The FSR also grants ex officio powers to the EC, including that it may retrospectively investigate M&A deals and public tenders that have already been concluded, as well as any other market situation, in which foreign subsidies may be involved.
The EC’s review procedure will follow a two-tier structure: a preliminary review to check whether there are sufficient indications that a company has been granted a foreign subsidy that distorts the internal market, followed by an in-depth investigation if that is the case. The EC can then adopt a no objection, a redressive measure or a decision prohibiting a merger or the award of the contract. Companies may be requested to offer far-reaching commitments if they want their transactions approved or to close the ex officio investigation.
In general, a foreign subsidy would be considered distortive if it could improve the business’ competitive position in the EU and, in doing so, negatively affect competition in the internal market. Subsidies likely to be distortive include supporting failing business without a long-term viability plan, unlimited guarantees and facilitating a concentration or a participation in the EU tendering procedure.
Foreign subsidies of less than €4 mn in the past three years or aimed at repairing damage caused by natural disasters or other exceptional circumstance are unlikely to be deemed distortive.
If there is a distortion, the EC will conduct a balancing test before deciding whether to block the deal or award. In such a scenario, the EC will consider the positive effects of the subsidy, such as benefits of the subsidized economic activity on the internal market and whether it supports a broader EU policy objective such as environmental protection, social standards or research and development.
PREPARING FOR M&A AND PUBLIC TENDERS
Companies have less than six months to prepare for the FSR. The filing obligation for M&A deals and public tenders will apply as of October 12, 2023. An implementing regulation as well as the notification forms for M&A and public tenders were published for consultation on February 6, 2023.
In general, all companies active in the EU that have received any form of direct or indirect financial contributions from a third country, in particular those that engage in M&A deals and EU public tenders, are advised to establish an internal system of data collection to record these contributions, regardless of whether they constitute foreign subsidies – in other words, whether or not they confer a benefit.
This information will be necessary not only to assess whether an M&A deal or public tender is notifiable, but also in case the EC asks the company to notify a transaction that is below the filing thresholds or if it investigates the dealings of the company with foreign governments ex officio.
Given the broad definition of foreign financial contributions under the FSR, the data-collection process will be burdensome. Any notification obligation will require information on foreign financial contributions going back three calendar years as part of the review process. Companies considering M&A deals and EU public tenders should therefore start preparations now, rather than waiting until the obligation to notify arises.
In the case of notifiable transactions, companies should plan for an FSR review in addition to the merger control and FDI reviews. Deal documentation will have to be adapted accordingly, and deal timing may be affected. We are now likely to see more complaints filed with the EC during and after the notification of the M&A deals.
The FSR will also add a new dimension to public tender competition in the EU. This is particularly the case for large (notifiable) tenders, in which companies will need to provide detailed information on their foreign financial contributions and undergo an FSR review. This may create an obstacle to win the tender, particularly if the company does not have the relevant information on the received foreign financial contributions.
In addition, companies may be disqualified from a tender if they fail to report foreign financial contributions. This may result in strategic complaints or litigation before the EC from rivals in public tenders, and we may see the EC impose far-reaching remedies on foreign-backed award winners.
Jérémie Jourdan, James Killick and Axel Schulz are partners in the Brussels office of White & Case and Irina Trichkovska is counsel
