EU's Foreign Subsidies Regulation: Implications for Business in Brief

Introduction

In December 2022 the European Union adopted the Foreign Subsidies Regulation (FSR). This new regulation sets rules for addressing distortions caused by foreign subsidies. It provides the European Commission with new enforcement powers, especially in the context of M&A transactions and public procurement, to ensure a level playing field in the EU internal market.

The implementing regulation to the FSR, which sets out procedural rules, was adopted on 10 July 2023. On 12 July 2023, the FSR provisions concerning ex-officio investigations became applicable. The new rules concerning mandatory prior notification of certain M&A transactions and foreign financial contributions in the context of public procurement will become applicable on 12 October 2023.

Understanding the Foreign Subsidies Regulation: What is it?

Key Provisions and Implications

The FSR provides for a very broad definition of foreign subsidies, including financial contributions in the form of capital injections, grants, loans, financial incentives, tax exemptions, and others. The foreign financial contributions that are subject to the Commission’s review are those provided by third (non-EU) countries, regardless of whether they are provided by the central government, public authorities, or (public and private) entities whose actions can be attributed to that third country.

Since 12 July 2023, the Commission can open ex-officio investigations into foreign financial contributions granted up to five years prior to the application of FSR.

In the context of M&A deals, from 12 October 2023 transactions are subject to mandatory notification to the European Commission, if the following thresholds are met:

• EUR500 million turnover (in the last financial year) has been achieved in the EU by one of the merging undertakings (in case of mergers); by the target undertaking (in case of acquisitions); or by the joint venture (in case of joint venture transactions); and
• More than EUR50 million combined aggregated financial contribution from third countries was provided in the three years preceding the transaction. The relevant contributions can be provided to the merging undertakings (in case of mergers); to the acquirer(s) or the target (in case of acquisitions); or to the joint venture parents or the joint venture (in case of joint ventures).

Acquisitions of target undertakings that do not reach the EUR500 million turnover threshold, or the creation of greenfield joint ventures to which no business of that magnitude is transferred, do not require prior notification under the FSR. Also, similar to the EU merger control rules, the new FSR regime does not apply to transactions that concern a pure internal restructuring.

Even if the above thresholds are not met however, the European Commission can still request the parties to a transaction to notify it for prior approval if the Commission suspects that substantial foreign subsidies have been received by the parties involved.

If an FSR notification is required, a standstill obligation applies: so the transaction cannot be completed until after the Commission’s approval is obtained. The obligation to notify applies to all transactions that meet the above-mentioned thresholds and that have not yet been closed on 12 October 2023, regardless of the date on which the transaction agreement is signed. It should be noted that FSR notifications can only be submitted from 12 October 2023, even if the parties would be ready to submit before that date.

The notification procedure for M&A deals resembles in many aspects the existing EU merger control procedure. A notification form must be completed and submitted to the Commission, in which information about the transaction, the parties’ business activities and the foreign financial contributions they have received should be provided. The procedure starts with a Phase I review, which may take up to 25 working days. At the end of Phase I, the transaction should either be approved or referred to a more in-depth Phase II review, which may take up to an additional 90 working days, unless commitments are submitted.

Both in ex-officio investigations and notification procedures, the Commission has wide powers in relation to potential redressive measures, which may include reducing capacity or market presence, refraining from investments, divestment of certain assets, and repayment of foreign subsidies.

FSR notifications do not replace potential notifications under applicable merger control or foreign direct investment (FDI) rules: transactions that must be notified to the Commission under the FSR, may also require (one or more) notifications under (EU or domestic) merger control rules and/or (national) FDI regulations.

Impact on Business

In addition to merger control and foreign direct investment assessments, for larger M&A transactions that may meet the above-mentioned thresholds, an assessment will also need to be made whether notification under the FSR is required.

In order to perform this assessment, the parties should be ready to provide information on the amounts of financial contributions they have received from non-EU governments in the three years preceding the transaction. Companies that are likely to fall under the new notification obligation may consider creating at a group level and regularly updating a database of foreign financial contribution from non-EU countries.

The contractual documentation should reflect whether FSR approval is required, as this may impact on the long stop date, the overall transactional risk and the parties’ obligations (e.g. in relation to potential hell-or-high-water clauses or break fees).

The possibility of an ex-officio investigation or notification in the context of public procurement should be considered in any case in which significant foreign financial subsidies have been provided. Companies should also be prepared for receiving a request of information concerning FSR proceedings and investigations, or even unannounced inspections which the Commission can conduct.

Conclusion

Our Competition team would be happy to answer any further questions regarding the FSR and its implications for your business.