The EU Foreign Subsidies Regulation (FSR) entered into force on January 12, 2023 and will start to apply from July 12, 2023. Under the FSR, the European Commission will have powers to intervene against distortions to competition in the EU internal market caused by companies active in the EU that benefit from foreign subsidies. A new notification regime will be introduced for certain M&A transactions and public tenders that is independent from current EU/national merger control and foreign direct investment notification requirements, and the Commission will have powers to conduct investigations into potentially distorting foreign subsidies.
The FSR is relevant to companies active in the EU that receive or have received financial contributions (including tax exemptions) from non-EU countries (for example under the U.S. Chips Act or the U.S. Inflation Reduction Act), particularly those that engage in high-value M&A and/or public tender EU activity. We advise companies to begin implementing data collection systems to gather comprehensive group-wide information regarding any foreign subsidies received and to factor in FSR assessment in relation to all M&A and public procurement awards completing on or after October 12, 2023, including reviewing foreign subsidies received as part of the due diligence process.
The FSR targets all (EU and non-EU) companies (i) that are active in the EU and (ii) have received direct or indirect financial contributions that may have a distortive effect from a non-EU country.
“Financial contribution” is defined widely and might include, amongst others, (i) any transfer of state fund (such as capital injections, grants, fiscal incentives, loans, guarantees, contracts given below market terms, debt to equity swaps or rescheduling) and (ii) any foregoing of state revenue (such as tax exemptions). The FSR provides that financial contributions may come from third country central governments, public authorities, state-owned enterprises and even private companies (depending on the specific factual circumstances).
II. Mandatory Notification Obligation
From October 12, 2023, companies engaging in (a) M&A activity or (b) a public procurement procedure in the EU will be required to submit formal notifications with the Commission if the following thresholds are met:
- EU Turnover: At least one of the merging companies (in case of merger), the target (in case of acquisition), or the JV is established in the EU and generated an aggregate EU-wide turnover of at least €500 million in the previous financial year; AND
- Foreign Financial Contribution: The parties to the transaction have received combined foreign financial contributions exceeding €50 million in aggregate in the previous three years to the conclusion of the agreement, the announcement of the bid, or the acquisition.
- Public Tender:
- Contract Value: The contract value net of VAT is equal or above €250 million; and in cases where the tender is divided into lots, the aggregate value net of VAT of the lots applied for is equal or above €125 million; AND
- Foreign Financial Contributions: The bidding party (including its subsidiaries and/or holding) and its main subcontractors (or suppliers) receive aggregated foreign financial contributions equal or above €4 million in the past three years prior to the notification. Bidding parties who received a foreign financial contribution falling under €4 million are still under an obligation to submit a declaration confirming that they are under the filing threshold.
Notification triggers a standstill obligation. This means that a notifiable M&A transaction cannot complete before the Commission has reviewed and issued an authorization. Similarly, in public tenders, the public contract cannot be awarded to the notifying undertaking before the Commission has concluded its investigation.
The FSR review process will be similar to EU merger control, and will require operators to provide substantial information on non-EU financial contributions that have been granted to them. Draft implementing legislation published by the Commission (but not yet formally adopted) provides a de minimis threshold below which foreign financial contributions will not have to be disclosed in a notification. For M&A notifications, a financial contribution only has to be identified if the individual amount of the specific contribution equals or exceeds €200,000 and if the total amount of all contributions per third country per year equals or exceeds €4 million.
Once a notification is made, the Commission will assess whether the financial contribution results in a distortive foreign subsidy, i.e. whether the associated benefit is liable to improve the competitive position of the beneficiary whilst potentially negatively affecting competition within the EU. In its review, the Commission will consider various factors including the amount and nature of the foreign subsidy, the amount of economic activity in the EU, and the purpose and conditions attached to the foreign subsidy as well as its use on the EU internal market. The FSR specifies certain categories of foreign subsidies that are presumed distortive, in particular where the subsidy is directly linked to an M&A deal or one that allows someone to submit an unduly advantageous tender offer.
The Commission can refuse or impose conditions on the notification/transaction where the Commission determines the notifying entity has received distortive foreign subsidies and, on balance, the M&A transaction/public tender bid has a negative impact on the EU internal market and/or broader EU policy objectives such as environmental protection). Conditions could for example include repaying the subsidy or mandating access to infrastructure or production capabilities.
The Commission has the right to impose substantial penalties (including a fine of up to 10% aggregate turnover in the preceding financial year) on companies that breach the standstill obligation by concluding or failing to notify a notifiable concentration.
III. Commission General Investigation Powers
From July 12, 2023, the Commission will have powers to conduct investigations into any potentially distorting foreign subsidies received in a period of up to ten years before the investigation commences (but no more than five years prior to the application of the FSR). The Commission will also have the power to request ad hoc notifications for transactions and public tenders that do not meet the prescribed thresholds, but for which it suspects that the involved companies received foreign subsidies within the three years preceding the transaction or tender submission.
To assist its investigations, the Commission can gather information by issuing requests for information to operators, interviewing parties, and conducting dawn raids both in and outside the EU. Failure to provide information and/or cooperate can lead to potential penalties being imposed by the Commission. Whilst there is no formal reporting or complaints process, third parties (including competitors) can make submissions on foreign financial contributions received by their competitors.
IV. Practical Impact
- Foreign subsidy data collection: companies should begin implementing data collection systems to gather comprehensive group-wide information regarding any foreign subsidies received. To ensure compliance, we advise companies to maintain detailed records of any foreign subsidies received during the five years leading up to July 12, 2023. Moving forward, data should be regularly updated and retained for a period of 10 years. Establishing a data system ahead of the FSR’s implementation will prevent any delays caused by extensive information-gathering processes.
- Notification: companies should factor in FSR assessment in relation to all M&A and public procurement awards completing on or after October 12, 2023, including reviewing foreign subsidies received as part of the due diligence process. Where a transaction or tender is subject to a notification, the review period under the FSR regime will need to be factored into the timetable for completion of the transaction/public tender process and reflected in transaction documents.