The new EU Foreign Subsidies Regulation ("FSR" or the "Regulation") is about to be adopted and will become effective in the coming months. Companies involved in M&A activity and/or public procurements in the EU need to be aware of the new regulatory clearance requirements introduced by the FSR.
1. Key takeaways
- Under the FSR, companies with activities in the EU will need to monitor foreign subsidies that they receive. The notion of a "foreign subsidy" is broad: it may include tax breaks, public support in the context of Covid-19 or the Ukraine war, the provision of loans or guarantees by the State at below market value and the supply of goods/services to the public sector at above market value.
- Companies will need to notify foreign subsidies received in the context of M&A and public procurement procedures where certain monetary thresholds are met. The European Commission will also be able to initiate an investigation where it suspects the existence of a distortive foreign subsidy.
- The European Commission will assess whether a given foreign subsidy distorts the internal market on a case by case basis. If so, the European Commission will be able to impose redressive measures.
- The new regime will enter into force in mid-2023. It will apply to subsidies granted in the five years prior to the Regulation's entry into force for ex officio investigations and three years for M&A and public procurement contract reviews.
Subsidies granted by EU Member States are already subject to EU State aid control (see our Quickguide here). However, there have been concerns that foreign subsidies may also impact the internal market. Under current rules, foreign subsidies are not taken into account in the context of EU M&A and public procurement procedures. The FSR seeks to address this issue by enabling the European Commission to scrutinise subsidies granted by non-EU Member States. The adoption of the FSR will have significant consequences for both foreign and European companies.
3. Scope of the Regulation
To determine whether the FSR applies, companies will need to assess whether there is:
- a foreign subsidy;
- which may have a distortive effect on the internal market; and
- whether any positive effects may outweigh the distortive effect.
Each of these elements is considered in more detail below.
A foreign subsidy is a financial contribution by a third country which confers a benefit to an undertaking engaging in an economic activity in the internal market. As set out above, the notion of a foreign subsidy is broad and may include: transfer of funds, foregone revenue, tax breaks, public support in the context of Covid-19 or the Ukraine war, the provision of loans or guarantees by the State at below market value and the supply of goods/services to the public sector at above market value. The contributions may be granted by a foreign public entity/authority or by private entities.
A distortion of competition occurs where a foreign subsidy may "improve the competitive position of the undertaking concerned in the internal market" which has a (potentially) negative effect on competition. The FSR provides guidance on factors which may be used to assess whether a subsidy has a distortive effect, including the amount / nature of the subsidy and situation of the relevant company.
The Regulation also provides examples of certain types of foreign subsidies that are most likely to distort the internal market, including foreign subsidies:
- granted to an ailing company, i.e. a company which is likely to go out of business in the short to medium term without the subsidy;
- in the form of an unlimited guarantee for debts or liabilities of the undertaking;
- in the form of an export financing measure that is not in line with the OECD Arrangement on officially supported export credits;
- which directly facilitate a concentration;
- enabling a company to submit an unduly advantageous tender.
The FSR also indicates that certain foreign subsidies are unlikely to be distortive, including foreign subsidies:
- below EUR 4 million over a period of three years;
- below EUR 200,000 per third country over a period of three years;
- for natural disasters or exceptional occurrences.
The European Commission will also consider whether the negative effects of the foreign subsidy on the internal market are outweighed by its positive effects, for example, on the development of the relevant economic activity. In this balancing exercise, the European Commission has a broad discretion to consider any other factors that it considers to be relevant.
Under the FSR, the European Commission will be the sole regulator, however, cooperation with Member States is strongly encouraged. In particular, the FSR provides for an alert system enabling Member States to voluntarily send information to the European Commission on suspected distortive foreign subsidies.
Member States will also be involved in the drafting of the European Commission guidelines on the implementation of the Regulation. The guidelines must be published within three years of the FSR entering into force. Recent reports suggest that the guidelines may be published by mid-2023. In the meantime, parties will be able to request pre-notification discussions with the European Commission on whether the notification thresholds are met.
The European Commission may also create a simplified procedure for certain types of transaction or public procurement procedures.
5. European Commission tool box
The FSR provides the European Commission with three new tools:
- a mandatory ex ante notification regime for mergers and acquisitions;
- a mandatory ex ante notification requirement for public procurement bids; and
- a general market investigation power.
Merger notification tool
Under the FSR, companies will need to notify the European Commission of mergers (including full-function joint ventures) involving a foreign subsidy the following thresholds are met:
- one of the merging companies, the target or the joint venture is established in the EU and generates an EU turnover of at least EUR 500 million; and
- all companies involved have received a total of more than EUR 50 million in financial contributions from third countries in the three years prior to the notification.
The European Commission may also request prior notification of any transaction which does not meet these thresholds if it suspects there has been a distortive foreign subsidy.
Unlike the EU Merger Regulation (Regulation 139/2004), there is no worldwide turnover threshold and the FSR includes an EU local nexus requirement for joint ventures.
The review timetable under the FSR is identical to the process under the EU Merger Regulation:
- The European Commission will have an initial review period of 25 working days.
- If the European Commission opens an in-depth review it will have an additional 90 working days (extendable by 15 working days if commitments are offered).1
The deal cannot be closed before the European Commission has completed its review. At the end of the in-depth review, the European Commission may: (i) not object, (ii) make commitments binding or (iii) prohibit the transaction.
Public procurement notification tool
Bidders are required to notify the contracting authority where:
- the estimated contract value is at least EUR 250 million; and
- the bidder (including their main subcontractors and suppliers) has received financial contributions of more than EUR 4 million per third country in the three years prior to notification.
Bidders that do not meet the above thresholds will need to provide to the contracting authority a declaration to that effect. The declaration must include a list of any non-notifiable foreign financial contributions they have received.
If a bidder fails to submit the required notification or declaration then the contract cannot be awarded to them. The contracting authority will transfer any notifications and declarations to the European Commission.
The European Commission will also have the power to request notification of any foreign subsidies received in the three years prior in any public procurement procedure (regardless of whether the notification thresholds are met) if it suspects that that a bidder may have received foreign subsidies.
As with the merger notification tool, the FSR provides for two separate phases:
- an initial review of 20 working days (extendable by 10 working days); and
- an in-depth review of 110 working days from the date on which the European Commission received the notification (extendable by 20 working days).
At the end of its review, the European Commission will: (i) prohibit the award of the contract; (ii) issue a decision that it does not object; or (iii) issue a decision, subject to commitments.
Importantly, the award procedure will not be suspended during the European Commission's review. As a result, the contract may be awarded to the economic operator which submitted the most economically advantageous bid which was not subject to the European Commission's scrutiny. The award decision may be made before the European Commission has completed its review of any tenders which have been notified to it.
General market investigation tool
The European Commission may, on its own initiative, investigate any market situation where it suspects the existence of a distortive foreign subsidy. Analogous to its powers to investigate anti-competitive behaviour, the European Commission will have broad investigative powers to collect relevant information, including the ability to send requests for information to third parties and to carry out inspections outside the EU (with the consent of third countries and the relevant company).
Penalties for non-compliance
The European Commission will be able to impose fines of up to 10% of the parties' combined worldwide turnover for: (i) failing to notify a relevant transaction or bid; (ii) breaching the standstill obligation; and (iii) failing to comply with the European Commission's decision. There is also a risk of daily fines for ongoing breaches.
Failure to cooperate with the investigation may result in fines of up to 1% of the total turnover of the company concerned and periodic penalty payments.
The unit of the European Commission tasked with enforcing the FSR will be well-resourced and is expected to be very active. According to the impact assessment accompanying the proposal for the Regulation, each year the European Commission anticipates:
- around 30 mergers, acquisitions and joint ventures will be notified;
- around 36 public procurement bids will be notified;
- between 30 and 45 ex officio investigations in other contexts.
The FSR will impose new and potentially burdensome administrative obligations on companies. Companies will need to identify and quantify financial contributions granted by third countries and, if necessary, notify M&A activity and/or bids for public procurement and concession contracts.
During a transitional period, the FSR will apply to foreign subsidies granted in the five years prior to its entry into force for ex officio investigations and three years for notifiable mergers, acquisitions and public tenders. Companies therefore need to start carrying out risk assessments now to assess their exposure.
To assess the potential risk, companies should:
- identify financial contributions provided by non-EU countries (including monetary transfers and other trades such as the granting of special or exclusive rights).
- determine whether these financial contributions constitute "foreign subsidies", i.e. whether they confer a benefit to a company active in the internal market (e.g. transfer pricing not in line with normal market conditions).
- assess whether any foreign subsidies could be considered "distortive". As part of this assessment, companies should consider: the purpose of the contribution(s), the relevant product/market; the nature and amount of the subsidy; and the overall market position and evolution of the company.
- review the possible positive effects of the subsidy (e.g. high level of environmental protection and social standards, the promotion of research and development, etc.).
Further guidance is expected so companies will need to take an iterative approach to risk assessments.