1. Introduction
  2. Which transactions will be caught by the Foreign Subsidies Regulation?
  3. The concept of a 'financial contribution'
  4. The FSR review
  5. Key take-aways

1. Introduction

The European Union has a strong regime to address EU State Aid, i.e. subsidies granted by EU Member States. However there has been growing concern over recent years that forms of assistance granted by 'third' (i.e. non-EU) countries can also impact the internal market, and that legislation is required to address the loophole.

The result is the Foreign Subsidies Regulation (or 'FSR'): a new regulation seeking to combat the effects of potentially distortive subsidies granted by third countries to companies operating in the EU.

On 30 June 2022, the European Commission, European Council and European Parliament reached political agreement on the text of the FSR. The final text was approved by the European Parliament on 11 July 2022, with the next step being a full vote of the legislature in November 2022. Once the Parliament and the Council formally adopt the final regulation, it will be published in the EU's Official Journal and will enter into force 20 days after that. The obligations under the FSR are expected to take effect from mid-2023.

The Foreign Subsidies Regulation provides three routes for EU scrutiny of third country (i.e. non-EU) subsidies:

  1. A broad ex officio review tool, giving the Commission the power to investigate potentially distortive foreign subsidies on its own initiative.  
  2. A mandatory, ex ante, notification regime for concentrations meeting certain financial thresholds, including a minimum level of foreign contribution received from third countries. (Note: the 'financial contribution' does not need to be directly related to the transaction in question).  
  3. A mandatory, ex ante, requirement to notify public procurement bids where a certain level of financial contribution has been granted by third countries.

This briefing focuses on the second aspect: the requirement to notify transactions where one or more parties have received financial contributions from one or more third countries. We explore how that regime will operate, as well as some of the ambiguities created by the drafting and next steps for dealmakers active in the EU.

2. Which transactions will be caught by the Foreign Subsidies Regulation?

The thresholds

Under the agreed text, 'concentrations' will need to be notified to the Commission, before they are completed, where the following thresholds are met:

  • One of the merging entities, the acquired undertaking or the joint venture is (i) established in the EU; and (ii) generates an aggregate turnover of at least Euro 500m in the EU; and  
  • All undertakings involved in the concentration were granted, in the three financial years prior to notification, combined aggregate financial contributions of more than Euro 50m from third countries.

The theory of harm underpinning the new notification regime for concentrations is intuitive: it is simply that the grant of a financial contribution to a transaction party can give an advantage to a bidder or an acquirer, not because of (for example) an inherently superior bid, but because of the mere existence of the advantage conferred by the financial contribution. Consequently, the Commission needs to be notified when a financial contribution might be of relevance to a transaction so that it can assess whether or not it is distortive in nature.

In addition, under its ex officio powers, the Commission will be able to require notification of potentially subsidised concentrations that fall below the notification thresholds (if it considers that the concentration would merit ex-ante review given its impact in the EU). The Commission will also have the power to review, on its own initiative, already implemented concentrations.

Helpfully, the concept of a 'concentration' has been lifted from the EU Merger Regulation ("EUMR"), i.e. is defined as a change of control on a lasting basis that results from the merger of two previously independent undertakings, the acquisition of control of an undertaking by another, or the creation of a full function joint venture.  The concept of 'control' is also analogous to the EUMR, meaning the ability to exercise decisive influence on an undertaking.

Who is the relevant party in asset management or private equity deals?

In an alternative asset management context, although the party acquiring control might technically be a fund limited partnership or a corporate entity in a stack designed to facilitate the acquisition, we expect the party deemed to be acquiring control for the purposes of the FSR to be the private equity firm or the asset manager: partly due to the analogous position under EUMR and because, in reality, they will be the ones exercising the decisive influence.

In any event, for the purposes of calculating the thresholds, group-wide turnover is used (see 'Valuing the financial contribution' below.

Establishment in the EU?

The concept of being 'established in the EU' is not defined in the proposed FSR. It is also not a term used in the EUMR and, therefore, would benefit from additional clarity in subsequent guidance.

An equivalent term is, however, used in the EU GDPR. Recital 22 of the GDPR defines 'establishment' as the 'real exercise of activity through stable arrangements' and, as such, whilst the presence of a branch or subsidiary isn't determinative, it is considered probative. We consider it likely that 'establishment' will prove a similarly low bar for the purposes of the FSR, and may indeed be analogous to the same concept used in the GDPR.

3. The concept of a 'financial contribution'

What is a financial contribution?

Many of the perceived difficulties in the FSR stem from the definition of 'financial contribution.' It is important to note that the concept of a 'financial contribution' is not the same as that of a 'subsidy' in a State Aid context. Indeed there is a wide difference between the two, with 'financial contribution' being a materially lower bar for the purposes of triggering a filing obligation. Unlike a subsidy, a 'financial contribution' granted by a third country does not need to be shown to 'confer a benefit' on an undertaking(s) or industry for the purposes of the notification obligation in the FSR.   

The question is then, what is a financial contribution? That is answered by Article 2 of the FSR.

A financial contribution shall include:

  • The transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling;  
  • The foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or  
  • The provision of goods or services or the purchase of goods or services.

Purchase of goods or services

The outlier in this definition is the reference to the 'purchase of goods or services' which prima facie would include contracts made between a government and a private undertaking for the purchase of goods and services, even if they have been negotiated on arm's length, commercial terms or were subject to a strict public procurement process. Examples might be, for example, government cleaning contracts, defence contractors, prison caterers, school stationary suppliers and other innocuous purchases of goods or services.

Such benign flows of money from governments to private companies is not the crux of the issue that the FSR seeks to address. However, as there will be cases where the Commission will want to assess any distortions from commercial contracts with third country governments (see potential examples below) this provision provides the Commission with that flexibility. It will, however, be important for guidance to be published in order to provide much needed certainty over the types of assistance that the Commission is most interested in, and whether this limb should be confined to circumstances where the purchase of goods is used as a front for, or in lieu of, other, more direct financial aid.

The inclusion of 'purchase of goods' in the definition of a financial contribution could, for example, cover the following types of circumstances.

Imagine the case of a property developer facing solvency issues, which is given a liquidity injection by a third country government purchasing its vacant property stock. This would be akin to a bailout insofar as the property would not have been purchased were it not for the undertaking's ailing financial situation. That property developer may then go on to seek to acquire a property portfolio (or, indeed, any business) in the EU.

The third country intervention should not escape the FSR regime simply because the government notionally received goods in return. Indeed the acquisition by a third country developer of a European property business would be exactly the sort of situation the FSR anticipates.

The issue at hand is that there is nothing in the text of the FSR to suggest that the scope can be limited to just these types of situations.

Loans and grants

The concept of a 'financial contribution' also includes loans and grants. This would capture, prima facie, measures taken by many governments in response to the COVID-19 pandemic (for example the Coronavirus Large Business Interruption Loan scheme in the UK that allowed businesses to borrow up to GBP 200m). Although applications for that particular loan scheme closed on 31 March 2021, the three-year reference period for measuring total financial contributions in the FSR means that those loans may be relevant for the calculation of the notification thresholds until well into 2024.

From whom can a 'financial contribution' be made?

Under Article 2 of the FSR, relevant financial contributions may be made by:

  • The central government and government authorities at all other levels;  
  • Foreign public entities, whose actions can be attributed to the third country, taking into account elements such as the characteristics of the entity, the legal and economic environment prevailing in the State in which the entity operates including the government’s role in the economy; or  
  • Any private entity whose actions can be attributed to the third country taking into account all relevant circumstances.