New power for European Commission: review of foreign subsidies in M&A transactions and procurements

The European Union adopted the Foreign Subsidies Regulation (“FSR”) late last year. The FSR introduces a new review tool for the European Commission (“the Commission”). This review tool targets undertakings that operate in the internal market and that have received subsidies from a non-Member State (third country). The Commission will assess in certain M&A transactions and public procurements whether the subsidy received distorts the internal market. The FSR will effectively enter into force on 12 July 2023.

The background and scope of the FSR are explained in this blog. The Commission’s new powers and the procedure under the FSR are also addressed. Finally, we look ahead to the implications for undertakings.

Background

Undertakings within the EU regularly receive investments from outside the EU. Large parts of those foreign investments consist of subsidies from third countries. Strict state aid rules apply within the EU, but those state aid rules do not apply to subsidies from third countries. Other European regulations, such as the competition and merger control rules, cannot effectively prevent such subsidies from distorting the internal market. This gives rise to an unfair difference between undertakings that receive subsidies from EU Member States and undertakings that receive subsidies from third countries. The FSR was therefore introduced to create a level playing field.

Scope

Five cumulative conditions must be met before a subsidy is deemed to fall within the FSR’s review framework:

1. the subsidy must be given to an undertaking that operates in the internal market;
2. a financial contribution must be involved;
3. the subsidy must come from a third country;
4. the subsidy must confer a benefit; and
5. the subsidy must be provided selectively.

The term ‘financial contribution’ must be interpreted very broadly. It includes all financial resources directly or indirectly provided, such as capital injections, loans, debt forgiveness and tax exemptions. A ‘benefit’ is granted if the financial contribution could not have been obtained under market conditions. ‘Selective’ means that the subsidy is granted to one or several undertakings or industries. It therefore does not refer to a general measure.

The Commission must determine whether the subsidy is likely to distort the internal market. A distortion occurs if the subsidy may improve an undertaking’s position on the market and that has a negative impact on the competition on that market.

The FSR divides subsidies from third countries into the following three categories:

1. subsidies that are unlikely to distort the internal market;
2. subsidies that are likely to distort the internal market; and
3. subsidies that may distort the internal market after a case-by-case assessment.

The FSR provides for three possibilities in which the subsidy is unlikely to distort the internal market (Article 4 FSR):

1. a subsidy that does not exceed €4 million over any consecutive period of three years;
2. a subsidy that does not exceed €200,000 per third country over any consecutive period of three years. This is in keeping with the permissible de minimis aid as defined in the De Minimis Regulation (1407/2013); and
3. a subsidy provided to repair damage caused by natural disasters or exceptional occurrences.

In principle, the Commission will therefore not review a subsidy from a third country if it comes under one of these three exceptions. In exceptional cases, the Commission may at a later stage establish a distortion for cases that comes under (a). This requires an in-depth investigation.

The FSR also provides a list of subsidies that are likely to distort the internal market (Article 5 FSR):

1. a subsidy granted to an ailing undertaking;
2. a subsidy in the form of an unlimited guarantee for the debts or liabilities of an undertaking;
3. an export financing measure that is not in line with the OECD Arrangement;
4. a subsidy directly facilitating a concentration (merger, acquisition or joint venture); and
5. a subsidy enabling an undertaking to submit an unduly advantageous tender.

If a subsidy does not fall into categories (i) or (ii), the Commission itself must establish a distortion on the internal market. This requires an in-depth economic investigation of the impact of the subsidy on the recipient undertaking’s position on the internal market. In that investigation, the Commission considers, among other things, the amount of the subsidy, the nature of the subsidy, the situation of the undertaking, and the conditions attached to the subsidy. The Commission will publish further criteria in the form of guidelines.

The Commission must also consider positive effects of the subsidy when assessing it. Those positive effects must be weighed against the negative effects. The positive effects may relate to the development of the relevant subsidised economic activity on the internal market. The positive effects may also relate to relevant policy objectives, such as environmental protection, job creation, promoting digital transformation, and public safety. This gives the Commission considerable discretion as to whether the subsidy is desirable.

Review instruments and reporting requirement

The FSR gives the Commission three different instruments to review subsidies:

1. an instrument for reviewing M&A transactions;
2. a public procurement review instrument; and
3. a general ex officio review instrument.

A notification requirement applies to a merger, acquisition or joint venture and to public procurements that exceed certain thresholds and to which none of the exceptions listed in (a) to (c) applies. A turnover/value threshold and a financial contribution threshold apply to both concentrations and public procurements. A standstill obligation applies during the period between the reporting and a review decision by the Commission. This means that undertakings may not complete the transaction or the public procurement procedure in this period.

The turnover threshold in relation to M&A transactions means that the undertaking acquired or at least one of the merging undertakings or the joint venture itself (i) is located in the EU and (ii) has a turnover of at least €500 million. The financial contribution received by the undertaking in question must total more than €50 million in the three years preceding the notification.

The value threshold in relation to procurements includes public procurements within the EU with an estimated value of at least €250 million. The financial contribution granted to the undertaking in question in the three years preceding the notification must be at least €4 million per third country.

In addition to the two forms of supervision of notifiable activities, the FSR also contains a catch-all provision. This ex officio instrument covers all economic activities of an undertaking that receives a subsidy from a third country that are not covered by Instrument 1 or Instrument 2.

The Commission’s powers under the ex officio instrument enter into force on 12 July 2023. The Commission’s powers under the concentration instrument and the public procurement instrument come into effect on 12 October 2023.

Procedure

A two-step process applies to all three of the instruments. The first step is a preliminary assessment; the second step is an in-depth investigation. The Commission has 25 working days for the preliminary assessment of M&A transactions from the time of notification. After this preliminary assessment, the Commission may decide to close the investigation if it finds that the subsidy will not lead to a distortion of the internal market. If the Commission cannot yet reach that conclusion, an in-depth investigation is launched. The Commission has 90 working days for that investigation. It has 20 working days for the preliminary assessment in public procurements and 110 working days for an in-depth investigation in public procurements.

The Commission has several powers when investigating a transaction. The Commission may request information from undertakings or conduct inspections, for instance. It furthermore has the power to impose fines or penalties on undertakings that fail to cooperate.

An in-depth investigation may have four possible outcomes:

• a decision of no objection;
• commitments from the undertakings involved;
• remedies; or
• a decision prohibiting the transaction or the award of the tender.

If either of the first two instruments is used, the Commission cannot impose remedies. It can do so only if the Commission launches an investigation on its own initiative. The remedies may include, for instance, an obligation for the parties to reduce their market presence or publish R&D results. The table below shows which outcome is possible for each investigative instrument.

	Concentration instrument	Public procurement instrument	Ex officio instrument
Decision of no objection	X	X	X
Commitments	X	X	X
Remedies			X
Prohibition	X	X

Impact of mergers, acquisitions and procurements

The potential impact of the FSR is significant. The FSR may restrict the operations of third-country funded undertakings within the EU. Undertakings will furthermore have to file a notification without the merger notification thresholds being exceeded or a Member State referring the concentration under Article 22 of the EC Merger Regulation.

Undertakings that intend to merge or complete an acquisition should take a number of things into account going forward. They should be mindful of what information needs to be collected internally in order to be submitted to the Commission. The legislation relates to financial contributions. That is a very broad concept. Many different types of information may therefore be relevant, such as loans granted, but also tax cuts. The information may have to be found in different places within the undertaking.

Undertakings should furthermore take into account the new requirements when planning the transaction timeline. For that reason, undertakings should also bear in mind that information gathering may take quite some time. The time that the Commission may take to assess a notification must also be included in the timeline.

The review under the FSR takes place in addition to the currently applicable competition rules, merger control, state aid rules, Foreign Direct Investment (“FDI”) rules and the Wet Vifo (Investment Screening Bill – "ISB"). See also this blog.

The FSR expressly applies to undertakings that operate in the field of sensitive technology. It therefore overlaps with the ISB. The FSR furthermore allows the Commission to include FDI considerations in its review of a merger, acquisition or joint venture (Article 52(3)(c) FSR). The FSR also complements existing FDI rules, as the granting of foreign subsidies does not usually lead to an FDI investigation.

A proposed merger may therefore be subject to different types of investigation. Those investigations may have different outcomes, since national security concerns do not always coincide with concerns about disruption of the internal market. Different types of review may therefore lead to less legal certainty for undertakings, because different outcomes are possible.

What next?

The FSR raises a number of questions that remain unanswered for the time being. It is still unclear, for instance, how intra-group transactions should be assessed: for example in the case in which a third country provides a financial contribution to an undertaking in a third country that may benefit the subsidiary based within the EU. The Commission has announced that it will soon come up with implementing provisions that should remove the legal uncertainty for undertakings.

In early February 2023, the Commission published draft guidelines detailing how it will enforce the FSR. These guidelines state, for instance, that notifying undertakings must disclose to the Commission what kind of subsidies they have received. They also describe the undertakings’ rights during the procedure. Reporting undertakings have the right, for instance, to inspect all the documents used by the Commission to arrive at a decision. The consultation period during which interested parties may provide feedback to the Commission runs until 6 March 2023.

It is important for undertakings that receive subsidies from outside the EU to be aware of the new rules introduced by the FSR.

Please feel free to contact us if you have any questions regarding the FSR.

More information on the ISB and FDI-related issues can be found in this, this, this and this blog or at wetvifo.nl.

Information on dawn raids by ACM and the European Commission can be found at invalacm.nl.

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