On 12 July 2023, the Regulation 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market (known as Foreign Subsidies Regulation or FSR), adopted on 28 November 2022, came into effect.
Under the FSR, the European Commission (“Commission“) is competent to review concentrations that exceed specified monetary thresholds for the amount of subsidies received from non-EU Member States, which may distort the internal market. This adds another layer of regulatory considerations to M&A deals, in addition to the existing merger control procedures and foreign investment screenings. FSR also mandates thorough foreign subsidy controls in public procurement processes in the EU.
Before FSR, the Commission was competent to review subsidies granted by the EU Member States. The subsidies granted by non-EU governments to undertakings doing business in the EU were left unchecked. FSR provides the Commission with three new tools to counter foreign subsidies:
- the power to initiate ex officio review to examine information from any source regarding alleged foreign subsidies distorting the internal market (applicable as of 12 July 2023);
- mandatory notification obligation for concentrations if turnover and foreign subsidy thresholds are exceeded (applicable as of 12 October 2023); and
- obligation to notify the Commission, through a contracting authority or entity, of received foreign contributions as a condition to participation in public procurement procedures (applicable as of 12 October 2023).
Foreign subsidy is any financial contribution which is provided directly or indirectly by a third country (a public authority at any level, a public enterprise, or a private entity if the actions of that private entity can be attributed to the foreign state in question), confers a benefit and is selective, i.e. limited to one or more undertakings or industries. The foregoing conditions are cumulative. The notion of financial contribution is broad and includes a range of support measures, such as transfer of funds or liabilities, foregone revenues or provision or purchase of goods or services.
Notification of concentrations
A notification obligation for concentrations will arise when: (i) at least one of the undertakings concerned is established in the Union and generates an aggregate turnover in the Union of at least EUR 500 million; and (ii) the undertakings concerned (the merging undertakings, the acquirer and the target, their respective parent companies or any of the joint venture members) were granted combined aggregate financial contributions of more than EUR 50 million from third countries in any of the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.
However, the European Commission also has wide powers to request prior notification of any concentration which falls under the threshold specified above, at any time prior to its implementation if it suspects that foreign subsidies may have been granted to the undertakings concerned in any of the three years prior to the concentration.
The standstill obligation applies until clearance from the Commission. The parties may notify a concentration on the basis of a serious intention, in the same manner as in standard merger control proceedings.
The transactions signed on or after 12 July 2023 and closed before 12 October 2023 are exempt from the notification obligation.
Notification of public procurement procedures
Foreign subsidies will be considered to be liable to distort a public procurement procedure when they enable an economic operator to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned. As with the concentrations, only foreign subsidies granted during any of the three years prior to the notification shall be taken into account in the assessment.
Foreign financial contribution in a public procurement procedure must be notified where:
- the estimated contract value is at least €250 million, and
- the foreign financial contribution involved is at least EUR 4 million per non-EU country.
The Commission has wide-ranging powers to start investigations on its own initiative if it suspects that foreign subsidies are distorting the internal market. This includes the possibility to request ad-hoc notifications for public procurement procedures and concentrations falling below the thresholds.
Commission’s assessment and available measures
If it detects a distortion on the market, the Commission has wide-ranging powers to impose redressive measures, block transactions or awards of public contracts, and even dissolve already implemented concentrations.
Foreign subsidies are not generally prohibited, and the Commission will assess on a case-by-case basis whether a subsidy distorts competition on the internal market. In that assessment, it could take into account different factors, such as the size of the foreign subsidy in absolute terms or in relation to the size of the market or to the value of the investment. As an example, a concentration, in the context of which a foreign subsidy covers a substantial part of the purchase price of the target, is considered likely to be distortive. The same approach will apply to foreign subsidies covering a substantial part of the estimated value of a contract to be awarded in a public procurement procedure. Foreign subsidies will also be more likely to cause distortions if granted for operating costs, to large undertakings (rather than to SMEs), failing undertakings, and/or in markets characterised by high barriers to entry, overcapacity or leading to overcapacity.
On the other hand, subsidies will be presumed unlikely to be distortive if lower than EUR 4 million in the past three years, or if granted for the purposes of repairing damage caused by natural disasters or exceptional circumstances. There is also a de minimis threshold akin to the EU state aid de minimis presumption, as subsidies below EUR €200,000 per third country in the previous three years will be considered non-distortive.
When the Commission identifies a distortion, it may conduct a balancing test to check whether this distortion can be counterbalanced by positive effects of the foreign subsidy, namely on the development of the relevant subsidised economic activity on the internal market, or the broader positive effects in relation to the relevant policy objectives, in particular those of the Union. The Commission will take into account the results of the balancing test when deciding whether and what type of redressive measures or commitments to impose.
Both ex-ante and ex-officio procedures will follow a two-step review. The Commission will first conduct a preliminary review to assess whether there are sufficient indications that an undertaking has been granted a foreign subsidy distorting the internal market. If not, it will close the investigation with a no objection decision. If sufficient indications of distortion exist, it will open an in-depth investigation, following which the Commission can adopt: (i) a no objection decision; (ii) a commitments / redressive measure decision; or (iii) a decision prohibiting the concentration or the award of the contract. The redressive measures and commitments can be structural (such as a ban on acquisitions, divestments, or reduction of capacity or market presence), or behavioural (such as offering access or licencing at FRAND conditions to an infrastructure, publicising R&D results, repayment of the foreign subsidy with an interest rate, or adaptation of the governance structure). Repayment of a subsidy will be accepted as an adequate commitment only if the Commission can ascertain that the repayment fully remedies the distortion, is executed in a transparent and verifiable manner and is effective in practice, while taking into account the risk of circumvention of the objectives of the FSR.
Effect on companies operating in non-EU countries including Serbia, Montenegro, and Bosnia and Herzegovina
Companies from non-EU countries, including from our region, that do business in the EU, as well as EU companies with subsidiaries in our region, will have to consider carefully the implications of FSR on their business operations in the EU. Even though Serbia, Montenegro, and Bosnia and Herzegovina have harmonised their state aid control regimes to a large extent with the EU state aid control rules, the enforcement of state aid control is still far from enforcement at the EU level. The national governments, particularly the government in Serbia, offer sizeable incentives to foreign investors, from subsidies to tax incentives, and including more sophisticated forms of state aids within the scope of large investment projects. Much of state aid still remains unnotified, and some state aid schemes are yet to be aligned with the state aid rules. All these contributions, whether notified to the national state aid authorities or not, are liable to be considered by the Commission within the scope of the FSR review. The Commission can obtain information on foreign subsidies from various sources, including from Member States, third countries, and any natural or legal person or association.
What can clients do to prepare?
Firstly, companies contemplating an M&A transaction in the EU or involving an EU target will have to factor in the possibility of an FSR review, and adapt the deal documents and timing accordingly. Until sufficient practice is developed, there is uncertainty regarding the total duration of the reviews, especially if initiated ex-officio by the Commission.
Companies participating in public tenders in the EU may expect that the tender procedures will become more complicated, regardless of whether they have received foreign subsidies or are competing with companies that have received such subsidies. A company that has benefited from distortive subsidies, or has failed to report foreign financial contributions will be excluded from the procurement procedure or required to offer serious commitments. It is almost certain that an increased number of complaints will be filed with the Commission in relation to public tender procedures.
Secondly, companies receiving any kind of financial contributions from non-EU countries, including the countries from the candidate countries, should start collecting and systematising their data on foreign financial contributions at a consolidated level. The companies should not exclude from their databases foreign contributions which they consider not to constitute foreign subsidies, as the Commission may conduct its independent review of whether certain contributions amount to state aid. The data should be regularly updated for the previous three financial years, regardless of whether a company is planning a notifiable acquisition or participation in a public tender, as a possibility of ex-officio investigation by the Commission exists regardless of the thresholds prescribed in the FSR.
Companies’ efforts to comply with FSR will be aided by the rules for implementing the Foreign Subsidies Regulation, adopted by the Commission on 10 July 2023. The rules offer detailed guidance on various aspects useful for data collection and notification planning. The Implementing Regulation details procedural aspects of the FSR, including the notification forms for concentrations and public procurement procedures and instructions on which kind of foreign financial contributions require detailed disclosure and which only high-level information. The Implementing Regulation also includes guidance and more details on notification procedures, the Commission’s investigation process, the procedural rights of the parties regarding the protection of confidential information, access to files and submission of observations, calculation and suspension of time limits for the provision of information and submission of commitments.