EU Foreign Subsidies Regulation - Additional obligations for companies in mergers, acquisitions and public tenders

1. Introduction: Key points
   

• The current instruments - in the form of the EU merger control and EU state aid rules - do not provide sufficient protection against the specific problems and unfair competition that non-EU subsidies bring.

• The new Foreign Subsidies Regulation ('FSR' or 'Regulation') entered into force on 12 January 2023. Under this Regulation, the European Commission ('Commission') has far-reaching powers to block mergers, acquisitions and joint-ventures ('mergers') and bids in public tenders and even retroactively dissolve certain mergers where foreign investment distorts competition in the EU internal market.

• Where certain financial thresholds are exceeded, there is an obligation to notify the concentrations and bids in question and implementation is suspended until the Commission’s approval.

• The Commission will also be given powers to launch its own investigations (ex officio) into other situations where foreign investment has been involved.

From 12 July 2023, the Commission can launch investigations on its own initiative and from 12 October 2023, the notification requirement for companies in relation to mergers and public procurement will apply.

2. Foreign subsidies

The Regulation covers foreign subsidies granted by non-EU governments to companies engaged in economic activity within the EU. This includes EU-based companies as well as foreign companies operating within the EU.

What qualifies as a foreign subsidy should be interpreted broadly and includes any financial contribution provided directly or indirectly by a non-EU government. This can include both more direct forms of capital injections, subsidies and loans, as well as more indirect forms such as debt forgiveness and not collecting income that would normally be due (e.g. tax exemptions). Finally, the supply or purchase of goods or services are also included in the definition.

Moreover, not only subsidies from the central government are considered, but also subsidies from decentralised governments or private parties whose behaviour is attributable to a government. Finally, the subsidy must confer an advantage and be limited to one or more enterprises or industries. This is in line with the current rules on state aid of EU member states and means, among other things, that financial contributions that are in line with market conditions, and thus do not confer a specific advantage, fall outside the scope of the Regulation. Benefits that are general in scope - such as general tax measures applicable to all - are also excluded.

3. Reporting and monitoring by the Commission

The FSR introduces three different powers for the Commission to determine whether foreign subsidies distort the internal market: (i) merger control, (ii) control on bids for public contracts, and (iii) general control.

The first two powers follow a notification requirement for companies involved in mergers or public procurement procedures where the respective notification thresholds are met.

Thus, in the case of mergers, there is a duty to file a prior notification with the European Commission when:

• the acquired company (target), one of the merging parties or the joint venture has a turnover in the EU of at least €500 million; and

• the merger involves a financial contribution from a non-EU government of at least €50 million provided in the previous three years.

Concentrations by merger or acquisitions of joint control are notified by the parties to the merger or by the parties acquiring joint control. In all other cases, the notification is made by the person or undertaking acquiring control of all or part of one or more undertakings.

In the case of a public tender, notification must be made to the contracting authority or contracting entity if:

• The contract value of the tender is at least €250 million; and

• there is attached to the bid a financial contribution from a non-EU government of at least €4 million provided in the previous three years.

Once the notification or declaration is submitted, the contracting authority or contracting entity shall promptly forward it to the Commission.

To consider whether the above thresholds are exceeded, not only the company that is tendering (including all subsidiaries and participating companies that do not have commercial autonomy) is considered, but also all subcontractors and suppliers involved in the same tender.

Finally, the Commission has a residual ex officio power whereby it can initiate investigations on its own initiative into distorting subsidies in the EU market. This power extends beyond mergers and public procurement and covers all economic activities of companies that have received a subsidy (regardless of the amount) from a non-EU government. Companies that believe that other companies have violated FSR rules can inform the Commission and the Commission could then investigate.

4. Procedure and powers of the Commission

The Commission's FSR investigations follow a similar structure to merger control: a first-phase investigation followed by a second-phase investigation if the first phase identified competition concerns that require further investigation. For mergers, the Commission uses 25 working days for the first phase and 90 working days for the second phase, with an option to extend by 15 working days.

For public procurement, there is a period of 20 working days for the first phase (with an option to extend by 10 working days) and 110 working days for the second phase (with an option to extend by 20 working days).

The concentration cannot be implemented and the tender cannot be awarded until the Commission has approved it.

For the ex officio power of investigation, there is no time-period for the Commission to complete its investigation.

During its investigation, the Commission can use far-reaching powers, such as requiring companies to provide necessary information, making inspections of companies within the EU and even conducting inspections on the territory of a third non-EU country. The Commission can only use this extraterritorial inspection power with the consent of the third government in question. 

If a company fails to cooperate with an investigation by, for example, supplying incorrect or incomplete information, the Commission can impose a fine of 1% of annual turnover or a penalty of 5% of daily turnover for each working day of non-compliance. If a company fails to notify a notifiable concentration or public tender, or does not await the Commission's approval, the Commission can impose a fine of 10% of its most recent annual turnover.

The Commission can block notifiable concentrations and public tenders. In addition, for mergers falling below the notification thresholds, the Commission may require parties to still notify if it suspects that foreign subsidies may have been granted in the three years preceding the merger. Finally, the Commission may ex officio investigate mergers and tenders already completed - up to ten years after the foreign financial contribution was made - even reversing completed mergers.

On 6 February 2023, the Commission released a draft Implementing Regulation detailing the procedures. The final text will be adopted in the second quarter of 2023 (and in any case before the FSR enters into force on 12 July 2023).

5. Distortion of the internal market - substantive test

The substantive test applied by the Commission looks at the distortion of the internal market. This occurs if the foreign subsidy can improve a company's competitive position in the internal market and competition in the internal market is actually (or potentially) affected.

There is still much uncertainty about the exact interpretation of the distortion criterion. Nevertheless, the Regulation mentions several indicators on the basis of which distortion can be determined. These include the amount and nature of the subsidy, the situation of the company, the level and development of economic activities, and the purpose and conditions attached to the subsidy provided.

It also identifies some specific categories of subsidies that are very likely to distort the EU market, such as, for example, subsidies provided to distressed companies, subsidies in the form of an unlimited guarantee of debt or subsidies that directly facilitate a concentration.

With respect to a de minimis limit - below which the subsidy is deemed not to distort the internal market - the Regulation has adopted a two-part structure. First, foreign subsidies of less than €4 million over a three-year period are considered unlikely to distort the internal market. Second, subsidies of less than € 200,000 over a three-year period are presumed not to distort the internal market.

Finally, there is the possibility for the Commission to balance the negative effects of foreign subsidies on the internal market against the positive effects they might have. In doing so, the Commission may consider both the specific economic activity subsidized and the broader policy objectives of the EU. Not much is yet clear about this balancing test except that the Commission appears to have a fairly wide margin of discretion.

The current uncertainty regarding the interpretation of distortion of the internal market and the balancing test that the Commission may apply will remain for the time being. Some guidance can be found in state aid legislation and its application by the Commission in the past, as the FSR should be interpreted in light of this already existing legislation. Concrete clarification is intended to follow from the Commission's future guidelines. The Commission is required to adopt guidelines on how to apply the criteria for determining the existence of an interference and how it will apply the balancing test. These will be released by January 12, 2026. In the meantime, it remains to be seen how the Commission will apply the FSR.

6. Conclusion

The FSR will have profound implications for non-EU and EU companies receiving subsidies from outside the EU. For mergers and acquisitions and bids in public tenders, companies will have to assess compliance with the FSR and there may be a filing obligation.

This will lead to delays in transactions and increased information obligations for companies in addition to the already existing obligations under merger control, state aid law and foreign investment regulations that apply in an increasing number of countries. In addition, companies must keep good internal records of financial support - in whatever form - received from a non-EU government anywhere within the company's group.

In addition, there are still many uncertainties about the interpretation of certain concepts in the FSR, which may or may not tie in with existing EU legislation on state aid, merger control and public procurement procedures. Finally, careful consideration will be given to how often the Commission will use its ex officio power to launch investigations and what results this will lead to. Also, with regard to mergers already implemented and public tenders already awarded, what is clear is that the Commission has been given far-reaching powers on the basis of the FSR and that companies should prepare themselves in time to avoid non-compliance and all its undesirable consequences.

Joost Haans