With the new EU Foreign Subsidies Regulation ("FSR") now fully in force, M&A transactions and public procurement processes above certain prescribed thresholds are now mandatorily notifiable to the European Commission since 12 October 2023. While the EC has had a 'call in' power to review potentially distortive non-EU subsidies since the FSR regime went live on 12 July 2023, identifying the existence of such mandatory approval requirements will further increase the compliance burden on companies moving forward.
The new FSR regime is part of the EU's broader industrial policy agenda, and represents a tougher stance against perceived unfair competition from outside the bloc. While the EC's State aid regime has long ensured oversight over subsidies given by EU Member States, the EC has lacked the same power in respect of subsidies granted by non-EU governments. The new FSR regime closes that gap by giving the EC a review power, as well as a power to block or impose commitments when it identifies potentially distortive subsidies at play.
The implications for both EU and non-EU companies in receipt of non-EU financial contributions and subsidies granted by non-EU government bodies or public or private entities attributable to non-EU governments are significant. At a minimum, new internal data collection processes will need to be implemented to capture all non-EU financial contributions received to ensure compliance.
This Briefing provides an overview of the key elements of the new FSR regime, and what companies can do to get ready and ensure they are compliant.
FSR Regime Fully in Force
The new regulatory regime established under the FSR and administered by the EC came into force on 12 July 2023. Since then, the EC has had a 'call in' power to initiate exofficio investigations into potentially distortive non-EU subsidies, including in respect of M&A transactions and public procurement initiated after that date.
Since 12 October 2023, larger-scale M&A transactions and high-value public contracts that meet the relevant thresholds will also need to be notified to the EC. This includes all M&A transactions that have been signed on or after 12 July but not completed by 12 October 2023, and public contracts announced on or after 12 July but not awarded by 12 October 2023.
Mandatory Notification Thresholds
M&A transactions
In relation to M&A transactions, parties will need to notify the EC to obtain pre-closing approval where the following cumulative thresholds are met:
- Turnover threshold: one of the target company,
one of the merging parties, or the joint venture
("JV") is established in the EU and has
EU-wide turnover of at least €500 million in the last
completed financial year; and
- Non-EU financial contribution threshold: the undertakings involved in the transaction (ie, the acquiring company and the target, the merging entities, or the JV and its parent companies) have received combined aggregate financial contributions of more than €50 million within the three year period prior to the agreement.
The transaction itself needs to involve an acquisition of 'control' (ie, 'decisive influence' or the power to approve or block strategic commercial decision-making) over the target business or the establishment of a 'full-function' JV (ie, a JV that will operate independently and autonomously on the market).
These mirror the same concepts as under the EU Merger Regulation ("EUMR").
Importantly, the concept of a non-EU 'financial contribution' is defined broadly, and notably, below the threshold of a non-EU 'subsidy' which confers a benefit on an undertaking(s). Thus, the concept of a non-EU 'financial contribution' covers any direct or indirect financial contribution made by governments of, or any public or private entity attributable to, a non-EU country, and including:
- The transfer of funds or liabilities such as capital
injections, grants, loans, loan guarantees, fiscal incentives, the
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 (even at market value).
While the turnover threshold is set relatively high, the financial contribution threshold is set a much lower level. The broad concept of 'financial contributions' is also cast widely to catch a broad set of arrangements with non-EU governments. Accordingly, if the turnover threshold is met, the prospect of the non-EU financial contribution threshold would generally be expected to be higher (but will depend on the parties and sectors involved, amongst others).
Potential mandatory FSR approvals will now be a standard element of the regulatory due diligence analysis, alongside merger control and foreign investment screening requirements.
See Figure 1 below regarding the M&A filing analysis.
Public Procurement
In relation to public procurement processes, tenderers participating in a public procurement procedure, are required to notify the contracting authority or contracting entity of all foreign financial contributions where:
- Contract value threshold: the estimated value
of the public procurement (or framework agreement) is at least
€250 million (and, where the contract is divided into lots,
the aggregate value of each lot is €125 million); and
- Non-EU financial contribution threshold: the company (including its subsidiary companies without commercial autonomy, holding companies, and, if applicable, main subcontractors and suppliers involved in the same tender in the public procurement procedure) was granted aggregate financial contributions in the 3 years prior to notification of at least €4 million per non-EU country.
The notification obligation also applies to the main subcontractors and suppliers if the economic share of their contribution exceeds 20% of the estimated contract value.
As referenced above, the tenderer is required to notify the contracting authority or contracting entity of all foreign financial contributions where the above thresholds are met. The contracting authority or contracting entity is then required to transfer the notification to the European Commission for review.
Where the contract value is above the threshold, but the non-EU financial contributions received are below threshold, the tenderer is still required to submit a declaration to the contracting authority or contracting entity setting out all non-EU financial contributions received and why the non-EU financial contribution threshold is not met.
Tenderers therefore need to be aware of the potential impact of mandatory notification or declaration obligations arising from non-EU financial contributions received.
See Figure 2 below regarding the public procurement filing analysis.
Residual 'Call In' Power
The EC has also had a general 'call in' power to initiate ex-officio investigations into potentially distortive non-EU subsidies, including in the context of M&A transactions and procurement processes initiated after that date and also including those below the mandatory notification thresholds. This power has been effective since the regime came into force on 12 July 2023.
The EC may exercise this power based on information from all sources including information from Member States and third party complaints.
In evaluating whether to exercise this power, it is likely that the EC will have regard to the considerations set out in the FSR as to when a financial contribution or subsidy is likely to distort the internal market. These considerations include the amount of the foreign subsidy; the nature of the foreign subsidy; the situation of the undertaking, including its size and the markets or sectors concerned; the level and evolution of economic activity of the undertaking on the internal market; and the purpose and conditions attached to the foreign subsidy as well as its use on the internal market.
The EC can exercise its 'call in' power in relation to any M&A transaction involving a potentially distortive subsidy that was granted in the five years prior to 12 July 2023 (ie, since 12 July 2018) and which potentially distorts the EU market after 12 July 2023. In the context of a public procurement process, the 'call in' power can be exercised in relation to any potentially distortive subsidiary that was granted in the three years prior to 12 July 2023 (ie, since 12 July 2020).
While the circumstances in which the EC will exercise its 'call in' power are as yet unclear, the possibility of a 'call in', even where mandatory approvals are not required, will create further risk for companies in receipt of non-EU subsidies.
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