Ready For Take Off: Final Implementing Regulation For New EU Foreign Subsidies Regime Published - M&A/Private Equity

Introduction

This week, the first tranche of rules in the European Commission's Foreign Subsidies Regulation ("FSR") package begins to take effect. This imposes on businesses a new set of rules seeking to combat the effects of potentially distortive subsidies granted by third countries to companies operating in the EU. In particular, it imposes obligations on merging parties to notify the European Commission ("Commission") before closing their transaction when certain turnover and financial contribution thresholds are met. In brief, the Commission will investigate whether the internal market is distorted by any foreign subsidies either in relation to the competitive bidding process, or in markets where the target operates. Businesses may need to repay the subsidy or offer other remedies to obtain clearance before closing their deal.

The new FSR rules will apply from 12 July 2023 in respect of Commission own initiative investigations, and 12 October 2023 for mergers and public procurements. On 10 July 2023, the long-awaited final version of the Implementing Regulation was published. ¹ It seeks to guide businesses and their advisors about how the new regime will work in practice, alongside EU rules regarding merger control and foreign direct investment. The Implementing Regulation provides detailed rules on the procedure for FSR notifications of mergers and public procurement proceedings involving foreign financial contributions, in particular the notification forms and what specific information must be included in these. ²

Key reporting requirements for mergers

Since publication of the draft implementing regulation in February 2023, the Commission has faced wide-spread criticism owing in part to the excessive burden of notification requirements being imposed on parties to relevant transactions, and most notably in the merger context. Against that background, the Commission has somewhat simplified the reporting requirements relating to mergers, but in fact less than many stakeholders had hoped.

Transactions meeting (cumulative) turnover and contribution thresholds will need to be notified to the Commission where (i) the EU turnover of the company to be acquired, at least one of the merging parties or the joint venture is of at least €500 million and (ii) the foreign financial contribution reaches at least €50 million. ³ In terms of turnover, the turnover of the target (in case of acquisitions), the JV (for creation of a JV), or one of the parties (for mergers) in the EU must have been at least €500 million in the last financial year.

The main simplifications in relation to contribution thresholds compared to the previous draft are:

Detailed information will only have to be reported for each of the foreign financial contributions granted to the parties to the merger that relate to subsidies granted to an ailing undertaking, unlimited guarantees, non-OECD-compliant export financing and subsidies directly facilitating a merger or a tender offer.
In relation to other foreign financial contributions, the notification form will require only an overview of the various types of financial contributions using a summary table indicating for each third country the total amount of contributions and for each type of financial contribution a brief description and the link with the notifiable transaction.
The following foreign financial contributions do not need to be described in the summary table at all:
- Deferrals of payment of taxes and/or of social security contributions, tax amnesties and tax holidays as well as normal depreciation and loss-carry forward rules unless limited, for example, to certain sectors, regions or (types of) undertakings.
- Application of tax reliefs avoiding double taxation in line with applicable. However, unilateral tax reliefs applied under national tax legislation will need to be reported.
- Supply/purchase of goods/services (except financial services) at market terms in the ordinary course of business.
- Foreign financial contributions below the individual amount of €1 million.
The de minimis threshold for reportable aggregate financial contributions per country is significantly increased from €4 million to €45 million. This means that where the aggregate amount of such contributions in the preceding three years is less than €45 million, they will not need to be reported in the filing, not even in summary form. However, note that all financial contributions (including the sale of products or services to a public entity) count for determining whether the €50 million notification threshold for the notification requirement is met (see above).

In the case of mergers involving investment funds, foreign financial contributions granted to other investment funds managed by the same investment company but with different investors (or granted to portfolio companies controlled by these other funds) will not need to be included in the summary table under certain conditions.

Taking the above into account, notification thresholds might be met in certain circumstances even though the chances of a distortion of competition are very low. This imposes significant internal monitoring obligations on businesses notwithstanding the low risk of market distortion. In particular, the concept of "financial contribution" in the Implementing Regulation remains open-ended, thus requiring businesses to take a broad approach when preparing records of subsidies received from foreign governments.

Practical takeaways

The final Implementing Regulation provides detailed rules on many practical aspects of filing for FSR clearance. In this way, the Commission is drawing on 'lessons learnt' from its experience with mergers and antitrust cases and has made clear that its approach to applying the FSR regime will evolve with experience. Over the next few weeks and months businesses involved in a merger which requires FSR clearance are well advised to:

Seek to persuade the Commission to adopt a pragmatic approach to its FSR investigations: the Implementing Regulation includes scope for some flexibility by the Commission, for example in respect of the timeframe during which commitments can be offered. Businesses should therefore plan their engagement with the Commission strategically and should consider what waivers they can offer the Commission in terms of protection of confidential information, to speed up both the FSR and merger reviews which have aligned deadlines, to allow the two notifications to run efficiently in parallel. The Phase I review will be 25 working days, while Phase II is 90 working days, extendable, in case of remedies. As with merger control to date, engaging in pre-notification discussions with the Commission about the FSR filing, and ensuring these discussions are 'joined up' will be paramount for transaction planning;
Adopt stringent data collection mechanisms: although the spirit of the amendments of the Implementing Regulation is to be welcomed, and the notification form which parties now must submit will be somewhat easier as compared to the initial draft of the Implementing Regulation, the data collection burdens on parties to a relevant merger under the FSR remain significant;
Include FSR provisions in corporate documentation: although the dates of the new rules sound neatly defined, in practice, all transactions signed after 12 July 2023 but that will not be closed by 12 October 2023 will need to be notified under the FSR procedures. All such deals should include provisions relating to FSR clearance in their conditions precedent and other relevant corporate documentation; and
Give particularly careful thought to financial contributions from countries where loans, utilities and land-use rights are provided at non-market terms: this is especially relevant when such conditions have been found in past European decisions, for example in the area of anti-subsidy investigations. The same applies to manufacturing inputs sourced from sectors with a significant State ownership or acting under entrustment and direction from a foreign government (batteries, steel, aluminium, chemicals and others). Such contributions therefore are unlikely to benefit from a waiver for the summary reporting.

The Commission has emphasised that the applicable rules and regulations in the FSR field will evolve as practice and experience grows so it will be important to closely follow developments as this new regime beds in. Mayer Brown offers a distinctive combination of in-depth experience in fields that inspired the FSR regime and procedures, namely (i) involvement in EU anti-subsidy investigations concerning subsidised imports of goods from third countries, including as counsel to exporters and governments in the most recent EU anti-subsidy investigations; and (ii) involvement in EU State aid investigations, FDI screening procedures, highly complex merger control proceedings and antitrust investigations, and public procurement procedures.

Footnotes

1. https://ec.europa.eu/transparency/documents-register/detail?ref=C(2023)4622⟨=en

2. Detail on the background to the Implementing Regulation can be found here.

3. Foreign Subsidies Regulation (europa.eu)

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