European Union agrees on new foreign subsidies regime with mandatory notification thresholds

On 30 June 2022, the European Commission announced that agreement has been reached on the Foreign Subsidies Regulation ("FSR"), originally proposed in May 2021. Here we look at what has changed, and our key takeaways.

The new regime, due to come into force by mid-2023, will impact undertakings engaging in M&A, participating in EU public procurement procedures, or receiving subsidies from third countries (i.e. from outside the EU).

The Regulation grants the Commission the power to investigate such subsidies for any distortions to the internal market and take remedial measures. The aim?

According to the Commission, the FSR will "ensure a level playing field for all companies operating in the EU Single Market".

Investigations and notifications

The Commission's toolbox will include general market investigations, which will comprise ad hoc notification or information requests, fact-finding missions and inspections (a.k.a dawn raids), and specific sector or subsidy investigations.

More onerously, there are two notification-based procedures, under which undertakings will be obliged to notify:

• Concentrations where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and the transaction involves a foreign financial contribution of at least €50 million; and
• Tenders in public procurements procedures, where the estimated contract value is at least €250 million and the bid involves a foreign financial contribution of at least €4 million per third country.

Such concentrations must be cleared by the Commission before they can be completed, at the risk of fines of up to 10% of the aggregated turnover of the relevant undertakings. If a distortive foreign subsidy is found, the Commission will undertake a balancing test between the positive and negative effects of the subsidy. If the latter outweigh the former, structural or behavioural remedies may be imposed.

Timing

The new M&A notification regime, like the existing merger control regime, will consist of an initial phase one of 25 working days, followed by an in-depth 90 working day phase two, starting from the date of formal notification. Notified transactions are suspended pending clearance.

In public procurement procedures, investigations can last as long as 160 working days, which would include a 20 working-day preliminary review (extendable by up to 10 working days in "duly justified cases"), and the 90-day in-depth investigation (also extendable by up to 20 working days).

Our comment

The FSR attempts to address a supposed lacuna in EU competition and state aid law by giving birth to a new regime of tighter control on foreign subsidies/state aid over undertakings operating or acquiring assets in the EU. There are a number of key takeaways.

Firstly, it should be noted that the mandatory notification regime represents a complete U-turn of responsibility in comparison with the state aid regime, whereby responsibility on notifying the specific aid measure is on the Member State. Under the proposed FSR, undertakings themselves will be responsible for making notifications and complying with information requests.

Secondly, the balancing test is also 180 degrees away from the state aid rules, which see the positive effects of the aid as the starting point. The FSR sees the negative effects (i.e. the distortion of competition) as the starting point, and limits the positive effects to "the effect on the development of the relevant economic activity".  Whether or not this will have any impact on the authorisation of foreign subsidies remains to be seen.

Finally, while at first glance these procedures are well-known tools from the Commission arsenal that we have seen in various settings, it is currently unclear what the exact minutiae of the notifications and information requests will entail.

As businesses ready themselves for the burden of compliance with the new provisions, we expect that by the time the FSR comes into force, notification forms and relevant guidance will be issued by the European Commission. Nevertheless, it would be wise to start collecting financial contribution information as soon as possible, and factor this additional risk and potential notification in any future M&A planning with a closing expected by or after mid-2023.

With special thanks to Trainee Solicitor, Mikhail Popov who contributed to this article.