As of October 12, 2023, notification obligations under the European Union’s (EU’s) groundbreaking Foreign Subsidies Regulation No. 2022/2560 (FSR) have started to apply, with wide-ranging implications for businesses operating in and with the EU. The FSR adds a third layer of EU filing obligations for certain deals, in addition to merger filing and foreign direct investment filing obligations.
The FSR also adds a notification obligation for certain bidders participating in EU public procurement procedures. As such, overall transaction timetables must be reviewed and agreements adapted.
We identify below the key practical consequences of the FSR’s notification obligations for businesses and provide guidance for compliance. See also our report Final Approval of the Foreign Subsidies Regulation for more information.
WHAT THE FSR COVERS
The FSR allows the European Commission (EC) to investigate financial contributions granted by non-EU governments to companies active in the EU.
What Are the EC’s New Tools?
The FSR introduces two prior notification procedures, one for parties to concentrations involving parties having been granted financial contributions by non-EU governments in the three years preceding the signing of the deal, so-called foreign financial contributions (FFCs), and one for participants in bids in public procurement procedures having received FFCs in the three years preceding the public bid.
A third procedural tool allows the EC to investigate all other market situations backed by FFCs on its own initiative (ex officio), including greenfield investments and deals or public procurement bids below the applicable thresholds.
What Is a ‘Foreign Subsidy’?
A “foreign subsidy” is any direct or indirect FFC by a non-EU country (including FFCs provided by foreign public and private entities whose actions can be attributed to third country governments), which is limited to one or more companies or industries and which confers a benefit to a company active in the EU’s internal market, which could not have been obtained under normal market conditions.
FFCs cover direct payments, transfer of funds or liabilities, capital injections, grants, loans and guarantees forgone, not-collected public revenue, the grant of special or exclusive rights without adequate remuneration, or the provision or purchase of goods, services, or other assistance at favorable conditions (benchmarked against typical market or industry practice on arm’s-length terms and conditions).
What Are the Red Flags?
Article 5 of the FSR classifies certain FFCs as “most likely to distort the internal market” (so-called “Article 5 FFCs”):
- FFCs granted to an ailing company;
- FFCs granted in the form of an unlimited guarantee for the debts or liabilities of the undertaking, namely without any limitation as to the amount or the duration of such guarantee;
- an export financing measure that is not in line with the Organisation for Economic Co-operation and Development (OECD) arrangement on officially supported export credits;
- a foreign subsidy directly facilitating a concentration; or
- a foreign subsidy enabling an undertaking to submit an unduly advantageous tender, on the basis of which the undertaking could be awarded the relevant contract.
What Does the EC Review?
As explained in more detail in our previous report of January 2023, the EC will assess whether an FFC indeed constitutes a foreign subsidy, whether that subsidy distorts competition in the EU’s internal market, and whether, in that case, the negative effects caused by the distortion can be balanced against, and are outweighed by, positive effects for the activity concerned or the market overall.
What Are the Timelines?
What Are the Possible Outcomes?
The prime remedy to counteract the identified market distortion is the repayment of the subsidy. Since that has its practical limits, additional remedies are also available. Such remedies can be structural (divestment of certain assets) or nonstructural (such as access to infrastructure, governance changes), or concern the prohibition of concentrations or award of the public procurement contract.
PRIOR NOTIFICATIONS TO THE EC AS OF OCTOBER 12
What makes compliance with the FRS somewhat difficult for businesses is the distinction between the information about FFCs that must be collected in order to assess whether the thresholds are met, on the one hand, and the FFCs that actually have to be notified, on the other. Set out below is a summary of what has to be notified, since this ultimately has to guide the data collection process.
What Must Be Notified?
The below table gives an overview of which FFCs have to be notified.
* Article 5 covers the most likely distortive subsidies.
The Private Equity Exception
In principle, not only FFCs granted to the entity in question are covered, but also those granted to any other entity of the same group, with an important exception for private equity funds. Only FFCs granted to the relevant fund vehicles involved in the deal and their controlled portfolio companies are reportable.
FFCs granted to other funds managed by the same sponsor, but with a majority of different investors, need not be notified, provided that the commercial transactions between the acquiring vehicle/fund and these other investment funds are limited.
Following the logic of the FSR, a further distinction will need to be made between financing commitments for specific deals and general financing commitments.
Joint Ventures
Likewise, in acquisitions, it is the target or joint venture’s (JV’s) own turnover (without the parents) that counts toward the revenue threshold; true greenfield JVs will therefore not meet that threshold. Conversely, the FFCs granted to the acquiror, or the JV parents, count for purposes of the FFC threshold test. Transfers of existing businesses or changes of control will follow their own very fact-specific rules.
Detailed or Summary Reporting
A further distinction is made between those FFCs that must be reported in detail and those that can be reported in a simplified overview table. For both types of notifications, only the Article 5 FFCs must be reported in detail.
In mergers and acquisitions (M&A) transactions, all other FFCs exceeding €1 million and granted by a non-EU government that amounted in aggregate to FFCs of at least €45 million in the three years prior to the concentration can be presented at a high level in a table.
In addition, in the course of the pre-notification contacts, parties have the possibility to request a waiver if the information requested is not reasonably available or not necessary for the examination of the case.
While the introduction of a possibility to request a waiver is desirable, the fact remains that the parties will not know which documents will not be needed until later in the process, and as such will have to start collecting the relevant data in advance.
Declarations in Public Procurement
In the area of public procurement, where none of the notifying parties have received a notifiable FFC of €4 million in the last three years but the contract value is above €250 million, bidders can submit a simple declaration to that effect.
Bidders will, however, still have to provide a list of all those FFCs received in the last three years; however, as with M&A transactions, not all FFCs need to be notified in detail:
- FFCs amounting to less than €1 million but more than €200,000 in the last three years can be listed in aggregate form, with a brief description of the types of contribution received but without indicating their values
- FFCs less or equal to €200,000 per third country in the last three years need not be listed or described in the declaration at all
- FFCs equal to or more than €1 million in the last three years must be listed and described individually in the declaration, per third country, also indicating the amount of the contribution
Finally, bidders have an additional challenge: they must also report the FFCs of their (1) subsidiary companies without commercial autonomy and all holding companies, (2) their consortia, and (3) their main subcontractors and main suppliers (defined as those that are expected to contribute to the performance of the resulting contract for more than 20% of the contract value).
What Must Be Collected?
The difficulty of the FSR lies in the fact that companies must collect more data than ultimately needs to be notified. This is because, in order to calculate the FFC thresholds, all FFCs, including supply contracts at market conditions, need to be taken into account.
In other words, all FFCs granted in the three years prior to the conclusion of an agreement or the acquisition of a controlling interest come into play to determine the potential applicability of the €50 million threshold for transactions, or the €4 million threshold in the case of public procurement.
Another reason why companies need to cast the net wide is that the EC could investigate a market situation at any point in time, and companies must be ready to respond within tight timelines to a request for information. Such requests for information can also come from private business partners that want to ensure that they are not tainted by FFCs granted to parties they are investing in or partnering up with.
THE DAMOCLES SWORD: EC INVESTIGATIONS CAN START ANY TIME
The third tool has already granted power to the EC to start investigations on its own initiative (ex officio), effective since July 12, 2023. This includes the possibility to request ad hoc notifications for smaller concentrations, greenfield investments, and public procurement procedures.
While there is no complaint procedure under the FSR to date, this tool has been used recently and most prominently by complainants[1] against investments by non-EU governments into EU football clubs.
Investments in sports were not what the EC and member states primarily had in mind when they proposed the FSR—in fact, this is hardly the “big fish” the EC is looking to catch. At the same time, it shows that private competitors can and will actively make use of this new legal instrument which provides a new avenue to challenge competitors’ behavior where no other means are currently available.
RECOMMENDATIONS
The FSR is a new tool, and many companies have adopted a wait-and-see approach. However, there is no question that companies operating in Europe, be they European or non-European, must examine the existence of possible FFCs received over the last three years on a rolling basis going forward.
The key is to be prepared and be able to respond convincingly when the situation requires. The most important internal-facing issue will not be to reinvent the wheel, but rather to make use of existing internal data-tracking systems within the company to mine the necessary information.
Deal documentation, contractual liability, and project timelines will need to be adapted. Note that one and the same transaction or procurement contract can be reviewed from multiple perspectives, which might not necessarily lead to the same outcome. This is a challenge that companies already face with parallel merger and foreign direct investment procedures—and now a third layer has been added.
[1]Belgian soccer team Royal Excelsior Virton filed a complaint against third country funding of Belgian soccer club Lommel SK, and La Liga filed a complaint against third country funding of Paris Saint-Germain.
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