1. The European Commission (EC) publishes guidance on the Foreign Subsidies Regulation (FSR)
New Guidance on the FSR
Within just over a year of the FSR coming into force, the EC has published a Staff Working Document ("SWD")1 consisting of questions and answers on certain key aspects of the FSR on 26 July 2024. Although the SWD is intended as non-binding and remains subject to the EC's case practice in many places, it nonetheless provides welcome clarification for businesses and practitioners alike seeking to navigate the uncertainties of the recently introduced FSR.
Background
As set out in previous AMT EU Law newsletters,2 the FSR allows the EC to review subsidies granted by non-EU states to companies operating in the EU internal market ("Internal Market"). This is done through several regulatory tools: a notification-system and restrictions on public procurement and concentrations of a considerable size; ex officio investigations; and wider market investigations.
The FSR is intended to remedy situations where subsidies offered by non-EU countries go largely unchecked. This is in contrast to subsidies offered by EU Member States that are subjected to the strict regime that has been imposed by EU State Aid control for many decades. This is said to create "distortions" in the Internal Market which the FSR seeks to address.
SWD's clarifications on the FSR
The SWD offers some clarification on the following key aspects of the FSR that will be important for any non-EU businesses benefitting from subsidies to consider before doing business in the EU:
How should the concept of "distortion" be interpreted?
There is no general presumption of distortion under the FSR. Instead, two conditions must be met for the EC to conclude there has been a distortion – (i) that the foreign subsidy is liable to improve the competitive position of an undertaking in the Internal Market; and (ii) that by improving the competitive position of the undertaking, the subsidy actually or potentially negatively affects competition in the Internal Market.3
In relation to the first condition, the SWD explains that there needs to be a genuine relationship between the foreign subsidy and the activities of the undertaking in the Internal Market4. For example, no such relationship will be apparent where a subsidy is granted to a particular group subsidiary not active in the EU where that subsidy is used for activities in a non-EU country. This is the case even when other subsidiaries of the group (i.e. other than the group subsidiaries that received the subsidy) are active in in the Internal Market. That said, the SWD makes clear that the EC is alive to the possibility of group companies engaging in cross-subsidizing activities. To give a straightforward example, a cross-subsidizing activity might be where the financial contribution from a direct subsidy to a non-EU group subsidiary is re-distributed and used to assist the economic activities of a subsidiary active in the EU, such as assisting with the funding of an acquisition or the submission of a tender in a public procurement process in the EU. In these types of cases, the subsidy can fall within the scope of the FSR despite the fact it is made to a subsidiary of a group that is not active in the EU. It will be interesting to see how the EC develops its case practice on cross-subsidizing activities in the coming years as, in principle, the EC has the potential to bring many subsidies into the orbit of the FSR using this mechanism.
In relation to the second condition, the SWD confirms that the scope of the "effects on competition" under review by the EC are broad – including the undertaking's ability to make investments or engage in the provision or purchase of any goods or services, as long as competition in respect of that activity in the Internal Market is, or may be, negatively affected5.
There is also a list of "indicators" under the FSR that are used to assess whether a foreign subsidiary is liable to give rise to a distortion (e.g., the level of economic activity of the undertaking on the Internal Market).6 The SWD confirms that these indicators are "neither exhaustive nor mandatory for every case" and that the EC will assess each case on its merits.
How will cases "most likely to distort the Internal Market" be treated?
The SWD explains that for those cases that are "most likely to distort the Internal Market",7 the EC does not need to perform a detailed assessment based on the indicators8. Instead, it will be for the relevant undertaking to show that the foreign subsidy in question would not distort the Internal Market in the circumstances of the case.
One of the categories of cases the SWD flagged as "most likely to distort the Internal Market" are unlimited guarantees9. This is expected given that these have been the main type of subsidy that the EC has investigated so far under the FSR. The SWD makes clear that unlimited guarantees can take many forms and may go beyond an explicit statement/act referring to the undertaking concerned – e.g., the ability to obtain more favorable funding terms because of the likelihood of State intervention in the case of illiquidity.
What is the EC's approach to the "balancing test"?
Under the FSR, once a distortion is established, the EC will then "balance" this against any positive effects the subsidy has on the "development of the relevant subsidized economic activity on the Internal Market" as well as the "broader positive effects in relation to the relevant policy objectives, in particular those of the Union".10
The SWD lists some examples of these policy objectives that it may consider as part of the balancing test. For example, "considerations relating to a high level of environmental protection", "social standards" and "the promotion of research and development"11.
In terms of procedure, the SWD goes on to explain that notifying parties, Member States and interested third parties can submit evidence at any point during the EC's investigation to support their case in the balancing test. In terms of practical application, aside from making the point that a foreign subsidy classed as "most likely to be distortive" (see above) is less likely to see its negative effects outweighed by its positive effects, the SWD's guidance on how these broad considerations will be balanced is limited. Indeed, the SWD acknowledges "at this early stage of implementation, the Commission has not yet gathered substantial experience on the application and interpretation of the balancing test".12
Implications for non-EU businesses
The FSR potentially affects all non-EU companies considering concentrations or bidding in public tenders in an EU Member State. As explained in previous AMT EU Law newsletters, it is essential for non-EU companies to consider the impact of the FSR before conducting business in the Internal Market as the FSR may have a significant impact on the scheme of a concentration as well as on the timing of the closing of a transaction. Furthermore, when a deal is approaching closing, companies must check whether or not the notification obligation under the FSR applies to the relevant transaction.
The SWD provides non-EU companies with welcome clarification on some key aspects of the FSR. That said, there are still many unanswered questions and much of the SWD's guidance will be developed through the EC's case practice. Therefore, it is highly recommended that non-EU companies keep an eye on the developments of FSR-related practices in the coming years.
2. The European Court of Justice (ECJ) rejects the EC's interpretation of Article 22 of the EU Merger Regulation (EUMR)
The ECJ's judgment
On 3 September 2024, the ECJ rejected the EC's interpretation of Article 22 EUMR in the Illumina/GRAIL case,13 by finding that the EC has no right to take merger control jurisdiction over a transaction following a referral request by an EU Member State when the transaction does not fulfil the notification thresholds under the EUMR or the EU Member State's national merger control laws. It is worth remembering here that the ECJ has the final say on questions of EU law and that the EC will therefore have to comply with the judgment (see, however, below some additional thoughts as to how the EC could achieve some of its original objectives through different means).
For the factual background to the Illumina/GRAIL case, please see previous AMT EU Law newsletters.14 In reaching its conclusion, the ECJ made the following key points:
- Article 22 EUMR is not a "corrective mechanism" intended to remedy deficiencies in the merger control system, by enabling the scrutiny of transactions that do not meet either the EU or the national thresholds.15
- Determining the competence of the national competition authorities by reference to criteria relating to turnover is "an important guarantee of foreseeability and legal certainty" for the undertakings concerned, which must be able "easily and quickly to identify to which authority they must turn, and within what time limit and in what form".16
- Article 22 EUMR pursues two primary objectives – (i) to permit the scrutiny of concentrations that could distort competition locally where a Member State in question does not have any national merger control rules; and (ii) to extend the "one-stop shop" principle so as to enable the EC to examine a concentration that is notified or notifiable in several Member States, in order to avoid multiple notifications at national level and thereby to enhance legal certainty.17
- The EC's interpretation of Article 22 EUMR was at "odds with the principle of institutional balance" of the EU – it is for the EU legislature alone to review the EU thresholds and for the Member States alone to revise downwards their national thresholds.18
Looking ahead
The Illumina/GRAIL saga has been watched closely by competition practitioners across the world as the EC's interpretation of Article 22 EUMR demonstrated the ever-increasing reach of the EC's jurisdiction. Therefore, at first glance, the ECJ's rejection of the EC's interpretation should provide comfort to non-EU businesses who are considering doing business in the Internal Market.
However, the practical impact of the ECJ judgment will likely be relatively limited for the reasons set out below. Indeed, the Executive Vice-President of the EC, Margrethe Vestager, referenced this point in a statement released immediately following the ECJ's judgment.19
- Member States updating their national merger control powers – since the EC's initial interpretation of Article 22 EUMR concerning Illumina/GRAIL, several Member States (e.g., Italy, Ireland and Denmark) have introduced provisions allowing them to request the notification of transactions to the EC that do not meet national thresholds. Furthermore, the French competition authority has announced it will also assess changes to its own merger thresholds following the ECJ's judgment. Therefore, looking ahead the EC may still be able to lawfully bring certain cases like Illumina/GRAIL within its jurisdiction even after the ECJ's judgment.
- Abuse of dominance review – As explained in previous AMT EU Law newsletters20, the ECJ recently confirmed in its Towercast judgment that the EU's abuse of dominance rules can be used to challenge (ex post) acquisitions which fall below the notification thresholds under the EUMR or the EU Member State's national merger control laws. Therefore, as this route continues to be available, the EC may lawfully review cases like Illumina/GRAIL via this route even after the ECJ's judgment. Although this would only be available against participants that hold a dominant market position.
- Possible amendment of the EUMR – it is of course possible that the EC could seek to formally amend the EUMR through the legislative process so as to allow it to review transactions concerning companies with limited turnover but still with the potential to play a significant competitive role in the Internal Market. However, no statement has been made to suggest this yet and it cannot be assumed that there is sufficient political will at Member State level to agree to such legislative changes to the EUMR.
Therefore, despite the ECJ's Illumina/GRAIL judgment, businesses should continue to expect the EC to be willing to intervene in order to maintain and enhance innovation and technology in mergers pursued by companies. Businesses should be just as alive to the risks associated with Article 22 EUMR referrals as they were before the ECJ's judgment. Furthermore, the guidance on Article 22 EUMR that the EC previously published will remain relevant to a great extent even after the ECJ's rejection of the EC's interpretation.21
Footnotes
2. For further information on FSR (including detailed explanation of the regulatory tools of the EC and associated legal tests), please refer to our EU Law Newsletter's previous editions: (Issued in May 2024, March 2023, August 2022).
3. Article 4(1) FSR.
4. Page 1 of the SWD.
5. Page 2 of the SWD.
6. Article 4(1) FSR.
7. Article 5(1) FSR.
8. Page 3 of the SWD.
9. Page 5 of the SWD.
10. Article 6(1) FSR.
11. Page 6 of the SWD.
12. Page 6 of the SWD.
13. Illumina/GRAIL (Joined Cases C-611/22 and C-625/22) – see ECJ judgment.
14. For further information on the Illumina/GRAIL case, please refer to our EU Law Newsletter's previous editions: (Issued in March 2023, December 2022). 15. Paragraph 192 of the ECJ judgment.
16. Paragraph 209 of the ECJ judgment.
17. Paragraph 199 of the ECJ judgment.
18. Paragraph 215 of the ECJ judgment.
19. See Vestager's statement here - Vestager released a statement saying that the EC will still ensure that the EC is "able to review those few cases where a deal would have an impact in Europe but does not otherwise meet the EU notification thresholds.
20. For further information on the ECJ's Towercast judgment (Case C-499/21), please refer to our EU Law Newsletter's previous edition: (September 2023).
21. See the EC's Q&A document which aims to provide practical information with respect to the Article 22 EUMR referral mechanism published in December 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.