On 30 June 2022, the European Parliament and the Council reached political agreement on a draft EU regulation aimed at preventing foreign subsidies from distorting competition in the EU single market (Foreign Subsidies Regulation, FSR), which the European Commission had proposed in May 2021. The final legal text of the FSR is expected to be formally adopted in Q4 2022. Mandatory notification obligations for M&A transactions and public procurement tenders will apply from nine months after the FSR enters into force (i.e., from some time in mid-2023).

This alert recaps the key features of the new regime, highlights the main, substantive changes to the Commission's initial proposals and sets out the practical considerations for businesses prior to the FSR's entry into force.

For more detailed background information on the EU's new foreign subsidies regime, see our prior alerts on the Commission proposal of 5 May 2021 and its White Paper of 17 June 2020.

Scope of the FSR

The new regime will affect companies engaging in M&A transactions (mergers, acquisitions and joint ventures) or participating in public procurement procedures in the EU that have received financial contributions from non-EU governments or state-owned entities.

Financial contributions cover a wide range of economic benefits, including public grants, loans, guarantees, fiscal incentives, compensation, certain forms of export financing, preferential tax treatment, tax credits and government contracts. Importantly, financial contributions provided by a non-EU country include not only contributions provided by the country's central government and government authorities at all other levels, but also all foreign public or private entities whose actions can be attributed to the third country.

The new regime will comprise three tools for reviewing foreign subsidies in M&A scenarios (i.e., mergers, acquisitions and joint ventures), public procurement bids and ex officio investigations.

Mandatory notification of M&A transactions

Under the final agreement, M&A transactions will need to be notified to the European Commission if they meet the following test:

  1. The transaction constitutes a concentration, i.e., a merger or an acquisition of (sole or joint) control over another business. In contrast, the acquisition of a non-controlling minority stake in another business would not trigger a review.
  2. One of the merging undertakings (in case of mergers), the acquired business (target) or the joint venture generates turnover within the EU of at least ?500 million. Under the initial Commission proposal, the EU turnover of at least one of the joint venture parents would have been sufficient to trigger a filing obligation (irrespective of the EU turnover of the joint venture). The European Parliament and the Council subsequently agreed to limit the EU turnover-based notification threshold to the joint venture itself, which will significantly reduce the number of likely filings compared to the initial Commission proposal.
  3. All undertakings concerned (e.g., the acquirer and the target, the merging parties, or the joint venture and its parent companies) received from third countries an aggregate financial contribution exceeding ?50 million in the last three years.

M&A transactions that meet this test will need to be notified to the Commission and have to await Commission clearance prior to closing (standstill obligation). Once notified, the Commission will have 25 working days to review the transaction and, if the Commission opens an in-depth investigation, an additional 90 working days (subject to further extension).

Where a company fails to notify a subsidised concentration, the Commission will have the power to impose fines (of up to 10 per cent of the company's aggregate worldwide turnover) and review the transaction as if it had been notified. In addition, the Commission can prohibit a subsidised concentration.

Mandatory notification of public procurement bids

A notification obligation will arise for tenders in public procurement procedures in the EU where:

  1. the estimated contract value is at least ?250 million; and
  2. the economic operator participating in the tender was granted aggregate foreign financial contributions in the three calendar years prior to the notification of at least ?4 million per third country.

Under the final agreement, the European Parliament and the Council significantly narrowed down the notification obligation to bidders that received aggregate financial contributions of at least ?4 million per third country over a three-year period. Under the Commission's initial proposal, a notification obligation applied to all bidders participating in tenders with a contract value of ?250 million or more.

If a bidder is under investigation by the Commission, they cannot be awarded a contract under the new regime prior to completion of the Commission's review. Where a company fails to notify the financial contribution in a public tender, the Commission can impose a fine (of up to 10 per cent of aggregate worldwide turnover). In addition, the Commission can prohibit the award of a public procurement contract to the subsidised bidder.

General (ex officio) market investigation of any other subsidised activity

The new regime will also empower the Commission to investigate, on its own initiative, all other market situations and to request ad hoc notification of smaller concentrations and public procurement procedures that do not meet the thresholds for mandatory filings (see above), if it suspects that a distortive foreign subsidy may be involved.

Under the final agreement, the Commission will be empowered to investigate subsidies granted up to five years before the entry into force of the FSR that distorted the internal market after its entry into force (the Commission's initial proposal had envisaged a 10-year limitation period).

Practical considerations and next steps

It is expected that the final legal text of the FSR will be formally adopted in Q4 2022. Once adopted, the FSR will be published in the EU's Official Journal and enter into force 20 days thereafter.

Notification of M&A transactions and public procurement bids will become mandatory from nine months after the entry into force of the FSR (i.e., from some time in mid-2023).

To assess whether transactions (and public procurement bids) are subject to notification requirements, businesses with direct or indirect commercial or other links with non-EU states, irrespective of whether they are based in or outside the EU, are recommended to take the following steps prior to the FSR's entry into force:

  1. Start identifying and compiling a record of financial contributions received from non-EU states since at least 2020. The term 'financial contribution' is very broad and includes any transfer of funds or liabilities, the foregoing of revenues (including tax exemptions), and the provision or purchase of goods or services to or from non-EU states. Businesses are therefore advised to establish systems for the collection of group-wide information relating to relevant contracts, grants, tax incentives, etc., on a global basis to ensure that financial contributions can be tracked and quantified over a rolling three-year period.
  2. Check whether financial contributions were received on market terms. The financial contribution threshold can be exceeded (and a notification be required) irrespective of whether the financial contribution was granted on market terms. Financial contributions granted on market terms will however avoid being classified as foreign subsidies, which the FSR aims to prevent and may result in the Commission requiring remedies or prohibiting an M&A transaction or public tender.
  3. Where it is not clear whether a financial contribution qualifies as a foreign subsidy or has distortive effects in the EU, consider its impact on any activities in the EU and whether the policy aims of the non-EU state are supported in the EU as this could serve as possible justification and defense against Commission intervention.

Once in force, the new regime will significantly increase the regulatory and administrative burden for closing M&A transactions by state-supported investors in Europe that will be caught by the new regime. Businesses will potentially have to file parallel notifications under the Commission's new foreign subsidy regime, EU or national merger control rules and/or foreign direct investment rules in the EU. This will need to be addressed in transaction documentation (conditions precedent, representations and warranties, break fees, etc.), deal timing/planning and due diligence reviews.

The new regime will also lead to significant legal uncertainty for M&A transactions falling below the notification thresholds but for which the Commission has the right to request notification prior to closing. It can also be expected that third parties will increasingly use the Commission's new investigation toolbox as a sword to oppose deals that are not in their strategic interests.

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.