First In-Depth M&A Investigation Under The EU Foreign Subsidies Regulation: What It Means For Future M&A Deals



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The EU Foreign Subsidies Regulation ("FSR") started to apply on 12 July 2023 as another instrument in the EU regulatory toolkit aimed at preventing distortions of competition on the EU internal market.
European Union Corporate/Commercial Law
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June 2024 – The EU Foreign Subsidies Regulation ("FSR") started to apply on 12 July 2023 as another instrument in the EU regulatory toolkit aimed at preventing distortions of competition on the EU internal market. In the spotlight of the framework are foreign subsidies granted to companies carrying out economic activities within the EU in the context of (i) M&A transactions, (ii) public procurement and (iii) other market activities.

Foreign subsidies are all financial contributions provided, directly or indirectly, by non-EU countries, including any transfer of financial resources from non-EU countries such as grants, capital injections, loans, tax incentives, credits and funds.

In the context of M&A, the FSR imposes a new notification and approval regime before the European Commission ("EC") as of 12 October 2023. The notification procedure is mandatory when certain thresholds are met by the concentrations:

  • turnover threshold – at least one of the merging undertakings (in the case of mergers), the acquired undertaking (the target) or the joint venture is established in the EU and generates an EU turnover of at least EUR 500 million; and
  • financial contribution threshold – all undertakings concerned (i.e., the acquirer and the target, the merging parties, or the joint venture and its parent companies) have received combined aggregate financial contributions by non-EU countries exceeding EUR 50 million in the preceding three years.

Similar to the merger control regime, there is a standstill obligation for the parties to obtain clearance before proceeding to closing.

Non-compliance with the notification obligation may result in a fine on the undertakings concerned of up to 10% of their turnover for the preceding financial year.

Most importantly, during such proceedings the EC has the power to (i) open an in-depth investigation, (ii) impose redressive measures or accept commitments to remedy distortions (e.g., divestment, access to infrastructure, repayment of the foreign subsidies), and (iii) prohibit a concentration.

1. The EC investigation

On 10 June 2024, the EC announced the opening of the first in-depth FSR investigation into a transaction for the acquisition by a third country buyer of a European telecommunications operator with activities in Bulgaria, Hungary, Slovakia and Serbia.

The deal is subject to a number of regulatory approvals, including merger clearance in Bulgaria, which was obtained unconditionally on 15 February 2024. The FSR notification was made on 26 April 2024, reportedly after lengthy pre-notification discussions with the EC. In its press release from 10 June 2024, the EC stated that there are sufficient indications of foreign subsidies distorting the EU internal market received by the third country buyer. The EC expressed concerns that the foreign subsidies are of such a nature (i.e. an unlimited guarantee and a loan directly facilitating the transaction) as to improve both the buyer's position to carry out the acquisition, and the competitive position of the future merged entity.

At the time of writing, the EC has 90 working days, until 15 October 2024, to issue a decision.

2. Key takeaways

While we wait for the EC's first decision of its kind to shed more light, here are a few takeaways for future dealmakers.

First, it is clear that the new regime will have longstanding implications on the various stages of a deal leading up to its closing. Investors involved in M&A transactions may need to obtain FSR clearance in addition to the standard merger control and foreign direct investment procedures, adding a layer of regulatory complexity for dealmakers to navigate. Parties to a transaction should keep the new FSR regime in mind and start an FSR assessment and, if necessary, preparation of the FSR filing at the early stages of deal planning in order to save time.

In addition, the FSR should be considered during the process of drafting of the transaction documents. Potential FSR filing and approval should be included as a condition precedent for completion of the deal. Provisions dealing with potential remedies in case of a negative decision or redressive measures imposed by the EC are to be considered as well.

Finally, the FSR notification should be clearly indicated in the deal timeline. Should a deal require an FSR approval, the parties would be subject to the "standstill obligation", preventing the transaction from closing until the notification process has cleared.

So far, the FSR proceedings have been focused on specific investors (i.e. Chinese) and sectors (e.g., infrastructure, energy, technology), but it is clear that the FSR will have a much wider impact on future M&A.

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.

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