European Union: Foreign Subsidies Regulation: Regime Live With Disclosure Burden Final

As of 12 July 2023, the new regulatory regime established under the EU Foreign Subsidies Regulation ("FSR") starts to apply, with the disclosure requirements in the context of future review processes now finalised.

Key takeaways:

• As of 12 July 2023, the European Commission ("EC") has a 'call in' power to investigate potentially distortive non-EU subsidies including all M&A transactions signed and public contracts initiated after that date and including those below the mandatory notification thresholds.
• Dealmakers need to be vigilant to notification requirements that could impact live deal timelines in relation to large M&A transactions and high-value public contracts above the relevant thresholds that will be mandatorily notifiable as of 12 October 2023. This includes transactions signed on or after 12 July but not completed by 12 October 2023, and public contracts announced on or after 12 July but not awarded by 12 October 2023.
• Concurrent with the new regime starting to apply, the EC has adopted the final Implementing Regulation which includes the final notification forms setting out the exact disclosure requirements in respect of notifiable transactions and procurement processes. While significantly reduced relative to EC proposals earlier this year, the disclosure requirements still represent a burden for companies and will require a bespoke data collection process and ongoing record-keeping in respect of all non-EU financial contributions to ensure minimal delays in future review processes.

See our previous articles in relation to the notification thresholds and review timelines relevant to large M&A transactions (see here) and high-value public contracts (see here).

New Regime Now Operational

As of 12 July 2023, the new regulatory regime established under the FSR and administered by the EC starts to apply. As of this date, the EC has a 'call in' power to initiate ex officio investigations into potentially distortive non-EU subsidies including M&A transactions and public contracts initiated after that date and including those below the mandatory notification thresholds. The EC may exercise this power based on information from all sources including information from Member States and third party complaints.

As of 12 October 2023, in another three months' time, large M&A transactions and high-value public contracts that meet the relevant thresholds will also be mandatorily notifiable to the EC. This includes all M&A transactions that have been signed on or after 12 July but not completed by 12 October 2023, and public contracts announced on or after 12 July but not awarded by 12 October 2023. Dealmakers and tenderers therefore need to be alive to potential notification requirements for business planning purposes.

Disclosure Requirements Now Finalised

With the new regime starting to apply, the EC adopted the final Implementing Regulation to the FSR on 10 July 2023. Most notably, the Implementing Regulation includes the final notification forms setting out the exact disclosure requirements in respect of notifiable transactions and public contracts.

The most controversial of these requirements has been the extent of information parties need to disclose in respect of non-EU financial contributions previously received, noting the broad concept of 'financial contribution' (i.e., any direct or indirect financial contribution made by governments of, or any public or private entity attributable to, a non-EU country, and including: (i) the transfer of funds or liabilities (e.g. capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling); (ii) the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or (iii) the provision of goods or services or the purchase of goods or services.)

As part of the final notification forms, companies have to disclose:

• Detailed information and documentation on all non-EU financial contributions granted to the notifying parties over the past 3 years that are considered most likely to distort the internal market (such as those granted to ailing undertakings, unlimited guarantees and those directly facilitating a concentration) and of an individual amount of at least €1 million; and
• An overview of all other non-EU financial contributions granted to the notifying parties over the past 3 years, of an individual amount of a least €1 million and in relation only to those countries that have granted to the parties to the transaction at least €45 million over the 3 years before the concentration, excluding certain ordinary course transactions and financial contributions within the same investment funds. (The aggregate country threshold is lower at €4 million in respect of public contracts.)

The disclosure requirements are significantly reduced relative to EC draft proposals earlier this year and in response to strong feedback from industry and advisors alike. The EC has significantly reduced the scope of the financial contributions for which detailed information and documentation is required, as set out above. The de minimis thresholds have also been increased (i.e., from €200,000 to €1 million) and a number of additional exemptions have been introduced which narrows the scope further. The circumstances in which potential additional waivers from disclosure requirements where information may not be reasonably available or where information is not considered necessary for examination of the case have also arguably been broadened, i.e. not just limited to "exceptional circumstances" as in the EC draft proposals (although it remains to be seen what the EC's future waiver practice will look like in practice).

Tracking Non-EU Financial Contributions

Tracking financial contributions received from non-EU countries will still place a huge burden on companies. Doing so will however be necessary both in assessing whether the combined €50 million financial contribution threshold for jurisdictional purposes is met and satisfying the information disclosure requirements for notifiable transactions and public contracts, as set out above.

This will likely require a bespoke data collection process and ongoing record-keeping in respect of all non-EU financial contributions to ensure notification requirements are properly identified and information disclosure requirements can practically be met when it comes to actual notification processes.

The extent of such data-collection and record-keeping processes will naturally vary depending on the size of the organisation in question. However, larger multi-national organisations will likely need to put in place an internal process that ensures the systematic collection of information on all non-EU financial contributions received (including three years back, i.e. since 2020) and a consistent approach across all global locations. Early engagement with advisors is therefore key.

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.