A regular briefing for the alternative asset management industry.
Earlier this year, the EU introduced a new regulatory regime - the Foreign Subsidies Regulation, or FSR - to address distortive foreign subsidies granted by non-EU states to companies active in the EU. That means that many large M&A deals will now face a new screening process: qualifying deals signed from 12 July 2023 that are due to close after 12 October must be notified to, and approved by, the European Commission before closing.
As we highlighted in March, while the regime's objective is laudable, the rules are widely drawn and could catch many deals where there is, in fact, no distortive subsidy. In addition, there were significant concerns about the detailed financial information that alternative asset managers would have to collect from across their portfolio.
There has been some good news over the summer: in response to significant push-back, including from Invest Europe (with whom we worked), the European Commission has significantly alleviated the reporting burden in its finalised Implementing Regulation. One concession is specifically focused on private equity deals, allowing firms to report only on the specific acquiring fund (rather than other funds under common management) if certain conditions are met.
Although that is good news, it is important to note that the final Implementing Regulation - laying down procedures rather than substantive rules - does not change the design of the underlying filing thresholds. It is still the case that deals where the target has revenues of at least ?500 million in the EU will need to be pre-notified where the acquiror and target groups (combined) have received at least ?50 million in "financial contributions" from non-EU states in the preceding three years.
In addition, the concept of "financial contributions" remains broadly defined: as confirmed in the Commission's Q&A, it is not limited to foreign subsidies granted on non-market terms. It can capture dealings with private entities associated with governments, not just public sector contracts. Sovereign wealth funds are clearly in scope, but also potentially other government-aligned private investors and entities entrusted with a public goal, such as state pension funds.
However, if a deal is captured, and an FSR notification is required, the final rules could make a material difference from a data gathering standpoint, including for alternative asset managers with multiple funds under management.
At the heart of the problem for private capital firms is that the FSR applies a group-wide concept to calculating the notification thresholds. "Financial contributions" made to one portfolio company could trigger an obligation to file all qualifying EU deals going forward - even if the specific acquiring fund had no interest in that portfolio company.
While a filing obligation could still be triggered on that basis, firms now need only disclose financial contributions received by the acquiring fund and its portfolio - provided certain conditions are met. These conditions will not always be present, so it will be important for firms to assess, for each fund and in relation to any large deal, whether they can benefit from the more limited reporting. For example, to be eligible for the exemption, the acquiring fund cannot share a majority of the same investors with any of the firm's other funds, plus the acquiring fund's transactions with the firm's other funds need to be non-existent or limited - including at a portfolio company level.
There has been some good news over the summer: in response to significant push-back, including from Invest Europe (with whom we worked), the European Commission has significantly alleviated the reporting burden.
The final regulations also include a number of other important concessions that will help all acquirors, including alternative asset managers. In particular, the European Commission has materially increased the de minimis value threshold, below which a financial contribution can be disregarded for the purposes of the notification form. According to the final version of the rules, financial contributions received by one of the notifying parties which are individually valued at less than ?1 million per country need not be reported.
The Commission has also simplified and abbreviated the reporting requirements for contributions that are not likely to distort the market, and decided that certain categories of financial contributions will be completely exempt from disclosure. For example, certain general tax reliefs need not be disclosed, nor do contributions associated with the supply or purchase of goods and services, provided these transactions were conducted on market terms in the ordinary course of business and do not relate to "financial services".
Overall, the changes made in the final Implementing Regulation should make notifications under the M&A screening regime more manageable. However, alternative investment fund managers invested across different jurisdictions and industries are still likely to face challenges in determining whether a notification is required, interpreting and applying the complex exemptions, and completing the form. If a notification is required, firms may want to engage the Commission early-on to flush-out issues, especially since the Commission has signalled that pre-notification discussions are to be expected - particularly if the notifying parties want to obtain waivers from reporting.
In the meantime, acquisitive firms that have material sovereign wealth fund investors and/or a portfolio with significant public sector exposure outside of the EU (including in the UK and US) may want to think now about how they can amend their own and their portfolio company's information gathering mechanisms to account for the FSR's unique notification requirements and highlight potential risk areas.
Moreover, companies active in the EU with significant non-EU public sector investment, or those involved in major public sector projects, may also have other concerns about the FSR. If there is a risk that such investments or contracts may not be on market terms the Commission can investigate and, if necessary, remedy foreign distortive subsidies. The Commission might do that on its own initiative or in response to a complaint - such as that recently raised by La Liga (Spain's top football division), alleging that non-market financial support from countries such as Qatar and the UAE is distorting competition in the EU's football markets.
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