EU adopts new foreign subsidies regulation requiring prior notification of certain M&A transactions and public procurement bids: What this means for companies doing business in the EU

16 January 2023

The European Union (“EU”) Regulation on Foreign Subsidies Distorting the Internal Market (“FSR”) was published in the Official Journal of the European Union on 23 December 2022. The FSR entered into force on 12 January 2023 and will apply from 12 July 2023. The notification obligations for concentrations and public procurement above certain thresholds start to apply on 12 October 2023.

Companies which are involved in mergers and acquisitions or joint ventures, or are participating in public tenders in the EU should consider if the thresholds prescribed under the FSR are met, and whether filings are required to be made.

Key implications

• Filing obligation for mergers: The FSR imposes mandatory filing and standstill obligations on mergers meeting the thresholds below:
  • Turnover threshold: At least one of the merging companies (in the case of a full merger), the target (in the case of acquisition) or the joint venture is established in the EU and generates an aggregate EU-wide turnover of at least EUR 500 million (approx. S$715 million) in the previous financial year; and
  • Foreign financial contributions: The parties to the transaction have received combined foreign financial contributions exceeding EUR 50 million (approx. S$71.5 million) in the three years prior to the conclusion of the agreement, announcement of the bid, or the acquisition.
• Filing obligation for public tenders: The FSR also poses mandatory ex ante filing obligations for companies engaging in public tenders in the EU, if:
  • Contract value: The contract value is equal or above EUR 250 million (approx. S$357 million); and in cases where the tender is divided into lots, the aggregate value of the lots applied for is equal or above EUR 125 million (approx. S$179 million); and
  • Foreign financial contributions: The bidding party (including its subsidiaries and/or holding companies) and its main subcontractors (or suppliers) receive aggregate foreign financial contributions equal or above EUR 4 million (approx. S$5.7 million) in the past three years prior to the notification. Bidding parties falling under EUR 4 million (approx. S$5.7 million) are still under an obligation to submit a declaration confirming that the foreign financial contributions received are under the filing threshold.

• Below thresholds filing obligations and ex officio investigations: The FSR introduces filing obligations for mergers and public tenders below the thresholds, if the European Commission (“Commission”) so requests. The European Commission also has the right to investigate ex officio all potentially distortive foreign subsidies on its own initiative (or following information received by Member States, or a complainant), including, but not limited to, M&A deals and public tenders that have already been concluded.
• Definition of foreign financial contribution
  • Foreign financial contribution: This is deemed to exist where a third country provides, directly or indirectly, a financial contribution, which confers a benefit on an undertaking engaging in an economic activity in the internal market, and which is limited to one or more undertakings or industries.
  • Covers a broad range of support measures: Financial contribution can be granted through public or private entities and includes a broad range of support measures which are not limited to monetary transfers, e.g. granting special or exclusive rights to an undertaking without receiving adequate remuneration in line with normal market conditions.
  • Could not have been obtained under normal market conditions: A financial contribution is considered to confer a benefit on an undertaking if it could not have been obtained under normal market conditions. The existence of a benefit will be determined on the basis of comparative benchmarks, such as the investment practice of private investors, financing rates obtainable on the market, a comparable tax treatment, or the adequate remuneration for a given good or service. A financial contribution provided exclusively for the non-economic activities of an undertaking does not constitute a foreign subsidy. However, if a financial contribution for a non-economic activity is used to cross-subsidise the economic activities of the undertaking, it can amount to a foreign subsidy covered by the FSR.

Overview

The FSR seeks to deal with distortions in the EU internal market caused by foreign subsidies in order to ensure a level playing field.

The FSR introduces three mechanisms:

• A notification-based tool to investigate concentrations involving a financial contribution from third countries, where the acquired undertaking, one of the merging undertakings or the joint venture is established in the EU and generates a turnover in the EU of at least EUR 500 million in the previous financial year, and the transaction involves a foreign financial contribution of more than EUR 50 million in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest;
• A notification-based tool to investigate public procurement procedures involving a financial contribution from third countries, where the estimated contract value is at least EUR 250 million, and in cases where the tender is divided into lots, the aggregate value of the lots applied for is equal or above EUR 125 million (approx. S$179 million); and the process involves a financial contribution of at least EUR 4 million per third country in the three years prior to notification; and
• A general tool to investigate all other market situations, where the Commission can start a review on its own initiative (ex officio) or request a prior notification for smaller concentrations and public procurement procedures.

Foreign subsidies under the FSR

Under the FSR, a foreign subsidy is deemed to exist where a third country provides, directly or indirectly, a financial contribution, which confers a benefit on an undertaking engaging in an economic activity in the internal market, and which is limited to one or more undertakings or industries.

A financial contribution can be granted through public or private entities and includes a broad range of support measures which are not limited to monetary transfers, e.g. granting special or exclusive rights to an undertaking without receiving adequate remuneration in line with normal market conditions.

A financial contribution is considered to confer a benefit on an undertaking if it could not have been obtained under normal market conditions. The existence of a benefit will be determined on the basis of comparative benchmarks, such as the investment practice of private investors, financing rates obtainable on the market, a comparable tax treatment, or the adequate remuneration for a given good or service. A financial contribution provided exclusively for the non-economic activities of an undertaking does not constitute a foreign subsidy. However, if a financial contribution for a non-economic activity is used to cross-subsidise the economic activities of the undertaking, it can amount to a foreign subsidy covered by the FSR.

Distortion of market

The FSR provides a non-exhaustive set of indicators to determine if a foreign subsidy distorts the internal market.

A distortion in the internal market is deemed to exist where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market. A distortion in the internal market will be determined on the basis of indicators such as the amount and nature of the foreign subsidy, the situation of the undertaking (including its size and the markets or sectors concerned), the level and evolution of economic activity of the undertaking on the internal market, and the purpose and conditions attached to the foreign subsidy as well as its use on the internal market.

A foreign subsidy not exceeding EUR 4 million over any consecutive period of three years will be considered as unlikely to distort the internal market. Foreign subsidies to an undertaking not exceeding the de minimis amount of EUR 200,000 per third country over any consecutive period of three years will not be considered to distort the internal market.

Mergers and acquisitions

Only concentrations meeting the combined thresholds in the FSR based on the size of the turnover in the EU and the size of the foreign financial contributions will be subject to mandatory prior notification.

A concentration is deemed to arise where a change of control on a lasting basis results from a merger or acquisition. The creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity will also constitute a concentration.

A notifiable concentration is deemed to arise where, in a concentration:

• at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million; and
• the acquiring undertaking, the acquired undertaking, the merging undertakings, the joint venture or the joint venture undertakings were granted financial contributions of more than EUR 50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.

When reviewing a concentration, the assessment of whether there is a distortion in the internal market will be limited to the concentration concerned, and only those foreign subsidies granted in the three years prior to the concentration will be considered in the assessment.

The Commission may request the prior notification of any concentration which is not a notifiable concentration at any time prior to its implementation where the Commission suspects that foreign subsidies may have been granted to the undertakings concerned in the three years prior to the concentration. Such concentration shall be deemed to be a notifiable concentration for the purposes of the FSR.

The Commission may initiate an in-depth investigation of a notified concentration no later than 25 working days after receipt of the complete notification. After the in-depth investigation, the Commission is to issue its decision within 90 working days after the opening of the in-depth investigation (which period may be extended by 15 working days). If the Commission does not issue a decision within that time limit, the undertakings concerned shall be allowed to implement the concentration.

Public procurement

A foreign financial contribution in a public procurement procedure must be notified if:

• the estimated value of that public procurement or framework agreement is equal to or greater than EUR 250 million; and
• the economic operator, including its affiliates involved in the same tender in the public procurement procedure, received financial contributions in the three years prior to notification equal to or greater than EUR 4 million per third country.
• In all other cases, economic operators are required to list in a declaration all foreign financial contributions received and confirm that the foreign financial contributions received are not notifiable under the FSR.

Where the Commission suspects that an economic operator may have benefitted from foreign subsidies in the three years prior to the submission of the tender or request to participate in the public procurement procedure, it may, before the award of the contract, request the notification of the foreign financial contributions provided by third countries to that economic operator in any public procurement procedure which are not notifiable under the FSR.

The Commission must carry out a preliminary review and decide whether to initiate an in-depth investigation no later than 20 working days after it receives a complete notification. The Commission may extend this time limit by 10 working days once in justified cases. The Commission must decide whether to initiate an in-depth investigation within the time limit for completing the preliminary review and inform the parties concerned without delay. The Commission must adopt a decision closing the in-depth investigation no later than 110 working days after it has received the complete notification. This period may be extended once by 20 working days in exceptional cases.

Investigatory and remedial powers of the Commission

The FSR provides the Commission with a range of investigatory and remedial powers including the following:

• Commitments and redressive measures: The Commission may impose redressive measures to remedy the distortion in the internal market actually or potentially caused by a foreign subsidy, and accept commitments offered by the undertaking under investigation which remedy the distortion in the internal market. Examples of commitments and redressive measures are reduction of capacity or market presence, refraining from certain investments, and the licensing on fair, reasonable and non-discriminatory terms of assets acquired or developed with the help of foreign subsidies.
• Information on future concentrations and public procurement procedures: The undertaking under investigation may be required to inform the Commission, for a limited period of time, of its participation in concentrations or public procurement procedures. That requirement is without prejudice to notification obligations.
• Ex officio review of foreign subsidies: The Commission may on its own initiative examine information from any source regarding alleged foreign subsidies distorting the internal market. Following an examination of the information, the Commission may conduct a preliminary review, and where necessary, an in-depth investigation, into whether the financial contribution under examination constitutes a foreign subsidy and whether it distorts the internal market.
• Interim measures: The Commission may order interim measures where there are sufficient indications that a financial contribution constitutes a foreign subsidy and distorts the internal market, and there is a risk of serious and irreparable damage to competition on the internal market.
• Requests for information: The Commission may require an undertaking under investigation to provide all necessary information, including information regarding its tender in a public procurement procedure. The Commission may also request a third country to provide all necessary information.
• Fines and periodic penalty payments: If an undertaking does not comply with a decision with commitments, a decision with redressive measures, or a decision ordering interim measures, the Commission may impose fines or periodic penalty payments.