The EU Foreign Subsidies Regulation (FSR) grants the European Commission (Commission) a broad mandate to investigate the impact of foreign subsidies that may cause distortions in the EU internal market by negatively affecting competition. To help the Commission collect information and assess substantive risks, FSR imposes suspensory filing requirements for certain transactions signed after July 11, 2023, and not closed before October 12, 2023. The newly published FSR Implementing Regulation (FSRIR) details the information to be reported (including a template notification form) and certain procedural aspects of the notification and review procedure.
How to manage FSR notifications
- Identify deals potentially affected by the FSR. Parties should assess the risk of meeting mandatory notification thresholds (as described in the following section). The Commission will also have powers to call in for review deals below filing thresholds, so that call-in risk factors (e.g., transactions with material non-EU government financing) should be considered as part of deal strategy.
- Start preparing early. Parties at risk of meeting notification thresholds or of a call-in should prepare their filings early to minimize the impact on deal timing. Information required for a notification is extensive and may take some time to gather. As part of preparations, parties should map the financial contributions received from non-EU countries. “Financial contributions” and “non-EU countries” are broad and complex concepts based on EU and World Trade Organization (WTO) (trade) anti-subsidy law. Gathering related information across company groups may prove challenging and time-consuming. Hence it is important to map as early as possible, even prior to having a specific deal in the pipeline. Timely preparation will mitigate the risks of delaying deal timelines or missing out on bids.
- Include regulatory filings provisions to address FSR risks. The FSR notification requirements and risks should be reflected in the drafting of deal documentation. Typical clauses would include, for instance, conditions precedent when FSR approval is required; possible springing conditions for FSR call-in risks; commitments to ensure parties cooperate to ensure smooth filing preparation and engagement before the Commission; provisions to identify the allocation of risk; and the efforts each party must make to secure clearance, including by negotiating and accepting possible remedies.
- Refine subsidy arguments. As part of the FSR notifications, parties may advance arguments that financial contributions are not subsidies and, if they are, that the subsidies do not distort competition and/or have positive effects capable of outweighing any alleged distortion. This will require expert legal and economic analysis. Doing the analysis upfront and controlling the narrative will mitigate risks of lengthy reviews.
To recall: M&A deals subject to FSR notification
Acquisitions of control, mergers, and the creation of joint ventures (JVs) that meet the following cumulative thresholds are subject to the FSR suspensory pre-closing notification and approval:
- The target group (in an acquisition of control), at least one of the merging parties (in a merger where two businesses combine with neither acquiring control of the other), or the joint venture (in the creation of a joint venture) has an aggregate turnover in the EU of at least €500 million and has a place of business in the EU.
- The parties to the deal have received aggregate “financial contributions” from non-EU countries in excess of €50 million over the previous three years. “Financial contributions” is a very broad concept borrowed from existing EU and WTO rules on protection against subsidized imports. It is only one of the constitutive elements for a subsidy. Most major corporates and sponsors will exceed this threshold by some margin. The concept of “non-EU countries” is not limited to contributions directly from governments and contributions can also arise from interactions with regional bodies or state-affiliated market operators, and from other public and even private entities whose actions can be attributed to a third country.
In addition, the Commission may request a suspensory filing for individual, below-threshold deals. Parties may face penalties of up to 10% of their aggregate turnover if they fail to notify or implement a deal before approval, or up to 1% if they provide incorrect or misleading information in a notification process.
Reporting financial contributions
The FSRIR sets out the information on financial contributions that must be reported as part of a notification. Reporting requirements have been simplified compared with the initial draft FSRIR that the Commission published in February 2023. Nonetheless, information collection and reporting continues to require significant efforts from businesses. Simplifications include the following:
- The FSRIR identifies certain categories of high-risk financial contributions that all parties to a notifiable deal (including the buyer and target groups) must report if the contribution has a value of €1 million or more, and was granted in the past three years. High-risk financial contributions are those that amount to subsidies (a) granted to an ailing undertaking; (b) in the form of an unlimited guarantee for the debts or liabilities of the undertaking; (c) in the form of an export financing measure that is not in line with the Organization for Economic Cooperation and Development Arrangement on officially supported export credits; or (d) directly facilitating the M&A transaction.
- The FSRIR provides that for other financial contributions, parties with the obligation to notify a deal (and particularly the buyer group but not the target group) must report all individual financial contributions of a value of €1 million or more if granted by a non-EU country that granted financial contributions of at least €45 million in the aggregate in the past three years.
- The FSRIR excludes certain financial contributions from reporting: (a) deferred taxes and social security contributions, tax amnesties, tax holidays, and normal depreciation and loss-carry forward rules, to the extent they are of general application and not limited to certain sectors, regions, or undertakings; (b) tax reliefs for avoidance of double taxation; (c) provision/purchase of goods/services (except financial services) at market terms in the ordinary course of business; and (d) financial contributions below €1 million.
- The FSRIR provides certain specific reporting exclusions for investment companies. Where an investment fund is the acquiring entity, financial contributions granted to other (uninvolved) funds managed by the same investment company will not need to be counted, provided that (a) a majority of the investors in the other funds (measured based on their entitlement to profit) is different from the acquiring entity, and (b) those funds have no (or limited) economic and commercial transactions (e.g., sales of assets including ownership of companies, loans, credit lines, and guarantees) with the acquiring entity and its controlled companies. This reporting exception does not apply to high-risk financial contributions.
Although the above thresholds and exclusions help streamline the information to be reported as part of notifications, businesses still face the burden of mapping across their groups a broad range of financial contributions going back three years.
Notably, the notification threshold of €50 million aggregated across three years must take account of all financial contributions (of any amount and type) received by the parties regardless of whether they have to be reported as part of a notification. In addition, parties will need to run potentially complex fact-specific analyses to assess the applicability of some of the above exclusions – such as (a) excluding tax measures that may be considered specific to them or their sector; (b) confirming that contracts are at market terms, including by taking into account reasonable benchmarks for dealings in markets subject to government intervention; and (c) running in-depth analyses of each fund’s composition. In addition, the Commission retains discretion to request any additional information it may deem necessary to conduct the review.
Making arguments about (the lack of distortive) subsidies
The FSRIR also requires parties to include in their notifications information necessary to assess whether the financial contributions granted by non-EU countries may distort the EU’s internal market by negatively affecting competition. Parties will have to explain whether and how the reported financial contributions may improve their competitive position, entering into the heart of the assessment of whether financial contributions amount to subsidies and what their effect is on the EU market. This will allow for arguments to address any potential findings of a distortion.
The Commission has not yet issued clear indications on how it intends to apply the distortion test. Nonetheless, the notions of “financial contribution,” “subsidy,” and “negatively affecting competition” are based on EU and WTO (trade) anti-subsidy legislation and practice, and decades of precedent on the application of competition law principles, which will provide valuable guidance. The Commission can also be expected to consider state-aid practice and precedent, especially where helpful to limit room for claims of discriminatory treatment of non-EU countries.
M&A review procedure
FSR reviews are separate from, and will run in parallel to, foreign direct investment and merger control reviews. The formal review is composed potentially of two stages: (1) a Phase 1 running from formal acceptance of the notification and lasting up to 25 business days; and (2) a Phase 2 initiated in case of substantive concerns and possible remedies, lasting up to 90 business days (subject to extensions).
Parties can (and in practice will be required to) engage in pre-notification discussions with the Commission. The FSRIR emphasizes that parties are encouraged to submit a draft notification and have preliminary discussions with the Commission about the transaction and possible concerns. During these pre-notification discussions, parties may also request waivers to avoid reporting information that is not reasonably accessible or that does not appear necessary to the assessment of the case. With the review clock starting only upon receipt of a complete notification, these preliminary discussions should also help accelerate acceptance of the notification.
We have you covered
Sidley’s market-recognized, leading experience in EU anti-subsidy investigations, WTO anti-subsidy law, and transaction clearance make us highly qualified to assist businesses as managing the burden and risk of the FSR in relation to transactions becomes a reality. We have litigated all of the landmark subsidy cases brought before the WTO, and we have extensive experience in merger control, investment screening procedures, and EU state aid proceedings before the Commission.
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