EU Proposes Far-Reaching Tools to Counter Foreign Subsidies, Including in Mergers and Acquisitions

The Whitepaper’s Three “Modules”

The Whitepaper proposes a framework composed of three interrelated “modules” or “tools.”

• Module 1: General instrument for review of Foreign Subsidies. This tool will cover Foreign Subsidies that might “distort” the EU internal market and are granted to a beneficiary active in the EU. The tool will cover all “market situations” in which Foreign Subsidies benefit a group active in the EU, or a non-EU investor acquiring an EU target.
  
  The Commission, or any Member State in which the Foreign Subsidy has an impact, will be empowered to initiate an ex officio preliminary review. Such preliminary reviews can be triggered by any information available to the authorities, including information provided by other market participants. Where the Commission, or a reviewing Member State, considers that a Foreign Subsidy may be distortive, it will be entitled to initiate an “in-depth” investigation, which looks set to be akin to existing EU state aid, merger, and trade defense investigations, likely including (i) requests for documents and information, (ii) on-site fact-finding visits, (iii) a formal exposition of the reviewing agency’s objections, (iv) a right of reply for the parties, (v) access to documents on the agency’s file and (vi) an oral hearing. If the beneficiary of the Foreign Subsidy does not provide requested information, the Commission or Member State will be empowered to decide based on the facts available (as is the case under EU trade defense and state aid rules).
  
  If the Commission or reviewing Member State establishes the existence of a distortive Foreign Subsidy, it could impose redressive measures (such as repayment of the subsidy, divestment of assets or businesses, or the prohibition of an acquisition or specific market conduct) or accept commitments with similar effects. It would also be open to the Commission (but not to a Member State) to find that a distortive Foreign Subsidy nonetheless is in the interest of the EU (similar to the concept used in trade defense rules) and so should be permitted. 

• Module 2: Prior notification and review of deals where Foreign Subsidies may be facilitating investment in an EU target. This tool will apply to situations in which a Foreign Subsidy facilitates — directly or indirectly (e.g., by strengthening a beneficiary’s financial position) — a beneficiary’s proposed investment in an EU target. 
  
  The beneficiary will be required to notify the Commission of its proposed investment (whether a controlling investment or a significant minority investment) in an EU target, and will be barred from closing the deal unless and until it receives Commission approval. The applicable procedure will consist of a preliminary review and, if warranted, an in-depth investigation. The process will be separate from — and run in parallel to — any EU (antitrust) merger review or FDI screening process (see our March 2020 Update).
  
  The Commission will have fact-finding and investigative powers akin to those that apply in EU trade defense and merger reviews and, as under Module 1, will be able to impose redressive measures or accept commitments.

• Module 3: Foreign Subsidies in public procurement. Module 3 concerns the participation of companies benefiting from Foreign Subsidies in public procurement exercises, including at a pan-EU level. When submitting their bids, beneficiaries of Foreign Subsidies will be required to notify the contracting authority of the existence and nature of such subsidies. The Commission and/or the procuring Member State will be entitled to investigate the Foreign Subsidies, and may exclude the beneficiary from the procedure at issue and, potentially, from future procurement procedures.

Practical Implications for Inbound Investments in the EU

While the reforms proposed in the Whitepaper will have wide-ranging effects on a host of companies active in the EU, the implications for inbound EU investments are likely to be most significant. Modules 1 and 2, in particular, could add significant regulatory risk and burden. 

• Risks of redressive measures. Parties to transactions would need to assess the likelihood of the Commission and/or Member States adopting redressive measures (such as blocking a deal or requiring a divestment) under either Module 1 (ex post measures) or Module 2 (ex ante measures). 

• Additional mandatory notification. Module 2 would impose an additional mandatory notification requirement, separate from existing merger procedures and FDI screening rules. With closing barred until approval has been obtained, deal timing may be extended by several months.

• Increased information burdens and disclosure requirements. The Whitepaper stresses the lack of information and transparency on Foreign Subsidies, suggesting that companies seeking approval for deals, or otherwise under investigation, would have to provide the necessary information themselves. Failure to do so would allow the Commission and/or reviewing Member State to either suspend the approval process or rely on the facts available in the review. Typically, the latter option would be to the detriment of the company seeking the approval or under investigation.

• Any Foreign Subsidies captured including those granted by U.S. or UK public bodies. The Whitepaper is not limited to specific countries and captures all Foreign Subsidies, regardless of origin. When asked whether the Whitepaper was targeting specific countries, Commissioner Thierry Breton (the EU Internal Market Commissioner) reportedly singled out China, the UK and the Middle East.

Entities looking at inbound EU investments would need proactively to identify whether they have benefited from any investment or assistance that might qualify as a Foreign Subsidy. With major corporates typically having dealings with multiple non-EU governments, and private equity groups oftentimes receiving investment from government-linked pension funds or sovereign wealth funds, the precise definitions circumscribing the new tools will be critical. The Whitepaper proposes a broad definition of Foreign Subsidy that reflects and expands on the definition of “subsidy” in EU and World Trade Organization trade defense rules. The final definitions, and the scope of the pre-notification requirement, will likely be the subject of much comment in the months to come.

Next steps

Interested parties can provide input on the Whitepaper until September 23, 2020. The European Parliament and the Council of the EU will then provide their initial input so that the Commission can submit an official legislative proposal in 2021.