European Commission Tables Far Reaching Proposal on Countering Foreign Subsidies

Background

The Proposal follows on from the Commission’s June 2020 white paper (see our June 18, 2020, update). In the Commission’s view, the new powers set out in the Proposal would close a regulatory “gap” among the EU’s existing foreign direct investment screening, procurement rules, state aid, and trade defense. To add to these rules, the new instruments would give the Commission broad authority to address subsidies given by non-EU countries to companies operating in the EU that, in the Commission’s view, would distort the EU internal market.

Which companies would be affected?

The Proposal could apply to a large number of companies, especially to multinationals:

1. Any company “operating” in the EU, including those not currently operating in the EU but acquiring a controlling stake in an EU company or participating in an EU Member State public procurement procedure.

2. Receiving a “foreign subsidy,” defined broadly as covering any financial contribution provided by any non-EU country and benefiting a specific company or a group of companies or industries. Subsidies granted in the 10 years prior to the date of application of the new rules would also be covered, provided they distort the EU market after the rules start to apply.

3. Distorting the EU market, which is again defined broadly. A distortion is present where a Foreign Subsidy is liable to improve the recipient’s competitive position, and, as a result, “actually or potentially” negatively affects competition in the EU.

• Indicators to determine whether a distortion is present include the amount and nature of the subsidy, the market situation, the company’s level of activity in the EU, and the purpose and conditions attached to the subsidy.
• Subsidies lower than €5 million over a period of three consecutive fiscal years are considered “unlikely” to be distortive.
• Some subsidies are, on the other hand, considered “most likely” to distort the EU market, namely those (1) granted to ailing companies, (2) in the form of unlimited guarantees for debts or liabilities, (3) directly facilitating an M&A deal, or (4) enabling a company to submit an unduly advantageous tender for a public contract.

How could companies be affected?

Three tools will be available to the Commission to investigate Foreign Subsidies and to adopt redressive measures if subsidies are found to distort the EU market.

1. First tool: General screening procedure

• Scope: Any Foreign Subsidy to a company operating in the EU that may distort the EU internal market. The scope of this first tool would also encompass M&A deals and participations in public tenders that do not meet the conditions for application of the M&A-focused second tool or the procurement-focused third tool.
• Procedure: On its own initiative, the Commission could decide to investigate information from any source regarding allegedly distortive Foreign Subsidies. The proposed two-phase investigation procedure would consist of a preliminary review and, if need be, an in-depth investigation. The Commission would be entitled to issue information requests and conduct inspections. If a company does not cooperate, the Commission would be able to take a decision based on the facts available to it and to impose fines for noncooperation.
• Redressive measures: If a Foreign Subsidy were found to distort the EU’s internal market, the Commission would be entitled to impose a wide variety of redressive measures. Companies receiving Foreign Subsidies could also offer commitments to address any distortions. The redressive measures and commitments proposed include far-reaching actions such as divestment of certain assets, dissolution of an M&A deal, or repayment of a Foreign Subsidy, together with interest.
• Balancing: In deciding whether to adopt redressive measures (and which measures to adopt), the Commission would be mandated to balance the negative distortive effects with “positive effects on the development of the relevant economic activity.”

2. Second tool: Prior notification of M&A deals — parallel to existing merger control and investment screening procedures
The second tool provides for mandatory and suspensory preclosing notification in certain M&A deals.

• Scope: M&A deals would be covered if (1) they result in a change of control, (2) at least one of the merging companies is established in the EU and generates an aggregate turnover in the EU of at least €500 million, and (3) the company or companies concerned received Foreign Subsidies amounting to more than €50 million in the three preceding calendar years.
• Procedure: Covered M&A deals must be notified and cannot be implemented until the Commission clears the deal. Clearance follows a two-phase approach similar to that set out in the antitrust-focused EU Merger Regulation. The Commission first has 25 working days from the date of formal notification to decide whether to initiate a 90-working-day in-depth investigation.
• Redressive measures: If a Foreign Subsidy is found to distort the EU internal market, the Commission will prohibit the deal unless it accepts commitments or concludes that the negative distortive effects are outweighed by positive effects (balancing). If a deal has already been implemented, the Commission may require the deal to be dissolved or adopt other lesser measures.

3. Third tool: Prior notification in case of participation in public tenders
The third tool provides for mandatory prenotification of Foreign Subsidies where companies participate in certain public tenders.

• Scope: Tenders are covered only if the estimated value of the public contract is at least €250 million.
• Procedure: Companies submitting a bid in covered tenders must notify the contracting authority of all Foreign Subsidies received in the three preceding years (or inform the authority that they did not receive any Foreign Subsidies). The Commission can then investigate, again using a two-phase approach, whether the Foreign Subsidies were unduly advantageous to the company.
• Redressive measures: If a Foreign Subsidy is found to distort the EU market, the Commission will prohibit the award of the contract unless it accepts commitments or concludes that the negative distortive effects are outweighed by positive effects (balancing).

Next Steps

As a next step, the European Parliament and the Council of the European Union will assess the Proposal with a view to reaching agreement on a final text. Separately, until July 14, 2021, stakeholders could submit comments on the Proposal in a second round of public consultations.