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Key takeaways
- The EU's foreign subsidies regulation (FSR) imposes strict rules on multinational companies and foreign investors in Europe, targeting foreign subsidies’ M&A and market activities, including the bidding for public contracts in the EU. The new FSR rules complement existing EU antitrust (merger control), foreign direct investment (FDI) and trade defence tools.
- Over the past six months, the EU Commission (EC) started four probes into Chinese wind turbine suppliers and into Romanian and Bulgarian bids for solar PVs and electric trains, scrutinized far more M&A deals than originally anticipated, and it carried out its very first dawn raids under the FSR in the security equipment sector just this week. A newly established unit (Directorate K) within Directorate-General for Competition with three separate units composed of senior officials with a track record in state aid enforcement is exclusively dedicated to enforcing the new FSR rules in the EU.
- These initiatives underscore the FSR’s importance for defending the EU’s strategic industries, including energy, semiconductors, security equipment and electric vehicles, etc.). Multinationals and foreign investors must therefore take FSR enforcement seriously and not believe the myth about the EC’s limited resources. While current enforcement appears to focus on activities supported by Chinese subsidies, the new FSR rules target all foreign (non-EU) subsidies having potentially distortive effects on the EU’s internal market, in particular in strategic industry sectors. The EU wields extensive powers for investigations, unannounced inspections, fines and periodic payments or taking interim measures.
- Extensive record-keeping is a must for all international businesses operating in the EU to ensure that all foreign (non-EU) financial contributions are properly monitored and tracked, and to avoid delays and other implications for their M&A investments, participation in public tenders and other operations in strategic sectors within the EU.
EC launches first ex-officio FSR investigation into Chinese wind turbine suppliers: On 9 April 2024, the EU Commission announced that it is launching its very first ex-officio investigation against Chinese suppliers of wind turbines concerning wind park development projects in Spain, Greece, France, Romania and Bulgaria. This announcement responds to the rapid market expansion by Chinese wind turbine manufacturers pushing to win new orders in Europe. According to public statements by European wind turbine manufacturers1, Chinese wind turbine suppliers are offering much lower prices in Europe than their European counterparts, “up to 50% lower prices than Europe-made turbines” and “incredibly generous financing terms with up to 3 years deferred payment”.2 Initially, the EC will investigate, including through requests for information (RFIs) and possibly unannounced inspections, whether an in-depth (so-called Phase II) investigation is warranted and, if so, it would then have an 18-month deadline to adopt a decision. If the EC’s initial concerns are confirmed, the EC has the power to impose redressive measures (or binding commitments) for foreign subsidies, which may include structural or behavioural measures, such as divestment of assets, reduction of capacity or market presence (including by means of temporary restriction on commercial activity), granting access to infrastructure and/or repayment of the foreign subsidy (including interest). The launch of the investigation is an integral part of the EC’s European Wind Power Action Plan presented in October 2023, which seeks to strengthen Europe’s industry and the EU’s energy security. Besides its investigation powers under the new FSR, the EU is monitoring the developments in the market and is ready to make full use of its other trade defence tools to defend the EU’s interests.
Three in-depth investigations launched against bidders in public tenders: Since October 2023, the FSR obliges companies to notify their public procurement tenders in the EU when the estimated value of the contract exceeds €250 million, and when the company was granted at least €4 million in foreign financial contributions from at least one third country in the three years prior to notification. Since then, the EC has opened three in-depth investigations related to the potentially market-distorting effects of foreign subsidies granted to three bidders in public tenders within the solar photovoltaics and electric train sectors:
Solar photovoltaics tender in Romania: On 3 April 2024, the EC launched two in-depth investigations against two consortia for allegedly submitting unfair bids in a public tender for the design, construction and operation of a photovoltaic park in Romania, with an installed power of 454.97 MW, partly financed under the EU Modernisation Fund. The first consortium is composed of a Romanian-based provider of engineering and consulting services (the consortium leader) and a newly established, wholly owned German subsidiary of a Hong Kong-listed supplier of solar photovoltaic solutions active in the development, manufacturing and servicing of solar wafers, cells and modules. The second bidding consortium comprises two wholly-owned subsidiaries of a Chinese state-owned enterprise that are leading global suppliers of industrial-grade solutions of energy, manufacturing and the integration of digital intelligence. They provide services on wind, solar and hydrogen storage, as well as an integrated process of generation, grid, load and storage. Both consortia submitted a complete notification to the FSR on 4 March 2024, and the EC has 110 working days from that date to conclude its investigation.
Electric trains tender in Bulgaria: On 16 February 2024, the EC launched its first in-depth investigation against the subsidiary of a leading Chinese state-owned train manufacturer into the potentially market distortive role of Chinese subsidies in the context of a tender launched by Bulgaria's Ministry of Transport and Communications relating to the purchase of 20 electric push–pull trains, as well as their maintenance over 15 years (with an estimated contract value of approximately €610 million). Shortly thereafter, the Chinese bidder withdrew from the public tender, and the EC closed the investigation, highlighting the success of the EC’s enforcement: “In just a few weeks, our first investigation under the Foreign Subsidies Regulation has already yielded results. Our Single Market is open for firms that are truly competitive and play fair. We will continue to take all necessary measures to preserve Europe’s economic security and competitiveness – with assertiveness and speed”. This case shows that, even absent a formal decision, FSR enforcement in itself can have a massive impact on businesses’ investment plans in the EU.
Investigatory powers include dawn raids: On 23 April 2024, the EC announced that it is conducting unannounced inspections (dawn raids) at the premises of a company active in the production and sale of security equipment in the EU (the EC was accompanied by their counterparts from the national competition authorities of the EU member states where the dawn raids were carried out). Dawn raids are one of EC’s far-reaching powers to assess possible distortions on the EU’s internal market resulting from foreign subsidies. The EC’s long experience in conducting dawn raids in antitrust investigations makes them a particularly effective tool for investigating alleged non-compliance with the new FSR rules.
More M&A deals being reviewed than expected: M&A deals can also be subject to a mandatory notification obligation under the FSR since 12 October 2023, and the EC is reviewing far more M&A under the FSR than originally expected. This is reflected in the EC’s recent FSR brief published in February 2024 with statistics on the notifications it has received during the first 100 days since the start of the notification obligations:
- The EC was engaged in pre-notification discussions in 53 M&A cases. The vast majority of cases (43 out of 53) were subject to parallel review under the EU merger rules, and some cases also triggered a parallel review under national merger control rules (5 out of 53). In addition, around half of the cases involved FDI screening in one or more EU member states.
- More than half of the cases involved non-EU to EU M&A deals, but the FSR also covered purely EU to EU M&A deals and even non-EU to non-EU transactions.
- Almost one-third of all M&A cases in pre-notification involved an investment fund as a notifying party.
By way of contrast, during the legislative process back in 2021, the EC had predicted only 33 M&A notifications per year. In the first 100 days alone, the number of communicated M&A deals therefore already exceeded the EC’s prior estimate. To accommodate businesses with the new reporting obligations for M&A deals, the EC policy brief provides clarifications on some recurring issues that have arisen in the context of the M&A notifications received, including how to categorise foreign financial contributions correctly, the level of detail required to report those identified as most likely to distort the internal market and how to interpret some the exceptions included in the notification form for M&A deals. The EC also regularly updates the Q&A on practical aspects of the new regime on its website.
Implications and outlook
The EC’s enforcement track record over the last six months clearly highlights that the new FSR rules have already started showing their teeth in practice and FSR compliance must be taken seriously by all international businesses investing and operating in the EU. Extensive record-keeping is a must to ensure that all foreign (non-EU) financial contributions are monitored and tracked accurately and to avoid delays and other negative implications for their M&A investments, participation in public tenders and operations in strategic sectors within the EU. For more guidance on the new FSR rules and how they can affect business activities in the EU, see our prior alerts from November 2022, May 2023 and October 2023.
- EU starts investigation into Chinese wind turbines under new Foreign Subsidies Regulation
- Press Release by WindEurope, “EU starts investigation into Chinese wind turbines under new Foreign Subsidies Regulation” (9 April 2024); see also Politico, EU launches probe into Chinese wind turbines (9 April 2024).
Client Alert 2024-087