1. (Mandatory) notification regime for foreign-subsidised M&A transactions

Any M&A deal will require notification to the Commission if the following cumulative requirements are met:

• First, the transaction must constitute a concentration, i.e., a merger or an acquisition of (sole or joint) control over another business. In contrast, the acquisition of a non-controlling minority stake in another business would not trigger review.
• Second, one of the undertakings (the target or one of the merging undertakings and, in the case of a joint venture, either the joint venture or one of its parents companies) is established in the EU and generates an aggregate turnover in the EU exceeding €500 million.
• Third, the undertakings concerned – or, in the case of joint ventures, the joint venture itself and its parent undertakings – received from third countries an aggregate financial contribution exceeding €50 million in the last three years.

As a consequence, a transaction may trigger a notification regardless of whether the financial contribution has a distortive effect on the EU. In other words, there is no need to prove a distortive effect to establish a notification requirement; it suffices that a financial contribution has been made to one of the parties.

The categories of concentrations covered, the methodology to calculate the relevant turnover, as well as the review process largely mirror the structure foreseen in the EU Merger Regulation (EUMR). Once notified, the Commission will have 25 working days to review the transaction and, if the Commission opens an in-depth investigation, an additional 90 working days (subject to further extension).

Any notifiable transaction must not be completed prior to obtaining Commission approval (under the standstill obligation in the EUMR). Where a company fails to notify a subsidised concentration, the Commission could impose fines (of up to 10 per cent of the company’s aggregate worldwide turnover) and review the transaction as if it had been notified. Notifiable transactions will therefore be subject to parallel review (including parallel filing obligations) under EU or national merger control rules and foreign investments laws, where applicable.

Importantly, even if the value thresholds are not met, the Commission has the right to request the notification of a concentration at any time prior to its implementation where it suspects that the parties benefitted from foreign subsidies in the three years prior to the concentration. This ‘safety net’ provision would grant the Commission large discretionary powers to review smaller transactions and increase legal uncertainty for merging parties and their deal planning. In this respect, the Commission’s investigatory powers are wider than under the EU merger control rules, under which the Commission depends on a complex referral mechanism involving Member States in order to take on jurisdiction over transactions that do not meet the EU turnover thresholds (see our recent alert on the Commission’s new (so-called Article 22 EUMR) merger referral practice for transactions that are not notifiable at the EU or national level).

2. (Mandatory) notification regime for bids in public tenders

The proposed Regulation further provides for a notification obligation for bids in public procurements involving a financial contribution by a non-EU state where the estimated value of the procurement exceeds €250 million.

When submitting a tender or a request to participate in a public procurement procedure, bidders are required to notify the contracting authority or entity of all foreign financial contributions received up to three years before the notification or confirm in a declaration that no foreign financial contributions were received in the same period.

The contracting authority shall then promptly transfer the notification to the Commission. Upon receipt, the Commission has 60 days to conduct a preliminary review (200 days in case of concerns). Pending the Commission’s review, the investigated bidder cannot be awarded the contract (under the suspension obligation in the EUMR). Where a company fails to notify the financial contribution in a public tender, the Commission can impose a fine (of up to 10 per cent of the aggregate worldwide turnover).

3. General (ex officio) market investigation for any other subsidised activity

The proposed Regulation further grants the Commission the general power to investigate on its own initiative (ex officio) all other market situations, including smaller concentrations and procurements that do not exceed the above notification thresholds, if it suspects that a foreign subsidy may be involved.

Different to the notification processes outlined above, the Commission’s market investigation would not be subject to any formal timeline. The limitation period foreseen is 10 years starting on the day on which a foreign subsidy is granted (with the possibility of interruptions). The Regulation would also apply to foreign subsidies granted prior to the application of the Regulation. This could create substantive risks for companies which have received funds from foreign public resources in the past.

If the Commission suspects that foreign subsidies in a given sector distort the Single Market, it also has the power to launch a market investigation of an entire sector and to use information obtained to initiate an investigation against individual companies.

Assessment of possible distortions

Distortion of the Single Market: Foreign subsidies will only raise concerns if they have a distortive effect in the EU. The proposed Regulation provides a number of categories and indicators to assess this:

• Foreign subsidies that are most likely to be distortive include, among others, unlimited guarantees, subsidies to undertakings in financial distress without a restructuring plan, subsidies directly facilitating a concentration or subsidies that facilitate the submission of an unduly advantageous tender.
• In all other cases the distortive effects will depend on a variety of indicators, including the amount, nature and purpose of the subsidy, the market situation, the level of economic activity of the undertaking concerned and the purpose and conditions attached to the foreign subsidy.
• De minimis foreign subsidies with a value of <€5 million (in aggregate over the previous three years) are unlikely to be distortive.

Balancing with positive effects: If a foreign subsidy distorts the Single Market, the Commission will need to consider potential positive effects of the foreign subsidy and balance these effects with the distortion.

Redressive measures and commitments: In a situation where the negative effects prevail, the Commission may impose redressive measures or accept commitments from the companies concerned that remedy the distortion. This may include structural or behavioural remedies, such as the divestment of assets, the reduction of capacity or market presence, granting access to infrastructure or the stopping of a certain market behaviour. If redressive measures cannot be achieved, the Commission has the power to issue a prohibition decision. This can also include the prohibition of a concentration or of an award of procurement contract.

Powers foreseen to address distortions

For each of these tools, the Commission has far-reaching investigatory powers, including the power to request information, conduct unannounced inspections within and outside the EU, impose fines and periodic penalty payments on companies if they provide incorrect, incomplete or misleading information (see our recent alert, “Withholding information can lead to fines in merger cases – companies must comply with EU merger rules”), or take interim measures.

If a company fails to provide the necessary information, the Commission may take decisions based on the facts available, a concept imported from trade defence investigations, in effect enabling the Commission to make adverse inferences as soon as parties fail or are unable to provide the requested information, in the required quality. In practice, this could have far-reaching implications for many businesses controlled by a state or a sovereign wealth fund as they will not always have the means to obtain the necessary information.

Practical implications

• If adopted, the proposed Regulation will have far-reaching implications for companies operating or investing in the EU with support from foreign states (financial or otherwise).
• The regulatory and administrative burden for closing M&A transactions by state-supported investors in Europe will increase significantly. Companies will potentially have to file parallel notifications under the Commission’s new foreign subsidy regime, EU or national merger control rules and/or foreign direct investment rules in the EU.
• The proposal also adds significant legal uncertainty for M&A transactions falling below the notification thresholds for which the Commission has the right to request a notification prior to implementation. It can also be expected that interested third parties will increasingly use the Commission’s new investigation toolbox as a sword to oppose deals that are not in their strategic interest.
• More generally, international businesses operating in the EU will need to closely monitor the subsidies obtained from non-EU states to limit potential risk exposure under the proposed new regime. This applies to not only future dealings but also any advantage received in the last previous 10 years.

In-depth 2021-150