On 30 June 2022, the European Parliament and the Council reached political agreement on a draft EU regulation aimed at preventing foreign subsidies from distorting competition in the EU single market (Foreign Subsidies Regulation, FSR), which the European Commission had proposed in May 2021. The final legal text of the FSR is expected to be formally adopted in Q4 2022. Mandatory notification obligations for M&A transactions and public procurement tenders will apply from nine months after the FSR enters into force (i.e., from some time in mid-2023).
This alert recaps the key features of the new regime, highlights the main, substantive changes to the Commission’s initial proposals and sets out the practical considerations for businesses prior to the FSR’s entry into force.
Scope of the FSR
The new regime will affect companies engaging in M&A transactions (mergers, acquisitions and joint ventures) or participating in public procurement procedures in the EU that have received financial contributions from non-EU governments or state-owned entities.
Financial contributions cover a wide range of economic benefits, including public grants, loans, guarantees, fiscal incentives, compensation, certain forms of export financing, preferential tax treatment, tax credits and government contracts. Importantly, financial contributions provided by a non-EU country include not only contributions provided by the country’s central government and government authorities at all other levels, but also all foreign public or private entities whose actions can be attributed to the third country.
The new regime will comprise three tools for reviewing foreign subsidies in M&A scenarios (i.e., mergers, acquisitions and joint ventures), public procurement bids and ex officio investigations.
Mandatory notification of M&A transactions
Under the final agreement, M&A transactions will need to be notified to the European Commission if they meet the following test:
- The transaction constitutes 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 a review.
- One of the merging undertakings (in case of mergers), the acquired business (target) or the joint venture generates turnover within the EU of at least €500 million. Under the initial Commission proposal, the EU turnover of at least one of the joint venture parents would have been sufficient to trigger a filing obligation (irrespective of the EU turnover of the joint venture). The European Parliament and the Council subsequently agreed to limit the EU turnover-based notification threshold to the joint venture itself, which will significantly reduce the number of likely filings compared to the initial Commission proposal.
- All undertakings concerned (e.g., the acquirer and the target, the merging parties, or the joint venture and its parent companies) received from third countries an aggregate financial contribution exceeding €50 million in the last three years.