- As of 12 October 2023, M&A transactions in the EU may trigger a new mandatory notification to the European Commission (EC) under the EU’s new Foreign Subsidies Regulation (FSR). Failure to notify (or early implementation) could result in high fines. Similar rules have been established for participation in public tenders.
- The new FSR notification obligation will increase red tape for closing M&A transactions involving state-supported investors (including state-owned entities and sovereign wealth funds) in Europe and add to existing notification requirements under EU and national merger control, foreign direct investment and, possibly, other sector-specific rules (e.g., in the energy sector).
- Strategic, streamlined and timely planning and preparation are key to comply with the FSR (as well as merger control, FDI and other regulatory notification obligations) and to ensure a smooth approval process for closing M&A transactions and a consistent approach for future transactions.
As of 12 October 2023, M&A transactions in the EU may trigger a mandatory notification to the EC under the EU’s new FSR. Similar rules apply to participations in public tenders in the EU. A failure to notify could trigger high fines.
The FSR aims to tackle foreign subsidies that distort the level playing field within the EU single market. It provides for a notification obligation for M&A transactions and will increase red tape for closing M&A transactions involving state-supported investors in Europe. The FSR will add to existing notification requirements under EU and national merger control rules, foreign direct investment rules and, possibly, other sector-specific rules (e.g., for certain energy infrastructure projects under the EU’s Third Energy Package).
The scope of the FSR has been widely criticised. In particular, the definition of financial contributions is far reaching, increasing to the widest extent possible the likelihood of notification obligations, instead of focusing on financial contributions bearing a real risk of having distortive effects. The administrative burden imposed on companies is substantial.
Some view the FSR as a tool to make investments by state-controlled companies, sovereign wealth funds or state-subsidised companies an unreasonable administrative burden. However, if approached strategically and in a timely manner, complying with the FSR (as well as merger control, FDI and other regulatory notification obligations) should in most cases be a process that can be managed constructively and effectively.
Christian Filippitsch and Max Seuster highlight the key issues businesses need to be aware of when planning M&A deals in the EU in order to successfully comply with the new FSR notification obligation.
Mandatory notification of M&A transactions
What M&A deals must be notified?
An M&A transaction requires prior approval from the EC under the FSR if:
- It constitutes a concentration (i.e., a merger or an acquisition of sole or joint control over another business); and
- One of the merging undertakings (in the case of mergers), the acquired business (the target) or the joint venture is established in the EU and generates turnover of at least €500 million in the EU; and
- All undertakings concerned have received an aggregate financial contribution from non-EU countries exceeding €50 million in the last three financial years.
1. Financial contribution threshold can be easily met: Many internationally active businesses are likely to exceed the €50 million threshold, given the wide definition of financial contribution and how the threshold is calculated:
- It includes all financial contributions granted by any non-EU country, including not only from government authorities, but also from public or private entities whose actions can be attributed to a third country.
Practice note: This might be of particular relevance to state-controlled companies, sovereign wealth funds and state-subsidised companies.
- “Financial contribution” is defined broadly and covers
(i) Any transfer of funds or liabilities (e.g., grants, capital injections, loans, loan guarantees, below-cost financing, tax incentives, debt forgiveness, offsetting of operating losses, compensation for financial burdens imposed by public authorities and debt-to-equity swaps).
(ii) Forgoing of revenue that is otherwise due (e.g., tax exemptions and the granting of special or exclusive rights without fair compensation).
(iii) Payments for the supply or purchase of goods or services.
- The relevant aggregate financial contribution comprises all financial contributions granted by non-EU countries to the entire corporate group.
- Even if thresholds are not met, the EC can request notification on an ad hoc basis prior to closing.