Our alert sheds light on the EC’s first in-depth M&A probe under the FSR and the new mandatory FSR filing obligations for M&A deals in general and also highlights the practical implications of recent FSR enforcement for M&A planning.
EU’s first in-depth probe into an M&A deal
On 10 June 2024, the EC opened its very first in-depth investigation of an M&A deal under the FSR concerning the proposed acquisition by the state-controlled Emirates Telecommunications Group Company PJSC (e&) of sole control of the non-Czech businesses of PPF Telecom Group.
The EC has “sufficient indications” that e& has received foreign subsidies distorting the internal market, namely in the form of an unlimited guarantee from the UAE and a loan from UAE-controlled banks directly facilitating the transactions. The EC is concerned that these subsidies may have improved e&’s capacity to perform the acquisition as well as the competitive position of the merged business in the EU going forward by improving its capacity to finance its EU activities at preferential terms.
The focus of the investigation will be for the EC to assess whether the alleged subsidies had actual or potential negative effects on the acquisition process – in particular, by allowing e& to deter or outbid other parties or to perform the acquisition in the first place – and the internal market more broady going forward. The EC has now 90 working days until 15 October 2024 to decide whether to issue a no-objection decision, prohibit the deal or accept commitments that could be proposed by the UAE buyer to remedy the alleged distortion.
Mandatory notifications of M&A deals under the FSR
Filing thresholds: Since 12 October 2023, M&A deals must be notified to the EC for FSR approval prior to closing if they meet the following test:
- Concentration. 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.
- Turnover threshold. 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.
- Financial contribution threshold. 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 financial years prior to the conclusion of the agreement, announcement of the public bid or acquisition of a controlling interest. Notably, the aggregate financial contribution comprises all financial contributions provided by third countries to the undertaking concerned, as well as all companies directly or indirectly controlled by the undertaking concerned (subsidiaries) and those directly or indirectly controlling the undertaking concerned (ultimate parent).
Standstill obligation: M&A transactions that meet this test must be notified to the EC, and the parties must await EC clearance prior to closing.
Procedure: Similar to the timetable for review under EU merger control rules, the EC will have 25 working days to review a notifiable transaction and, if the EC opens an in-depth investigation, an additional 90 working days (subject to further extension).
Fines/prohibition: Failure to notify can lead to high fines (of up to 10 per cent of the company’s aggregate worldwide turnover), and the EC has the power to prohibit a subsidised concentration.
Track record to date: Since 12 October 2023, the EC has reviewed far more M&A deals under the new FSR rules than originally expected when setting up the new FSR framework. In the first 100 days alone, the EC was engaged in pre-notification discussions in 53 M&A cases. 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 in the first cases involved an investment fund as a notifying party. Often the cases were also subject to parallel review under EU (or national) merger control rules and involved FDI screening in one or more EU member states.
Practical implications for M&A planning
FSR developments must be followed closely: The EU’s new FSR regime is an entirely new legal regime, and the EC’s ongoing practical application of the new rules will increase legal certainty going forward. With respect to the new in-depth probe, for instance, there is well-established EU state aid practice how the EC assesses unlimited state guarantees and loans under EU state aid rules. This case is likely to bring more clarity on how the EC will assess these state measures in the new FSR framework and, in particular, whether, and if so, what types of remedies it may require for clearing the deal. Further developments must therefore be followed closely.
FSR enforcement remains a top priority for the EC: The opening of the in-depth probe is again a stark reminder that FSR enforcement has been a top priority of the EC enforcement agenda since the FSR entered into force in July 2023. It follows recent EC investigations of public tender bids in the clean energy sector (solar, wind) and electric trains, and the EC’s first ever FSR dawn raids conducted in the security equipment sector (see also our recent alert). The newly established unit (Directorate K) within Directorate-General for Competition has only recently increased staff to more than 40 officials and hired external economic and legal advisors and university research to support its M&A reviews and ex officio investigations going forward.1
Practical tips for planning M&A deals: When planning M&A deals in Europe, investors are advised to
- Evaluate FSR notification obligations for upcoming deals or public procurement bids.
- Identify, screen and compile a group-wide record of financial contributions received from non-EU states going back five years, and establish an internal monitoring system to track future, reportable contributions. The term ‘financial contribution’ is generally very broad and includes any transfer of funds or liabilities, the foregoing of revenues (including tax exemptions) and the provision or purchase of goods or services to or from non-EU states.
- Perform FSR risk assessments for specific transactions and public bids to identify potential risks and mitigating strategies upfront. Special attention is needed where group companies may potentially have benefited from foreign subsidies in the form of unlimited guarantees and/or loans from state-controlled banks.
- Reflect the FSR compliance reqirements in transaction documents, where needed.
- Check parallel filing requirements under EU/national merger control rules, foreign direct investments and EU sector-specific regulatory rules.
The FSR as a sword: Recent FSR enforcement has raised significant public attention. We therefore expect that third parties will increasingly use the FSR to oppose deals that are not in their strategic interests (both in competitive M&A and public tenders) and that they’ll also launch complaints and take other legal actions.
For more guidance on the new FSR rules and how they can affect business activities in the EU, see our prior Alert from 26 April 2024 and our In-depths from 13 October 2023, 4 May 2023 and 1 December 2022.
- See also Tono Gil, “London Economics, Gianni & Origoni, others win EU tender to support foreign subsidy reviews” (MLex 15 May 2024).
Client Alert 2024-130
