On 28 November 2022, the EU finally adopted its regulation on foreign subsidies distorting the internal market (Foreign Subsidies Regulation, FSR)1. The new regime targets foreign-subsidised M&A transactions, but also any kind of foreign-subsidised activity affecting EU markets, including the bidding for public contracts in the EU, and seeks to close an enforcement gap under existing EU law rules. It complements existing EU antitrust (merger control) and trade law rules in force. The FSR will shortly be published in the Official Journal and enter into force 20 days thereafter.
Certain M&A transactions and participations in public tenders in the EU will require mandatory filing to and approval from the European Commission (EC) as of nine months after the entry into force of the FSR (i.e., some time in the second half of 2023). International investors that are, or have relationships with, non-EU government bodies and state-owned enterprises are required to assess whether their envisaged deals involving EU targets and participation in public tenders in the EU are caught by the new filing obligations, even if these relationships are at market terms. This will involve establishing a group-wide reporting system for identifying and compiling a record of all financial contributions received from non-EU states since at least 2020 and going forward.
The EC’s new investigation toolbox in a nutshell
The FSR gives the EC three new tools to tackle potentially distortive foreign subsidies: two (mandatory) notification-based tools for certain M&A transactions and bids in public tenders and a general (ad hoc) market investigation tool.
Mandatory notification regime for M&A transactions
Filing thresholds: M&A transactions will need to be notified to the EC 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 will need to 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.
Mandatory notification of public procurement bids
Filing thresholds: A notification obligation will arise for tenders in public procurement procedures in the EU where the following thresholds are exceeded:
- Contract value threshold: The estimated contract value is at least €250 million.
- Financial contribution threshold: The economic operator participating in the tender was granted aggregate foreign financial contributions in the three financial years prior to the notification of at least €4 million per third country. If financial contributions remain below the €4 million threshold, no notification is triggered, but companies participating in tenders must declare foreign financial contributions and confirm in a declaration that foreign financial contributions received are under €4 million.
Standstill obligation: If a bidder is under investigation by the EC, under the new regime, they cannot be awarded a contract prior to the completion of the EC’s review.
Process: 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 EC. Upon receipt, the EC has 20 working days for review (which can be extended by 10 working days in certain cases) and, if the EC opens an in-depth investigation, it must close the investigation within 110 working days after receipt of the complete notification (subject to a possible 20-working-day extension). Special rules apply to multi-stage public procurement procedures.
Fines/prohibition: If the EC finds that a company participating in public procurement tenders benefited from a foreign subsidy distorting the EU internal market, it can prohibit the award of the contract to the company. The EC can also impose fines of up to 10 per cent of the company’s aggregate worldwide turnover if a company fails to notify foreign financial contributions during the public procurement procedure or circumvents or attempts to circumvent the notification requirement.