Background
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.
Main issues
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.
2. Standstill obligation: Notifiable M&A transactions must await EC clearance prior to closing. Failure to notify could lead to high fines (of up to 10 per cent of the company’s aggregate worldwide turnover).
3. FSR review process: Mirrors the EC merger control process. Once a notifiable transaction is filed, the EC will have 25 working days to complete its review (90 working days in case of an in-depth investigation, subject to further extension). Parties are advised to engage in informal pre-notification discussions.
Practice note: By way of reference, in straightforward merger reviews, pre-notification discussions with the EC typically take two to four weeks (prior to formal notification), but can last for several months in more complex cases.
4. Preparation will avoid unnecessary delays: For most businesses, information on financial contributions obtained outside the EU is not readily available. Assessing whether notification is required under the FSR and, if required, preparing the notification will therefore take time.
5. In the FSR notification itself, parties do not need to provide detailed information on all financial contributions granted during the last three years. Less stringent reporting requirements may apply depending on the nature, size and circumstances of the financial contribution.
Practice note: Parties might further request a waiver from the EC for certain reporting requirements when information is not reasonably available or not relevant to the review.
Practical issues for the M&A process
1. The new FSR notification obligation will increase the red tape involved in closing M&A transactions by state-subsidised investors in Europe.
2. The preparation and the review process can be time-consuming and costly.
3. Parties will potentially have to file parallel notifications under EU and national merger control rules, foreign direct investment rules and, possibly, sector-specific rules (e.g., for certain energy infrastructure projects under the EU’s Third Energy Package).
Practice note: Coordinated, streamlined and timely planning and preparation are necessary to ensure a smooth approval process and a consistent approach to future transactions.
4. We also expect that third parties (e.g., competing bidders in M&A tenders) will seek to use the FSR as a tool to oppose or delay deals. Therefore compliance with the FSR rules is of utmost importance.
Which M&A transactions might cause concern?
1. As part of the review process, the EC will assess whether:
- The financial contribution gives rise to a distortive effect; and
- If so, whether there are potential positive effects of the foreign subsidy (e.g., on the environment or social security) which outweigh the negative effects. More details on the EC’s substantive assessment criteria can be found in our prior alert.
2. Prohibition or corrective measures: If negative effects are identified, the EC can prohibit the transaction or impose remedial measures or commitments. This may include divestment of assets, the reduction of capacity or market share, granting access to infrastructure, repayment of the foreign subsidy (including interest), etc.
Remember: Ex officio market investigations are also possible
Since 12 July 2023, the EC has had the power to investigate foreign subsidies by way of an ex officio investigation. According to press reports, the EC has already received two complaints related to the sports sector (football), but it has not yet opened any market investigation. In the automotive sector, the EC recently opened an anti-subsidy investigation, under trade rules, into Chinese subsidies to EV producers in China, and there is a considerable risk that the EC could initiate a parallel market investigation under the FSR. The limitation period for ex officio investigations is 10 years, and the EC can investigate any foreign subsidies granted after 12 July 2018.
Outlook and preparatory steps to take
Certain M&A transactions will require mandatory notification as of 12 October 2023 (similar rules apply to participation in public tenders in the EU). To assess possible notification requirements for ongoing/future M&A transactions in the EU, businesses with direct or indirect commercial or other links with non-EU states, irrespective of whether they are based in or outside the EU, are advised to take the following steps:
- Given that data collection can be time intensive, start identifying and compiling a record of financial contributions received from non-EU states since at least 12 July 2020 (or, ideally, since 12 July 2018). This will facilitate completion of the subsequent M&A notification procedure.
- Identify those financial contributions that fall into higher risk categories, specifically: (i) subsidies granted to an ailing undertaking; (ii) subsidies in the form of an unlimited guarantee of debts or liabilities; (iii) subsidies in the form of export financing measures that are not compliant with the OECD Arrangement on Officially Supported Export Credits; (iv) subsidies directly facilitating a concentration; and (v) subsidies enabling an undertaking to submit an unduly advantageous tender.
- Check whether financial contributions were or will be received on market terms.
- Where it is unclear whether a financial contribution qualifies as a foreign subsidy or has distortive effects in the EU, consider its impact on any company activities in the EU and whether the policy aims of the relevant non-EU state are supported in the EU as this could serve as possible justification for the subsidy and as a defence against EC intervention.
- For all ongoing/future M&A projects, assess possible parallel merger control, FDI and other regulatory approval requirements and make reference to notification requirements and processes in the transaction documentation.
- Coordinated and streamlined planning and preparation are necessary to ensure a smooth transaction approval process and a consistent approach for future transactions.
Client Alert 2023-226
