On 24 September 2024, following the first in-depth investigation of a proposed acquisition under the EU’s FSR, the EC announced it would conditionally approve, subject to commitments, the acquisition of parts of the telecommunication operator PPF Telecom Group B.V. (PPF) by the Emirates Telecommunications Group Company PJSC (e&). e& is controlled by the United Arab Emirates (UAE) through the UAE’s sovereign wealth fund, the Emirates Investment Authority (EIA). This represents the first time that the EC has used its powers under the FSR to approve an acquisition only conditionally based on the commitments offered by the parties.
The foreign subsidies
The EC found that e& and EIA received foreign subsidies from the UAE in the form of, among others, an unlimited State guarantee. Unlimited state guarantees are considered high-risk foreign subsidies because of their increased risk of distorting competition. EIA also benefitted from various grants, loans and other debt instruments granted by the UAE. The receipt of foreign subsidies is not, by itself, problematic. Instead, the EC needs to assess whether the foreign subsidies distort the EU internal market by improving the competitive position of an undertaking in a way that actually or potentially negatively affects competition in the EU.
It is noteworthy that the EC’s in-depth investigation found that the foreign subsidies in this case did not lead to actual or potential negative effects on competition during the acquisition process, since e& was the sole bidder for PPF and had sufficient resources to acquire PPF without the foreign subsidies. It is unlikely that the EC would reach a similar conclusion where the acquisition process involves multiple bidders competing to purchase a target, in which case the foreign subsidies could potentially facilitate the concentration and distort the level playing field.
In turn, the EC found that these foreign subsidies could nonetheless lead to a distortion of competition in the EU after the transaction by improving the ability of the acquired entity to finance its activities and by reducing its risk exposure in a way not achievable by an equivalent competitor not benefitting from such subsidies. This could be done, for example, by enabling the merged entity to invest in new technologies or in the deployment of infrastructure, or by providing it with the financial means to acquire its competitors beyond the ability of an equivalent competitor in the absence of the foreign subsidies. On this basis, it appears that the abstract possibility that a high-risk subsidy could lead to a distortion of competition in the EU is sufficient. This is indicative of the wide scope of the FSR rules and shows that subsidies received in non-EU jurisdictions may nonetheless be considered as liable to distort competition in the EU.
Commitments
Because of the potential distortive effects of the foreign subsidies, wide-ranging commitments were deemed necessary in this case to address the EC’s concerns. In particular, the commitments remove the unlimited State guarantee through a commitment in the articles of association of e&.
The commitments also prohibit e& or EIA from financing PPF’s activities in the EU for a 10-year period, subject to limited exceptions, and they require that all transactions between PPF on one side, and e& or EIA on the other side, must be on market terms. This commitment will be monitored by an external monitoring trustee, who will have wide access to the internal workings of all relevant undertakings.
Finally, e& will have to inform the EC of any future acquisitions that do not fall within the FSR notification thresholds. Considering the EC’s wide ex officio powers, which allow it to investigate any situation involving foreign subsidies at its own initiative, this commitment practically makes each acquisition by e& subject to the EC’s prior approval under the FSR rules, regardless of the notification thresholds.
Procedure and timing
The EC’s decision on 24 September 2024 brings an end to the FSR investigation of PPF’s acquisition by e&, which was originally notified to the EC on 26 April 2024. The EC had originally made full use of its 25 working days to review the transaction prior to opening its in-depth investigation on 10 June 2024, and then releasing its in-depth decision approximately three weeks in advance of the 90 additional working days deadline. The official five-month duration of the procedure may seem manageable, but any notification of an acquisition falling within the scope of the FSR is preceded by an often lengthy pre-notification procedure during which the EC could issue multiple rounds of requests for information.
To facilitate and expedite the approval process, it is important for international businesses operating in the EU to keep thorough records of all foreign (non-EU) financial contributions they receive in order to avoid delays and other negative implications regarding their M&A investments or public tender bids.
Crucially, an FSR notification may be required in parallel to other filing requirements under EU or national merger control rules, foreign direct investment and EU sector-specific regulatory rules, making the efficient, consistent and coordinated preparation of these filings a necessity to avoid undue delays and contrasting outcomes.
Implications and outlook
This decision marks an important milestone in the enforcement of the FSR and sets the standard for future acquisitions involving problematic and high-risk foreign subsidies.
It suggests that behavioral remedies could be a solution to address concerns. A relevant factor is to ensure that the parties cannot channel foreign subsidies to the activities of the merged entity in the internal European market after the transaction. In the present case, this is ensured by the prohibition from cross-financing PPF’s activities in the EU for a 10-year period.
One might even go a step further and consider whether commitments can be avoided if respective safeguards are considered upfront, when structuring the transaction.
This might also be an effective strategy to avoid the transparency commitment, offered by e&, i.e., to inform the EC of any future acquisitions that do not fall within the FSR notification thresholds. In reality, considering the EC’s wide ex officio powers, which allow it to investigate any situation involving foreign subsidies at its own initiative, this commitment practically makes each acquisition by e& subject to the EC’s prior approval under the FSR rules, irrespective of the notification thresholds. This is a situation that should be avoided.
Client Alert 2024-206
