The EU Foreign Subsidies Regulation (FSR) grants the European Commission a broad mandate to investigate the impact of foreign subsidies that may cause distortions in the EU internal market by negatively affecting competition. The newly published FSR Implementing Regulation (FSRIR) details the information on financial contributions that must be reported as part of a notification.
Background: FSR thresholds for M&A deals
To help the Commission collect information and assess substantive risks, the FSR imposes suspensory filing requirements for certain transactions signed after 11 July 2023 and not closed before 12 October 2023.
Acquisitions of control, mergers or the creation of joint ventures (JVs), where (i) the target group, one of the merging parties or the JV has an aggregate turnover in the EU of at least €500m ($536.59m) and has a place of business in the EU and (ii) the parties to the deal have received aggregate financial contributions from non-EU countries (foreign financial contributions) in excess of €50m over the prior three years, will be subject to the FSR suspensory pre-closing notification and approval.
In addition, the Commission may request a suspensory filing for individual, below-threshold deals. Parties may face penalties of up to 10% of their aggregate turnover if they fail to notify or implement a deal before approval, or up to 1% if they provide incorrect or misleading information.
FSRIR simplification is positive but significant efforts still required from businesses
The FSRIR aims to streamline and explain the reporting obligations set out in the FSR itself. Rather than requiring reporting of all foreign financial contributions, the FSRIR simplifies reporting requirements as follows:
- Mandatory reporting of certain foreign financial contributions deemed by the EU to be most likely to distort the EU market (high-risk foreign financial contributions), where the contribution has a value of €1m or more and was granted in the prior three years.
- For non-high-risk foreign financial contributions, mandatory reporting of all individual financial contributions of €1m or more, if provided by a non-EU country that granted financial contributions to the business of at least €45m in the aggregate over the prior three years.
- Exemption from the reporting requirements of certain foreign financial contributions such as tax holidays; tax reliefs for avoidance of double taxation; and financial contributions below €1m.
- Specific exemption from reporting requirements for investment companies under certain conditions – where an investment fund is the acquiring entity, non-high-risk financial contributions granted to other (uninvolved) funds managed by the same investment company will generally not need to be reported (though exceptions apply).
Despite these simplifications, information collection and reporting will nonetheless require significant efforts from businesses. Under the FSR, businesses must map across their groups a broad range of foreign financial contributions going back three years, to be reported as part of a notification. Additionally, businesses must take account of all foreign financial contributions received to assess whether they meet the financial contribution notification threshold (aggregate of €50m).
Crucially, the Commission has discretion to request any additional information it may deem necessary to conduct the review. Parties will have to explain whether and how the reported financial contributions may improve their competitive position, entering into the heart of the assessment of whether financial contributions amount to subsidies and what their effect is on the EU market.
The Commission has not yet issued clear indications on how it intends to determine if foreign financial contributions may distort the EU market and affect competition negatively. Anti-subsidy, state aid and merger control practice will inform early decisional practice.
Four steps to manage FSR seamlessly
There are four ways in which parties that may be affected by FSR notifications should prepare.
- First, identify deals that are potentially affected by the FSR and assess the risk of meeting mandatory notification thresholds. The Commission will have powers to call in for review deals below the filing thresholds, so that call-in risk factors (for example, transactions with material non-EU government financing) should be considered as part of deal strategy.
- Second, prepare early. Parties at risk of meeting notification thresholds or of a call-in should prepare for filings early to minimise the impact on deal timing. Information required to be reported as part of a notification is extensive and may take some time to gather. Gathering related information across company groups may prove challenging and time-consuming, hence it is important to map out plans as early as possible, even prior to having a specific deal in the pipeline. Timely preparation will mitigate the risks of delaying deal timelines or missing out on bids.
- Third, include regulatory filings provisions in deal documents to address FSR risks. The FSR notification requirements and risks should be reflected in the drafting of deal documentation. Typical clauses would include, for instance, conditions precedent when FSR approval is required; possible springing conditions for FSR call-in risks; provisions to identify the allocation of risk; long-stop date and extension mechanisms; and the efforts each party must make to secure clearance.
- Finally, refine subsidy arguments. As part of the FSR notifications, parties may advance arguments that financial contributions are not subsidies and, if they are, that the subsidies do not distort competition and/or have positive effects capable of outweighing any alleged distortion. This will require expert legal and economic analysis. Doing the analysis upfront and controlling the narrative will mitigate risks of lengthy reviews.
Parties can (and in practice will be required to) engage in pre-notification discussions with the Commission. The FSRIR emphasises that parties are encouraged to submit a draft notification and have preliminary discussions with the Commission about the transaction and possible concerns. During these pre-notification discussions, parties may also request waivers to avoid reporting information that is not reasonably accessible or that does not appear necessary to the assessment of the case.
With the review clock starting only upon receipt of a complete notification, these preliminary discussions should also help accelerate acceptance of the notification.
Ken Daly and Sven de Knop are partners at law firm Sidley Austin.