(1) Proactive Enforcement of the European Union's ("EU's") FSR
Since the commencement of the notification obligation under the EU's FSR on 12 October 2023, the European Commission ("EC") has launched three in-depth investigations with respect to the notification procedure regarding public procurement (see Section (2) below). The EC's proactive posture on the enforcement of the FSR reminds us of the FSR's potential impact on non-EU companies.
- Among the three in-depth investigations, the first one was opened against CRRC Qingdao Sifang Locomotive Co., Ltd., a subsidiary of CRRC Corporation, a Chinese state-owned train manufacturer1 . It submitted a complete notification on 22 January 2024 concerning a public procurement procedure regarding an electric "push-pull" train project launched by Bulgaria's Ministry of Transport and Communications. On 16 February 2024, the EC revealed that it had opened an in-depth investigation based on its preliminary review of the notification, "...since there are sufficient indications that this company has been granted a foreign subsidy that distorts the internal market"2 . The EC had 110 working days since the filing of the complete notification to make a final decision. However, the commencement of the indepth investigation led the concerned company to withdraw from the public tender procedure3 .
- In addition, the EC launched two more in-depth investigations on 3 April 2024 against two Chinese companies that are involved in the public procurement procedure initiated by a Romanian contracting authority4 . That project plans to construct and operate a photovoltaic park in Romania. These investigations are expected to end by 14 August 2024 as the concerned companies filed a complete notification on 4 March 2024.
Furthermore, on 9 April 2024, the EC's Executive Vice President M. Vestager revealed that the EC had initiated its first inquiry into Chinese suppliers of wind turbines based on the ex officio procedure, although the details of the investigation have not yet been disclosed5.
Although, currently, the regulatory actions by the EC have been targeted at Chinese companies, this should not be interpreted by non-Chinese companies as indicating that they are immune to the FSR's scope. In light of the growing presence of the FSR, this article covers the basics of the notification obligations with updates offered by an EC's brief published in February 2024, procedural precautions for the notifications, as well as practical impacts for non-EU companies.
(2) Basics of the Notification Obligation
The FSR entered into force on 12 January 2023 and became effective on 12 July 2023. As elaborated upon in our previous newsletters6, the new regime allows the EC to review subsidies granted by non-EU states to companies operating in the EU internal market. This is done through several regulatory tools: a notification-system or public procurement and concentrations of a considerable size; ex officio investigations; and wider market investigations. The FSR is intended to remedy situations where subsidies offered by third countries go largely unchecked, while subsidies offered by EU Member States are subjected to the strict regime that has been imposed by EU State Aid control for many decades now. In other words, the FSR aims to ensure a more level playing field within its internal market.
Under the FSR, companies are obliged to notify the EC of transactions that meet both a turnover threshold and a foreign financial contribution ("FFC") threshold. The notification thresholds for concentrations and public procurement are set as per the table below.
| Concentrations (Article 20, FSR) | Public Procurements (Article 28, FSR) |
|---|---|
|
(i) At least one of the merging parties, the target company or the joint venture is established in the EU and has an EU turnover of at least EUR 500 million in the last financial year, and (ii) the companies that are parties to the concentration received more than a total of EUR 50 million in FFCs in the last three years. |
(i) the tender value is equal to or greater than EUR 250 million, and (ii) the economic operator has received more than EUR 4 million in FFCs per third country in the last three years. |
The FSR stipulates that FFCs can be: (i) any transfer of funds or liabilities, (ii) any foregoing of revenue, or (iii) any provision or purchase of goods and services7,8 . This contribution must be provided by the central government or a public authority at any other level, a foreign public entity, or a private entity whose actions can be attributed to the third country. The presence of FFCs is a determinant of companies' obligations to notify regardless of whether or not the relevant FFCs have been provided on market terms or are generally available (not limited in nature)9 .
The EC's first FSR brief which reviewed the first 100 days since the start of the notification obligation for concentrations was published in February 2024. At the time of the brief, the EC had reviewed 53 cases, 42 of which also underwent parallel investigations under the EU Merger Regulation ("EUMR"). The most common type of FFCs assessed were capital injections and equity contributions, but the brief notes that loans obtained from financial institutions could also be considered attributable to FFCs. In addition, state guarantees, direct grants for specific projects, and tax benefits (especially for R&D expenses and investment projects) are frequently observed as FFCs.
(3) Precautions of the Notification Obligation
While notifying parties have to self-assess whether or not they have an obligation to notify, the EC will confirm whether or not the concentrations are notifiable and the necessary information is reported correctly upon receipt of a draft notification.
Turnover Thresholds and Category of Concentrations
To ensure that the obligation to notify has been assessed correctly, the parties have to properly qualify the concentrations as either an acquisition, merger or joint-venture, since the FSR thresholds apply to different companies involved in the transaction, depending on the nature of the transaction10.
The qualification results in several material procedural differences in the notification obligation. This is because the nature of the concentration will determine to what extent the parties involved in the concentration are subject to the FSR's notification obligation. In other words, there may be significant procedural differences in determining the notification obligation depending on the category of concentration. For example, in an acquisition, only the turnover of the target company is taken into account in relation to the turnover threshold. If the parties mistakenly qualify the "merger" as an "acquisition," one of the parties involved in the merger (with EU turnover of less than EUR 500 million) is the "target company" and the other party involved in the merger (with EU turnover of EUR 500 million or more) is the "acquiring company". In such case, if the parties incorrectly apply the notification thresholds of an "acquisition" and refrain from the notification obligation, the notification threshold of a "merger" shall actually apply to the transaction, thus they will have violated the notification and standstill obligation (the prohibition to carry out transactions until clearance is obtained from the EC) as long as the FFC thresholds are met.
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Footnotes
1 Commission opens first in-depth investigation under the Foreign Subsidies Regulation
2 See footnote 1
3 Chinese Train Maker CRRC Drops Bid for $665 Million Bulgarian Contract - WSJ
4 Commission opens two in-depth investigations under the Foreign Subsidies Regulation in the solar photovoltaic sector
5 A lecture on technology and politics (europa.eu)
6 For further information on FSR, please refer to our EU Law Newsletter's previous editions: (Issued in March 2023, August 2022).
7 Regulation (EU) 2022/2560 Article 3.2.
8 The Foreign Subsidies Regulation – 100 days since the start of the notification obligation for concentrations
9 See footnote 8
10 The concepts of 'concentration', 'merger', 'joint venture' and 'acquired undertaking' are derived from the EUMR.
Originally published 6 June 2024
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