The EU Foreign Subsidies Regulation (FSR) is one of the hottest topics in EU law right now. Since 12 July 2023, the European Commission (EC) has new powers to ensure that third country governments are not subsidizing their industries to the detriment of fair competition on the EU internal market. Companies will also have new notification obligations under the FSR, so how can you prepare?
It is important to be aware of the three new tools that the FSR has introduced:
- Extensive powers for the EC to launch ex officio investigations into distortive foreign subsidies received by a company;
- A mandatory notification obligation for M&A transactions where the target (or JV, or one of the merging parties) has at least ?500 million in EU turnover and the undertakings concerned have received at least ?50 million in foreign financial contributions (FFCs) in the three years prior to the conclusion of the relevant agreement; and
- A mandatory notification obligation for public tenders valued at least ?250 million or if divided into lots, the aggregate value of the lots applied for is not less than ?125 million and the bidding party received at least ?4 million in FFCs per third country in the three years prior to the notification. Bidding parties that received aggregate FFCs of less than ?4 million per third country must submit a declaration setting out all FFCs received and confirm that they fall below the threshold.
With these new rules the EU is trying to close a regulatory gap. Prior to the FSR, subsidies granted by third countries went largely unmonitored, while subsidies granted by EU Member States were subject to close scrutiny under EU State aid rules.
When do the notification obligations kick in?
12 July and 12 October are important dates to keep in mind. M&A transactions and public procurement procedures meeting the FSR thresholds are notifiable from 12 October 2023 and subject to a standstill obligation pending approval by the EC. Take note though, that this will include transactions where the agreement was concluded (or public tenders commenced) on or after 12 July 2023, even if they have not yet been implemented (or completed) by 12 October 2023.
FSR notifications: what needs submitting?
When submitting FSR notifications companies will have to provide a significant amount of information, particularly on FFCs - a concept which is very far-reaching and can take a broad range of forms, including direct grants, interest-free or low-interest loans, tax incentives (e.g. exemptions/reductions) state-funded R&D, government contracts (regardless of size, whether they qualify as "subsidies" or whether they have any nexus to the EU), and grants of exclusive rights without adequate remuneration.
This will impose a substantial burden on companies since they will need to set up sophisticated group-wide data collection systems to be able to fulfill the extensive information requirements.
FSR preparation: who is impacted?
Interestingly, it isn't only companies that are ramping up FSR preparations. To assist in managing the increase in case load that will come from dealing with notifications and complaints designed to trigger ex officio investigations, the EC launched a tender on 11 July 2023 seeking expert consultants to assist DG Competition's enforcement of the FSR. In particular, so as to receive detailed reports on the impact of subsidies in given sectors, on the benefits of financial contributions, on the distortions caused by foreign subsidies, and on any potentially positive effects of foreign subsidies. This shows, on the one hand, how the implementation of the FSR will place huge demands on the EC's resources. On the other hand, companies that are able to deliver a positive narrative are more likely to ensure a smoother review of their case by the EC.
For multinationals and private equity funds that engage in significant M&A activity or have activities in Europe in industries subject to public tender rules (e.g. healthcare, energy, infrastructure, transport etc.) the FSR will lead to new regulatory hurdles.
With a rolling three-year time frame, identifying and quantifying FCCs will no doubt be time consuming.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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