Main rules and impact on non-EU companies, transactions and public contracts

I. Introduction

The FSR¹ was approved by the European Council on 28 November 2022 and entered into force on 12 January 2023. Its provisions are based on the White Paper adopted by the European Commission (“Commission”) in June 2020² and aim to address what is perceived as a regulatory gap in the EU’s ability to control distortive foreign subsidies granted by non-EU governments and which currently escape scrutiny under EU competition rules, public procurement rules, foreign direct investment ("FDI") control rules and trade defence instruments.
 
The FSR enables the Commission to investigate subsidies granted by non-EU public authorities to companies operating in the EU and will have a major impact and far-reaching implications for M&A and public procurement in the EU. It is expected to impact investments in the EU by both third-country State-owned companies and private companies that have received direct or indirect financial contributions or benefits from non-EU countries. In practice, any company (foreign or European) active in non-EU countries involving state intervention in the economy or in subsidized sectors, or benefitting from fiscal incentives, can be subject to this new scrutiny.

The FSR is a new legal regime with mandatory notification requirements backed up by the threat of fines. It establishes a separate approval process independent from the EU merger control regime and applies a legal test based on the distortion of the EU internal market, rather than the competition/consumer-welfare based test underlying the EU merger control regime.

II. What is a foreign subsidy?

The FSR defines a foreign subsidy as any intervention that meets three cumulative conditions:

• A financial contribution provided, directly or indirectly, by the public authorities of a non-EU country.

• Such a financial contribution confers a benefit on an undertaking engaging in an economic activity in the EU internal market.

• The benefit is limited to an individual undertaking or industry or several undertakings or industries.

  III. Notification obligations and investigative tools

The FSR establishes three tools in order to identify and control distortive subsidies, namely:

1. A mandatory notification-based tool with suspensory effect for concentrations (including M&A and joint venture transactions).
2. A mandatory notification-based tool with suspensory effect for tenders in public procurement contracts.
3. An ex officio tool allowing the Commission to investigate all other market situations where distortive foreign subsidies may be involved, including concentrations and public procurements below the notification thresholds. 

During its investigation on the compatibility of the foreign subsidies with the EU internal market, the Commission has far-reaching powers, including the powers to request information, conduct inspections, adopt interim measures and impose fines and periodic penalty payments. As regards the latter, the Commission has the power to impose fines if the Parties provide incorrect or misleading information (fines up to 1% of the company’s global turnover), or in case of failure to notify, implementation ahead of clearance, or implementation of a prohibited transaction (fines up to 10% of the company’s global turnover).

At the end of its investigation and in case distortive effects are found, the Commission can impose redressive measures or accept commitments. It can also ultimately take steps such as the prohibition of a planned transaction or the award of a contract.

IV. Mandatory notification regime for foreign subsidized transactions

Notification thresholds

Concentrations need to be notified if they meet the following cumulative criteria:

• The acquired undertaking or at least one of the merging undertakings or the joint venture is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million, and

• Either the undertakings concerned, or the joint venture itself and its parent undertakings, received from third countries an aggregate financial contribution in the three calendar years prior to notification of more than EUR 50 million.

The Commission may also request the prior notification of any concentration at any time prior to its implementation where it suspects that the undertakings concerned may have benefitted from foreign subsidies in the three previous calendar years.

Procedure

Notifiable concentrations must be notified to the Commission prior to their implementation and following the conclusion of the agreement. The Commission's review has a suspensory effect.

The procedure for the investigation of transactions involving foreign subsidies is similar to merger control investigations, involving:

• A preliminary review (Phase I) which starts from complete notification and lasts 25 working days, and

• If there are indications of the existence of a distortive subsidy, an in-depth investigation (Phase II) which lasts an additional 90 working days and can be potentially extended by up to 35 working days.

The Commission can stop the clock if the Parties fail to provide the requested information within the prescribed time limits.
 
The Commission’s in-depth investigation determines whether the transaction is facilitated by a foreign subsidy and ends with the adoption of either (i) a no objection decision when there is no subsidy or indication of distortion in the EU internal market, (ii) a decision with commitments, or (iii) a decision prohibiting a concentration, where the Commission finds that a foreign subsidy distorts the EU internal market.

V. Public procurement mandatory notification requirement

Economic operators participating in EU public procurement procedures must notify the contracting authority when:

• The value of the public procurement is at least €250 million (or €125 million if split into lots), and

• The  participant received a benefit of at least €4 million per (non-EU) country in the three calendar years prior to the notification.
  
  

• A preliminary review (Phase I) of 20 working days from receipt of the complete notification (extendable by 10 working days); and

• An in-depth review (Phase II) of 110 working days from receipt of the complete notification (extendable by 20 working days).

At the end of its review, the Commission has the power to (i) issue a no objection decision, (ii) issue a decision subject to commitments that fully remedy the distortion to the EU internal market, or (iii) prohibit the award of the contract to the economic operator concerned.

During the Commission’s investigation, all procedural steps in the public procurement procedure can continue except for the award of the contract to the participant that submitted a notification. Consequently, and since the award procedure is not suspended during the investigation, the contract can be awarded to the economic operator which submitted the most economically advantageous bid which was not subject to the Commission's review. The award decision may be made before the Commission has completed its review of any tenders which have been notified to it.

VI. Next Steps

The FSR will apply from 12 July 2023 and companies will be obliged to notify concentrations or financial contributions related to public procurement from 12 October 2023. The FSR will not apply to (i) concentrations for which the agreement was concluded before 12 July 2023, and (ii) public procurement contracts that have been awarded, or procedures initiated, before 12 July 2023.
 
As the practical application of most of the FSR provisions remains uncertain, the Commission is required to adopt implementing legislation providing further details on the overall notification procedure by 12 July 2023. Moreover, the Commission is also required to adopt guidelines at the latest three years after the entry into force of the FSR regarding the assessment of distortive subsidies as well as the application of its powers relating to the notification obligation for concentrations and public procurement.

VII. Implications for companies

Companies that have received or will be receiving financial contributions from non-EU countries will have to conduct a detailed assessment of the risks that a potential transaction or bid in the EU may entail before proceeding with an investment decision or tender application. This includes companies based outside the EU, EU-based subsidiaries of foreign companies, and EU companies with foreign subsidiaries.
  
In this regard, identifying financial contributions can prove to be a challenging task involving the collection and assessment of significant amounts of data, especially taking into account the broad definition of “financial contributions” provided in the FSR. More specifically, financial contributions include many different types of measures and transactions, such as capital injections, grants, loans, loan guarantees, fiscal incentives, debt forgiveness, tax exemptions, the provision or purchase of goods or services on advantageous terms etc. and a notification is required regardless of whether such contributions are ultimately qualified by the Commission as distortive foreign subsidies.

Moreover, based on the current text of the FSR, financial contributions have to be taken into account, regardless of whether they are directly or even indirectly linked to the relevant transaction or the public procurement process.  It is also notable that all financial contributions received by any member of the corporate group of the participating entity have to be added together for the purpose of assessing whether the notification thresholds are met.

As far as M&A are concerned, the FSR is expected to significantly increase the administrative burden for companies operating in the EU and could significantly impact the timeline for transactions. The FSR applies without prejudice to the relevant competition rules, including the EU Merger Control Regulation (or national merger control regimes), which essentially means that transactions by State-backed investors involving EU targets may potentially require notifications and clearances prior to closing under (i) the FSR regime, and/or (ii) EU merger control rules at EU or national level, and/or (iii) national foreign direct investment review/national security regimes. As with merger control and FDI clearances, clearance under the FSR will also need to be reflected in the transaction documentation as a condition precedent and reflected in the transaction timeline and risk-sharing provisions.  Foreign investors will need to allocate time and internal and external resources to the assessment and identification of the applicable pre-closing filing requirements as well as to the strategic coordination of any parallel filings. These parallel investigations may in turn result in different outcomes or require the adoption of different sets of remedies. Relatedly, none of the relevant legal instruments addresses situations where a concentration is notifiable under different regimes and whether the investigation process and outcomes would need to be aligned.

Against this backdrop, it is hoped that the required implementing acts and guidelines will provide at least a certain degree of certainty and guidance to investors and ensure a smooth application of the notification obligations with effect from October 2023 onwards.

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