The Foreign Subsidies Regulation in practice

Yesterday, the European Commission published a so-called “FSR brief” on the first 100 days since the EU’s Foreign Subsidies Regulation’s filing requirements started to apply. Here is an overview of the most important numbers and practical learnings from the Commission’s update.

We have blogged about the Foreign Subsidies Regulation (the FSR) a few times already (inter alia on complaints and clarifications), but as a quick recap: The FSR is meant to tackle the (perceived) issue of companies receiving subsidies from non-EU countries and thereby gaining an unfair competitive advantage over other companies in the EU’s internal market. The FSR has three main pillars: A review regime for M&A deals, a review regime for public procurement of a certain size, and the power for the European Commission to launch (ex officio) market investigations.

Numbers…

The notification requirements of the FSR started to apply on 12 October 2023. Within the first 100 days (so until 20 January 2024):

• The Commission engaged in pre-notification discussions with 53 parties
  
• One case was abandoned (it is unclear whether this was due to FSR concerns)
  
• Nearly 80% of cases were subject to the EU’s merger control regime in parallel
  
• Roughly 50% of cases were also subject to foreign investment control in at least one EU Member State
  
• About a third of the cases involved an investment fund

…information to provide…

The FSR brief includes some noteworthy points on what the Commission deems to be important in practice when it comes to notifications:

• Companies have to take into account any “foreign financial contribution” when determining whether a notification is necessary – even when such contributions are provided on market terms or are generally available.
  
• Parties should carefully assess whether their transaction should be classified as an acquisition, a merger, or a joint venture. This has a direct impact on whose turnover and which foreign financial contributions are to be taken into account.
  
• To ease the burden for companies, parties only have to provide more detailed information on certain foreign financial contributions in notifications. However, whether detailed information has to be provided in the notification is independent from the assessment of whether a transaction is notifiable.
  
• Where the notification threshold is met but the underlying foreign financial contributions do not trigger the requirement to provide more detailed information, notifications should explain why no details need to be provided. Otherwise, case teams need to request more information, which – according to the Commission itself – could lead to delays.
  
• Parties are expected to disclose all foreign financial contributions granted specifically for a given acquisition. This is interpreted broadly: A grant, loan or guarantee which is conceded generally for acquisitions or which is used for or facilitates a given transaction may also be considered as directly facilitating it. So in practice, a loan for an acquisition by a bank that is owned by foreign country generally has to be disclosed.

…and specific guidance for investment funds

Beyond general notes, the Commission’s publication also includes advice aimed at financial investors:

• Limited partner investments by foreign countries (or potentially companies owned by foreign countries) in an acquiring investment fund generally have to be disclosed in notifications as foreign financial contributions. Parties will have to explain whether these investments were made at market conditions and will have to provide information on the rights of the limited partners in the funds and the governance of the target companies. The necessary conversations with investors as part of the notification preparations are not always easy in practice.
  
• Tax measures only benefit from an exemption from reporting obligations if they are explicitly listed in the FSR. Tax measures which the parties only deem to be similar do not benefit from the same exemption.
  
• Different from merger control, for the purposes of the FSR, the information to be provided can be limited to the acquiring fund and the portfolio companies of this fund – as long as certain conditions are met, such as that the investors in the acquiring fund have to differ from the investors in non-acquiring funds. Where an investment fund is not subject to specific EU legislation on Alternative Investment Fund Managers, it can be very burdensome for investment funds to show that they should benefit from the limitation.

What is next

The FSR brief is a helpful step to provide more information on how the Commission applies what is still a nascent review process. This is also important because, as the FSR brief emphasizes, notifications and the closing of investigations in Phase I are not published. Only summary notices of decisions following Phase II investigations will ultimately be published.

It will naturally take quite a while until there is a rich body of published case law to draw from. But first steps have been made: Just last week, the Commission launched its first in-depth investigation under the FSR, covering the bid of Chinese rail company CRRC for a Bulgarian government contract. While this proceeding will not answer all or even most questions around the scope and limits of the FSR, practitioners will certainly watch it closely.

Photo by Jordan Sanchez on Unsplash