The new EU Foreign Subsidies Regulation (FSR) has been in force since last October. While the verdict on the Commission’s application of the FSR has been mixed, what is certain is that the new rules have increased administrative burden and costs for business.
New instruments for the Commission
The FSR plays a prominent role in transactions, and gives the European Commission new, far-reaching powers to address market distortions caused by subsidies from non-EU countries. It focuses on new notification and standstill obligations for M&A deals that are subsidised by non-EU countries, and although the rules are primarily aimed at non-EU companies, EU companies may also be affected if they receive foreign financial contributions (FFCs).
The FSR is intended to close a “regulatory gap” resulting from the fact that the EU State Aid rules place strict limits on the extent to which Member States can subsidise companies operating in the EU, whereas no comparable control exists for subsidies granted by third countries.
The new rules provide the European Commission with three powerful tools to tackle foreign subsidies:
- The most important of these is the so-called “M&A tool”, also known as “merger control 2.0”, which requires additional notification of M&A deals to the Commission. A standstill obligation then applies until clearance of the transaction.
- The “procurement tool” requires that bidders for high-volume public contracts notify the Commission of FFCs.
- Beyond these notification obligations, the Commission can investigate foreign subsidies ex officio using the third instrument (“ex officio tool”).
Forms, forms, and more forms
The FSR Implementing Regulation specifies a series of detailed forms that must be completed when notifying concentrations using the M&A tool and bids in public procurement procedures using the procurement tool. The notification obligations also apply independently of other regulatory procedures, for example under the EU Merger Regulation or the FDI Screening Regulation.
Companies therefore often have to prepare more than one notification simultaneously and manage multiple regulatory tracks with different deadlines and standstill obligations at the same time. The time-consuming FSR procedure can lead to delays in a deal’s timeline. Above all, it includes an informal but de facto mandatory pre-notification procedure, often lasting several weeks. In addition, even in simple cases, the official part takes a minimum of 25 working days, with no possibility of expediting that timeframe.
Mixed bag of positive and negative
Stakeholders have criticised the original draft of the Implementing Regulation, in particular for its unrealistic FFC disclosure requirements. The Commission took the concerns seriously and at least partially addressed them; now, significantly less information has to be disclosed than originally planned.
However, the legal and factual complexity of the information gathering process has increased. The numerous references to complex legal concepts and the multi-layered system of exceptions and counter-exceptions for FFCs make it even more challenging for companies to apply the FSR in some respect. In particular, notifiable FFCs cover a large number of measures that, for example, lack any selective preferential treatment and therefore do not involve any subsidy elements at all.
FFCs include grants, loans, guarantees, capital injections, fiscal incentives, setting off of operating losses, debt write-offs, debt restructuring measures, debt/equity swaps, tax waivers, and even the mere provision or purchase of commodities or services.
With regard to their origin, “state” benefits covered by the FSR include both those from third country authorities and all public and even private entities whose actions can somehow be attributed to the third country, such as transactions by development banks or certain measures by public companies.
All financial contributions from third countries that have been granted to a corporate group over the past three years are aggregated, regardless of whether they are directly or indirectly related to the relevant M&A transaction or the public procurement procedure.
Practice so far
It remains to be seen how the Commission will manage this tremendous additional workload. After just a few months, the number of cases has already exceeded the original forecast of 30 per year, although the past few months have not seen a wave of mergers.
So far, the Commission has shown a surprising interest in the ownership and financing structure of companies, for example. In the case of private equity funds in particular, it wants to know exactly what links there are to third countries. This can be time-consuming, as the numerous investors often include those with state backing (sovereign wealth funds, pension funds, universities and state-affiliated funds, etc.).
Conversely, suspicions that the Commission has certain countries on its radar – China and Russia, for example – have not yet been confirmed. By all accounts, these countries are not treated more strictly than others. Likewise, non-EU countries that are not suspected of particularly lavish subsidy practices are no less closely monitored, either.
Notifying transactions preceded by competitive bidding processes is particularly demanding: In such cases, the Commission wants details about the various bids and bidder universe to be able to find out whether the successful bidder has gained advantage by receiving subsidies.
Inconveniently for EEA members and Switzerland, they all count as third countries and are therefore subject to the FSR control. This applies even if they have concluded a comprehensive free trade agreement with the EU that includes provisions on state aid control – meaning that the countries most closely aligned with the European Union are subject to double subsidy control.
The real test is yet to come: The Commission has yet to initiate an in-depth investigation into a merger or acquisition. However, it did open its first such investigation under the “procurement tool” on 16 February 2024 against Chinese train manufacturer CRRC, where it is investigating whether subsidies enabled CRRC to submit an unduly advantageous tender.
When there are such proceedings in an M&A case, they will test the resources of both the Commission and the companies involved and reveal just how far into this highly sensitive political arena the Commission intends to venture.
Private-sector response
The process of gathering the information required for notification is time-consuming and complex. Comprehensive data needs to be collected on a global, group-wide basis for the past three years. As this is not possible in the short term, many larger companies have decided to establish permanent monitoring systems – which need to be updated regularly to ensure that the information they contain is ready at the push of a button should a notifiable transaction arise.
This additional burden for businesses bears little semblance to the “deregulation” often touted.
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