EU Foreign Subsidies Regulation - Competition Update

From 1 March 2024, the review of concentrations under the EU Foreign Subsidies Regulation (the “FSR”) will be entrusted to the new Directorate K in DG Competition – specifically created to ensure the proper enforcement of the FSR.

It is timely therefore that the European Commission (the “Commission”) recently published an overview of the trends observed during the first 100 days since the commencement of the notification obligation under the FSR.  In this Briefing Note we summarise the main points flowing from the Commission’s experience so far.

Key statistics [1]

• 53 case team allocation requests were received by the Commission during the first 100 days (i.e. notifiable transactions)
• 26% of the notifiable transaction had, at the time of publication, been formally notified to the Commission
• 72% of the notifiable transactions were, at the time of publication, subject to on-going pre-notification discussions
• One case was withdrawn as the notifying parties decided not to proceed
• 79% of the notifiable transactions were subject to parallel EU merger control procedures
• roughly half (49%) of the notifiable transactions were also subject to national foreign direct investment (FDI) screening procedures in one or more Member States
• A significant number of transactions involved investment funds (almost one-third)
• The most common types of FFCs related to sources of financing of the notified transaction (including capital injections, equity contributions, loans from financial institutions that could be attributable to a third country, state guarantees, direct grants for specific projects and tax benefits (notably R&D expenses and investment projects)

Unlike under the FSR public procurement enforcement tool (see our recent brief here), the Commission has not yet opened an in-depth investigation in respect of ‘concentrations’ (M&A transactions). Out of the 9 fully assessed transactions, either foreign subsidies relevant to the concentration were not identified, or if they were, there were no indications that they would distort the internal market. A wide range of sectors, including basic industries, fashion retail, and high technologies, have been the subject of the initial FSR notifications. This is not that surprising, as the mandatory filing obligation comes into play once the specified thresholds are met. 

Remember to report what is necessary  

The Commission re-iterated that the notification obligation, and the information required to be notified, under the FSR are based on foreign financial contributions (“FFCs”), not foreign subsidies (FFCs and foreign subsidies are different concepts under the FSR). Only the presence of FFCs is relevant for determining if there is an obligation to notify. Also, the Commission noted that identifying whether a concentration qualifies as an acquisition, a merger or a joint venture is a critical first step in determining whether the notification thresholds are met.  If a transaction is incorrectly characterised, and the wrong turnover thresholds are considered by the parties, then the parties may end up violating the standstill obligation.

The overview published by the Commission also addresses the notification process, including Form FS-CO requirements introduced by the Implementing Regulation[2], what types of FFCs should be reported and under which sections of the Form FS-CO they should be reported under. Where there are doubts as to the correct qualification of a subsidy, the parties are encouraged to contact the case team during the pre-notification phase to avoid delays.

Financing of concentration always in the spotlight

Parties are expected to disclose all FFCs used to finance an acquisition, or from which the transaction benefits. For instance, guarantees which are granted specifically for a given acquisition should be considered as directly facilitating it. A foreign country’s intention to facilitate a specific transaction is not decisive. Thus, FFCs should be interpreted broadly; for example, a grant, a loan or a 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 and should be reported.

Exceptions to the reporting obligations; and tax measures of general application

The Commission noted that the reporting exceptions in the Implementing Regulation have considerably reduced the administrative burden for undertakings. However, as these are exceptions to the general obligation to report FFCs, they must be interpreted narrowly.

In particular, the Commission noted that point 6 of the instructions to provide information on FFCs[3] indicates that certain tax measures can benefit from the reporting exceptions if they are of ‘general application’.  In this regard, the Commission clarified that: (a) the list of tax measures in point 6 is exhaustive (meaning other or similar tax measures cannot benefit from the exception only because the parties consider them to be of ‘general application’; (b) tax measures not listed in point 6(b) should be reported regardless of whether the parties consider them to be of general or limited application; and (c) if there is any doubt, the parties should consult the case team.

Specific guidance for investment funds

As part of its overview of the first 100 days, the Commission also took the opportunity to address the case of investment companies that enter into transactions through one or different funds.  When investments funds are involved, the relevant undertaking for the purposes of a notification will usually be formed by the investment company.

In acknowledging the specificities of investment fund structures, the Commission noted that point 7 of the Instructions allows parties to limit the information required to be provided to FFCs granted to the acquiring fund and the portfolio companies of that fund only, subject to certain conditions being met, such as district profit entitlements for acquiring and non-acquiring investors, compliance with the rules of Directive 2011/61/EU for Alternative Investment Fund Managers, and commercial transactions between the acquiring fund and the non-acquiring funds are limited are non-existent.

Conclusions

The insights published by the Commission are helpful in understanding some of the issues and the complexities associated with the application of the FSR.

As more concentrations are notified to the Commission under the FSR, more learnings and experience will be gained in understanding the scope and application of this new regulatory regime. The establishment of the FSR-dedicated Directorate K, as announced by the Commission, and as more experience is gained should only act to further assist in providing guidance and clarification going forward.

1. 12 October 2023 - 20 January 2024
2. Implementing Regulation 2023/1441
3. Section 9 of the Implementing Regulation