European M&A is expected to become more complex after European legislators agreed on a new Foreign Subsidies Regulation (FSR), which came into force in January 2023 and aims to control subsidies that distort the EU internal market. With the recently published final implementing regulation setting out key procedural requirements for notification under FSR, a more manageable regime for PE is emerging, albeit one in which PE firms still need to carefully assess relationships with government entities across jurisdictions and group structures.
Notification obligations are effective from 12 October 2023. However, deals signed after 12 July 2023 (when the regulation became effective) and not closed by 12 October 2023 must still be notified. PE deal teams and portfolio companies must act now to prepare.
What types of deals are captured?
The FSR grants the European Commission powers to intervene in mergers, acquisitions, and joint venture transactions in the EU and requires PE acquirers to notify before a transaction closes if (i) the turnover of the target, the joint venture, or one of the merging parties in the EU is equal to or exceeds €500 million; and (ii) the undertakings concerned and/or its parent company(ies) have received total financial contributions of more than €50 million from non-EU countries in the three calendar years prior to the notification.
The concept of financial contribution is much broader than government grants and includes a wide range of payments, tax exemptions, contracts for the sale and purchase of goods, or investments with non-EU governments and public entities.
Scope and Exemptions
The implementing regulation includes some welcome exemptions relevant to PE acquirers. Only financial contributions granted to the fund vehicles involved in the deal and their controlled portfolio companies will be reportable. Financial contributions granted to other funds managed by the same sponsor (but with a majority of different investors) do not need to be reported as long as the commercial transactions between the acquiring company/fund and these other investment funds are limited. This exemption relieves many PE firms of the need to provide large amounts of firmwide information.
The implementing regulation also clarifies reduced demands for information disclosure on financial contributions from third countries. For instance, some categories of financial contribution will be exempt from notification including:
- the purchase/sale of goods and services on market terms;
- general tax measures (e.g., deferrals of tax payments and social security contributions, tax amnesties, normal depreciation, loss-carry forward rules);
- individual financial contributions less than €1 million; and
- aggregate financial contributions less than €45 million per third country over three years.
See “The FSR Will Soon Apply: What Companies Need to Know” for additional information.
Takeaway
While the changes are welcome, the FSR remains a significant new hurdle for PE dealmakers, given the suspensive effect of the notification and the risk of sweeping measures if distortive subsidies are found (e.g., unwinding of the M&A deal), as well as turnover-based fines for non-compliance. Diligence will still be required to assess and determine impacted entities based on the factual matrix of each deal, making early engagement with expert legal counsel essential.
