The obligation under the EU Foreign Subsidies Regulation (FSR)[1] to report M&A transactions involving parties which have benefited from foreign financial contributions enters into force today. This creates an additional layer of regulatory scrutiny and potential need for transaction conditionality beyond merger control and foreign direct investment scrutiny. This brief provides a summary of key points to consider when engaging in M&A deals with a significant nexus to the EU. For more information about the FSR regime, read our previous client alert.

When will M&A transactions need to be reported?

From 12 October,[2] transactions involving a change of control and meeting the following two thresholds must be notified to the European Commission (“Commission”) and cannot be implemented prior to clearance:

• Turnover: The target company (in case of an acquisition), at least one of the merging companies (in case of a merger), or the planned full-function joint venture is established in the EU[3] and generates an aggregate annual EU-wide turnover of at least EUR 500 million; and
• Amount of Foreign Financial Contributions (FFC): The combined aggregate financial contributions received by the companies involved in the transaction from non-EU governments exceed EUR 50 million in the three financial years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.

Failure to notify can result in significant fines (up to 10% of turnover). Companies can also be fined up to 1% of turnover for negligent or intentional supply of incorrect or misleading information.

What are FFC?

The concept of FFC covers a broad spectrum of financial contributions, including:

• transfer of funds or liabilities (e.g., capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps, or rescheduling);
• the foregoing of revenue that is otherwise due (such as tax exemptions or the granting of special or exclusive rights without adequate remuneration); and
• the provision or purchase of goods or services (even if in line with normal market conditions and including ordinary-course arm’s-length transactions).

FSR review process

Although the FSR review timeline is similar to the one under the EU Merger Regulation, FSR reviews will be carried out separately and could potentially not align with EU merger control reviews.

If during its investigation the Commission determines that a foreign subsidy risks distorting the EU internal market, redressive measures or commitments could apply (e.g., divestment of certain assets, repayment of the foreign subsidy, or obligation to refrain from certain investments, among other structural and behavioral measures). Serious non-mitigatable concerns could also lead to the prohibition of the transaction.

Plan ahead

As the notification obligation is far-reaching and disclosure obligations may be very burdensome, we recommend that companies consider the following key preparatory steps:

• Assess whether an FSR notification will be required for transactions recently signed or already in the pipeline.
• Account for the impact of FSR reviews in transaction timelines and documents, namely, via regulatory conditions precedent, representations and warranties, disclosure schedules, and, where commercially relevant, possible break fees.
• Consider establishing a robust procedure to record, monitor, and identify, on a group-wide basis, all relevant financial contributions received or to be received.

[1] Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market.

[2] Transactions signed on or after 12 July but not closed before 12 October would also need to be reported if the thresholds are met.

[3] A company is “established in the EU” not only if it is itself incorporated in the EU, but also if it is based outside of the EU but has a subsidiary or permanent business establishment in the EU.

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