On 6 February 2023, the European Commission (EC) launched a public consultation on a draft implementing regulation (IR) which sets out procedural rules relating to the EU Foreign Subsidies Regulation (FSR).

Background

The FSR regulates subsidies granted by non-EU countries to companies active in the EU. Under the new notification regime, companies participating in M&A transactions and public tenders in the EU will face notification obligations, even if they do not consider they have received any relevant foreign government subsidies. The EC will also be able to investigate on its own initiative all market situations regarding potentially distortive foreign subsidies.

The FSR entered into force on 12 January 2023 and most of its provisions will apply from 12 July 2023. The notification obligations kick in slightly later, from 12 October 2023.

You can read about the obligations the FSR will impose and implications for businesses in our alert.

The content of the draft package

The EC’s draft package consists of three elements:

• the IR, which gives guidance on procedural rules for applying the FSR
• Annex 1, which provides a standard notification form for notifiable transactions
• Annex 2, setting out a standard notification form for notifiable public procurements

The IR sets out the rules on notification procedures, the calculation of time limits, submission of commitments, redressive measures, access to file and confidentiality, transmission of documents and the EC's investigative powers. However, the package being consulted on does not contain any significant guidance on how the EC interprets the new thresholds or how it will apply them in practice.

Extensive information requirements

The draft notification forms require the provision of a significant amount of information.

As well as basic information about the parties and transaction/procurement, similar to what would be included in an EU merger control filing, there is a requirement for disclosure and quantification of all foreign “financial contributions” received in the last three years.

The test for “foreign financial contributions” is not clearly defined, but is clearly broader than the test for “foreign subsidy”. Gathering information on all foreign financial contributions and deciding on how to disclose those contributions in the form is likely to require significant attention for businesses carrying out M&A transactions which will fall within the scope of the new notification regime.

There is a limited information “safe harbour”, clarifying that the parties will only have to submit details of foreign financial contributions where:

• For transactions: the value of the financial contribution is at least EUR200,000 and the total amount of contributions per third country and per year is at least EUR4 million. In addition, the EC attempts to narrow the scope of the disclosure requirements further by only requiring detailed information on financial contributions (such as their form, purpose and economic rationale and conditions) that fall into certain listed categories considered “most likely to distort the internal market”.
• For public procurement procedures the financial contribution granted to any notifying party falls into the listed categories considered “most likely to distort the internal market” or relates to operating costs, and its aggregate amount is or exceeds EUR4m per third country in the three years before notification.

While these exclusions will certainly help to reduce the scope of information that notifying parties must submit to the EC, crucially they will not relieve companies from the need to track all the foreign financial contributions that they receive. This will be necessary to, for example, determine whether the filing thresholds set out in the FSR are met.

In addition, the draft transaction notification form requires the submission of certain highly detailed confidential information on the sources of finances used to fund the transaction, the transaction value, how the enterprise value has been calculated and, surprisingly, copies of due diligence reports prepared by external parties assessing the deal “from a strategic, legal, economic, or tax point of view”.

Certain information will not be readily available to an acquirer. This includes detailed information on any bidding process, such as how many other candidates were contacted, which candidates expressed an interest or submitted an offer, and which bidders withdrew at what stage of the process.

Potential reduction of notification burden

In the drafts, the EC encourages companies to engage in pre-notification contacts in both transaction and public procurement notification procedures. During these contacts, companies will be able to discuss and agree with the EC the amount of information that needs to be submitted in the notification forms.

Importantly, the EC is proposing to allow notifying parties to request waivers from the information requirements in two scenarios: (1) if the information is not necessary for the examination of the case; and (2) when the information is not reasonably available to the notifying party (this will be accepted only in exceptional circumstances).

The possibility of pre-notification contacts/waivers is welcome. However, it remains to be seen how the EC will conduct the procedure in practice – in particular, how willing it will be to accept waiver requests – and how much extra time seeking waivers could add to the transaction or public procurement timeline.

Arguing the positive effects

Finally, notifying parties will be able to set out the possible positive effects of their transaction or public procurement procedures on the EU market. These can include broader positive effects in line with the EU’s policy objectives.

However, guidance on these points is scarce. It is not clear what type of positive effects the EC will take into consideration during the review process. Nor is it certain how much and what type of evidence will be required to substantiate these arguments.

Many questions remain

The EC is reported to anticipate only a “two-digit” number of notifications each year. It remains to be seen if this will be the case, especially if limited or no guidance is given on the tests for notification. In any event, it may be challenging for the authority – already stretched by its state aid caseload – to be sufficiently resourced by October to deal with the influx of pre-notification requests and filings.

For those companies who will need to make filings when the notification obligations kick in, a number of points remain outstanding.

Since the drafts focus on the procedure, they do not answer key questions regarding various substantive points that are crucial to understanding and applying the FSR, such as how to interpret “financial contribution” or what constitutes a “distortive” subsidy.

With guidance on the new regime only expected in 2024 at the earliest, navigating the notification process, at least in its initial period of application, will be challenging.

In the meantime, the EC is seeking comments on the draft IR and annexes. The deadline is 6 March 2023.