As of July 12, 2023, the Regulation (EU) 2022/2560 of Dec. 14, 2022, on foreign subsidies — the foreign subsidies regulation, or FSR — will allow the European Commission to investigate, analyze and remedy distortions that have occurred within the European Union as a result of subsidies granted by non-EU countries to undertakings operating in the EU internal market.

The main objective of the European Commission is to prevent unfair trade. Indeed, some companies receiving foreign subsidies may use them to purchase companies operating in the internal market that hold, for example, strategic assets or innovative technologies.

In this context, the European Commission has been granted new powers to control the impact of foreign subsidies on the internal market, including the new merger control regime for transactions involving foreign subsidies, and the opportunity to investigate where there is suspicion  that foreign subsidies could distort the internal market.

New premerger filing obligation with the European Commission

As of Oct. 12, 2023, the parties to a transaction will be required to notify the European Commission of mergers involving companies that received financial contributions from public authorities of a non-EU country, where both of the following thresholds are met:

(i) The target, one of the merging parties or the joint venture is established in the European Union and generates a turnover in the EU of at least €500 million.

(ii) The foreign financial contribution granted to the acquirer or the target, the merging companies, or companies creating a joint venture or the joint venture was at least €50 million in the three years preceding the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest.

This notification must be made before the closing of the transaction and must be filed in addition to the merger control filing required under the EU merger control regulation (Regulation (EC) 139/2004 of Jan. 20, 2004, on the control of concentrations between undertakings).

The European Commission may request prior notification of any concentration that is not a notifiable concentration, at any time prior to its implementation, where the Commission suspects that foreign subsidies may have been granted to the undertakings concerned in the three years prior to the concentration.

The definition of “concentration” under FSR is the same as under the EU merger regulation: a concentration is deemed to occur "where a change of control on a lasting basis results" from (i) "the merger of two or more previously independent undertakings or parts of undertakings"; (ii) “the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertaking”; or (iii) from the creation of a full-function joint venture (i.e., “performing on a lasting basis all the functions of an autonomous economic entity”).

As under the EU merger control regulation, “control” results from rights, contracts or any other means that, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising “decisive influence on the business of an undertaking."

Review of a merger by the European Commission under the FSR

In connection with the filing of a concentration under the FSR, the European Commission may adopt one of three types of decisions as the outcome of the investigation:

• To authorize the transaction unconditionally
• To authorize the transaction subject to commitments
• To prohibit the transaction if the foreign subsidy distorts the internal market

The European Commission may use several criteria to assess whether the foreign subsidy distorts the EU internal market or not, such as the value and the amount of the foreign subsidy, the size of the market, the value of the investment, the features of the market or the existence of barriers to entry. For example, if the subsidy covers a substantial part of the purchase price of the target, it may be likely to create distortions.

The FSR does not apply to transactions completed before July 12, 2023.

With regard to the sanctions incurred and the investigative powers granted to the European Commission under the FSR, please refer to our article on this matter.

Future clarifications

Even though the FSR set forth new obligations that parties to transactions must comply with, it does not define key concepts, such as distortions caused by foreign subsidies or the balancing of the positive and negative effects of a foreign subsidy.

These concepts will be defined by case law. The European Commission plans to publish guidelines by Jan. 12, 2026, at the latest to clarify the relevant criteria for targeting a distortion resulting from a foreign subsidy in the internal market, as well as to clarify the Commission's power to require prior notification of any relevant merger involving a foreign subsidy.

The implementing regulation, which clarify the applicable rules and procedures, including notification forms for mergers, calculation of deadlines, procedures for access to file and confidentiality of information, has been adopted by the European Commission on July 10, 2023.

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