Starting July 12, 2023, the new EU Foreign Subsidies Regulation (FSR) will give the European Commission (EC) powers to review subsidies from non-EU states to companies active in the EU. Its aim is to complement the EU’s existing state aid regime, which controls subsidies by EU Member States, by preventing distortions in the European market caused by third country subsidies.
The FSR will impact M&A deals involving companies established in the EU because it introduces a new mandatory review layer, complete with pre-closing notification requirements, standstill obligations, and the EC’s power to require remedies or block the deal. This is in addition to the already complicated web of merger control and foreign direct investment (FDI) requirements at both an EU and national level.
The FSR’s scope is extremely broad as it captures subsidies received on a corporate group basis from any non-EU country, therefore affecting both non-EU and EU companies. To add to the complexity, a subsidy may be any financial contribution received from a non-EU state, including loan guarantees, tax exemptions, capital injections, fiscal incentives, debt forgiveness, contributions in kind, but also any provision or purchase of goods or services by government entities (or a private entity whose actions can be attributed to a government). For instance, recent U.S. government measures, such as the Inflation Reduction Act, will see U.S. companies active in the EU brought into the FSR’s crosshairs.
What Changes with the FSR?
1. Requirement to obtain EC clearance for large M&A deals
Pre-closing notification is mandatory if:
- the acquisition target, one of the merging parties, or the joint venture (JV) is established in the EU and has revenues of at least €500 million ($539 million) in the EU in the previous financial year; and
- the parties to the transaction received combined financial contributions from non-EU countries of more than €50 million ($54 million) over the three years preceding the conclusion of the agreement, announcement of the public bid, or acquisition of a controlling interest.
Failing to file and disregarding the suspension obligation prior to EC clearance can each lead to fines of up to 10 percent of global turnover.
The notification and review process will be similar to the EC’s merger control process. Reviews will comprise a “Phase I” review period of 25 working days from the filing date and, potentially, a “Phase II” of at least 90 working days (which can be suspended or extended) where the EC identifies a risk that the subsidy distorts the market. Prenotification talks with the EC are “encouraged,” and if these mirror the EC’s current merger practice, we could see several weeks added on to the timetable in more complex cases.
Based on the filing form annexed to the FSR draft implementing regulation (FSR-IR) published for consultation on February 6, 2023, the EC will require companies to provide a detailed overview of their transactions with governments over the three preceding years (including details such as their purpose and economic rationale, conditions attached, etc.). This may introduce a significant burden, which is only slightly alleviated by exempting individual contributions below €200,000 (approximately $215,000) from the listing obligation and, more generally, contributions where the total amount per non-EU country and per year is below €4 million ($4.3 million). The EC will also be able to waive certain information requirements upon request, but how frequently this will occur in practice remains to be seen.
Following review, the EC will either issue a “no-objection” decision, require remedies (structural or behavioral) where there are distortive effects, or block the deal.
2. Possibility of EC scrutiny of M&A deals below notification thresholds
Deals that do not meet the notification thresholds are not exempt from the FSR’s reach.
First, the EC may require a notification of below-threshold deals where it suspects that foreign subsidies may have been granted to the companies concerned in three years prior to the deal.
Second, the FSR gives the EC powers to conduct investigations (including compulsory information requests and inspections) where it suspects the existence of foreign subsidies distorting the EU market and impose remedial measures. In the context of M&A, this may impact implemented deals that were not reviewed by the EC and expose them to the potential risk of remedial measures, including divestiture.
3. Review of subsidies in the context of public procurement
Finally, it should be noted that the FSR will also impact public procurement in the EU. Companies participating in public tenders in the EU will need to notify foreign financial contributions of €4 million ($4.3 million) in tenders worth at least €250 million ($269 million) and obtain clearance from the EC, which may require remedies or prohibit the award of the contract.
Parties that do not meet the thresholds are still required to declare the contributions and confirm they are not notifiable.
Wilson Sonsini Takeaways
The FSR adds another layer of complexity to an already challenging M&A landscape in the EU.
Companies contemplating M&A deals with an EU dimension (or participation in public procurement in the EU) should:
- put a system in place to identify and document any financial contributions received from a non-EU state on a group-wide basis in the past three years; and
- reflect the FSR filing requirements in their M&A agreements similar to standard competition merger review clauses and factor in the review timeline into the overall timetables.
