Movement Towards a New European Foreign Investment Control Tool to Protect European Strategic Assets?

McDermott Will & Emery

McDermott Will & Emery

After reinforcing its control over foreign direct investments over the past year, the European Commission adopted on 5 May 2021 a draft regulation that aims to close a regulatory loophole by addressing distortions of competition on the European market caused by foreign (non-EU) subsidies.


Following adoption of a white paper in June 2020 and a consultation phase, the European Commission has proposed a regulation to address distortion of competition caused by foreign subsidies, accompanied by an impact assessment with examples of such distortion.

EU rules regulate competition, public procurement and certain commercial relationships to ensure a level playing field for companies operating on the European market. However, while subsidies granted by Member States to their companies are strictly regulated through State aid control, foreign public financing granted to certain non-EU companies have gone largely unchecked. This financing can take several forms: interest-free loans, unlimited state guarantees, tax exemptions or reductions for foreign investments, or specific public financing. In many cases, such financing would be problematic if it were granted by Member States to an EU company and would be subject to close scrutiny. This has not been the case for non-EU public financing, and the regulation aims at correcting this loophole.

The impact assessment accompanying the proposal reveals that the Commission considered several strategies for ensuring a level playing field on the EU market for companies that receive foreign subsidies and those that do not (see Impact Assessment, p. 38 ff.) Ultimately, drawing up new legislation proved to be the most efficient way to achieve that goal.

Under the proposed regulation, three new tools would enable the Commission to investigate financial contributions granted by the public authorities of a non-EU country which benefit companies engaging in an economic activity in the European Union and, if necessary, to remedy their distorting effects on the market. The first two tools would cover situations in which a foreign company intends to:

  • Acquire a European company with a turnover exceeding EUR 500 million, and the foreign financial contribution is at least EUR 50 million
  • Bid in an EU public procurement worth more than EUR 250 million.

Ex-ante notification to the Commission of any financial contribution received from a non-EU country would be required. In case of non-notification, the Commission may impose fines. Depending on the situation, the Commission would have the power to impose commitments and remedies (such as divestment of certain assets) or even prohibit the notified operation (Articles 5 and 6).

Foreign subsidies with a turnover of less than EUR 5 million are not considered likely to distort competition (Article 3).

The last tool, known as the “general market investigation tool”, is probably the most significant and could be implemented automatically by the Commission on suspicion of payment of a foreign subsidy, for all situations, mergers and public procurement procedures below the automatic notification thresholds (Article 7 et seq.)

While recent events demonstrate the desire of France and other EU Member States to protect assets considered strategic through the control of foreign investments, this proposed regulation comes in context of the Commission’s efforts to refine its influence in protecting European strategic assets.

Earlier this year, the Commission published new guidance on the application of the referral mechanism set out in Article 22 of the EU Merger Regulation allowing for mergers falling below national merger thresholds to be referred to the Commission if they might affect trade between Member States and threaten to significantly affect competition. This mechanism has just been put into practice in the acquisition of the innovative biotechnology company Grail by the US company Illumina, the world leader in genomic sequencing (see Communiqué Autorité de la concurrence, 20 Apr. 2021). Also relevant is the Commission’s 2020 guidance which aimed at avoiding a sell-off of Europe’s business and industrial actors, including small and medium enterprises, in view of the application of Regulation (EU) 2019/452 (Foreign Investment Screening Regulation).

In light of the fact that the European Union is the destination of a third of the world’s investments and is home to some 100,000 companies owned by foreign entities, the European Union wishes to strengthen and adapt its regulatory arsenal to the new challenges of competition today.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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