As of July 12, 2023, the EU’s new Foreign Subsidies Regulation (FSR) began to apply. Deals signed from this date will now fall under the European Commission’s (EC’s) new powers to review subsidies from non-EU states to companies active in the EU (see Wilson Sonsini Alert here). Notification is mandatory and suspensory where thresholds are met. This adds yet another potential regulatory filing to the approval checklist for M&A transactions, alongside regimes such as antitrust and foreign investment.

Just two days prior to the regime going live, on July 10, the EC adopted the rules for implementing the FSR following a public consultation. The FSR-IR details procedural aspects of the implementation of the FSR, including the notification forms and information required to be provided to the EC. A detailed Q&A on both procedural and jurisdictional issues has also been made available by the EC.

What Transactions Are Caught?

The FSR tackles foreign subsidies, which are financial contributions received from non-EU countries or entities attributable to a non-EU country (foreign financial contributions (FFCs)).¹

Pre-closing notification under the FSR is mandatory if:

1. 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
2. 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.

Separate thresholds apply for public procurement.

What Does Notification Entail?

Notifying parties must complete a template notification form and provide information on the transaction (or public procurement bid). The parties must also provide information on FFCs, but the extent of the detail required will depend on the amount and nature of the FFC.

The finalized version aims to address concerns raised during the consultation about the administrative burden on parties. While all FFCs are still relevant for the purposes of calculating the jurisdictional thresholds, companies will now only be required to disclose FFCs of at least €1 million ($1.1 million) in the notification form (de minimis). The other main simplification relates to the type of FFCs that need to be disclosed and the details required:

• The FSR-IR asks for a detailed description of subsidies (above the €1 / $1.1 million de minimis threshold) that are “most likely to distort the internal market,” i.e., subsidies granted to an ailing undertaking, unlimited guarantees, non-OECD-compliant export financing, and subsidies directly facilitating a merger or a tender offer.
• For any other FFCs, the FSR-IR relegates them to a high-level overview summarizing the FFCs granted per non-EU country (only where the aggregate amount of FFCs from that country was above €45 million ($47.4 million)) over a period of three years for M&A deals (the relevant threshold being €4 million ($4.2 million) for public tenders).

Importantly, the FSR-IR now excludes from the reporting obligation exchanges of goods or services involving public authorities and state-affiliated companies (except financial services) at market value in the ordinary course of business—a welcome change to its initial draft, absent which parties could have been required to report to the EC items such as electricity bills in any non-EU country. It should be noted, however, that while these are not included in the detailed reporting requirements, they are still relevant to determine whether the notification thresholds are met.

Next Steps

The new EU FSR rules entered into force on January 12, 2023, and the rules started applying on July 12, 2023. Parties can now engage in prenotification discussions with the EC, and any transactions signed on or after July 12, 2023—and which have not closed by October 12, 2023—will need to be notified. The EC can also now conduct investigations on its own initiative (ex officio) into transactions or public procurement procedures (including completed transactions or those falling below the thresholds).

In light of the remaining uncertainties (e.g., how the EC will apply the substantive test for a distortive subsidy or what types of remedies it may require), EC officials have indicated that the agency intends to publish guidelines in the near future that will help companies navigate the new regime. The EC has also encouraged companies to engage early in prenotification talks and has introduced waiver requests to exempt companies from notifying nonproblematic subsidies.

Key Takeaways

While the revised FSR-IR attempts to ease the regime’s administrative burden, a lot remains in practical terms. Even for subsidies below the €1 million ($1.1 million) threshold, the EC can still request more information about a specific FFC. Companies would be well-advised to already establish systems for the collection and tracking of subsidy information (on a three-year rolling basis, in line with the reporting requirements), as the FSR imposes significant monitoring obligations.

For companies contemplating transactions which will not close before October 12, 2023, careful assessment of whether the deal is caught by the FSR will be required—formal notification with the EC will not be possible before that date, so prenotification talks with the EC should begin as soon as possible to ensure the review is front-loaded and delays to closing are minimized.² FSR clearance will also need to be factored into transaction documents and deal timetables.

^[1]The definition is broad and includes any financial contribution received from a non-EU state, including loan guarantees, tax exemptions, capital injections, fiscal incentives, debt forgiveness, and 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).

^[2]As a reminder, 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.