The Foreign Subsidies Regulation: Lessons from the First Year of Enforcement

Introduction

Since October 2023, the European Commission has been aggressively enforcing a revolutionary new European Union (EU) law, the Foreign Subsidies Regulation (FSR). The FSR was designed to prevent “foreign”, meaning non-EU, subsidies from distorting EU internal markets. The FSR introduced a number of new legal concepts and procedures, including the “foreign contribution” (FFC), into EU competition law. It drew on other EU laws, such as State aid, merger reviews and trade laws. The first year of FSR enforcers provides lessons to companies that are involved in mergers and acquisitions that have a significant EU connection, participate in public tenders that are governed by EU regulations, or work in an industry which may be the subject of a Commission investigation ex officio. In particular, the requirement to provide three years of groupwide information on FFCs for certain M&A transactions and public tenders means companies that may engage in such transactions need significant time to collect the required information from multiple sources including financial, tax and business reporting systems.

Background

The Commission proposed regulating foreign subsidies in a 2020 White Paper

, followed by a formal regulation proposal

in 2021 and final adoption November 2022. The short period of 1.5 years between the proposal and the adoption reflected the strong support for action to combat foreign subsidies that distort the EU internal markets. If the Commission determines that these FFCs are distortive subsidies, then it can impose measures in order to correct their distortions. Examples of FFCs include grants, loans, tax incentives (e.g., exemptions/reductions), state-funded R&D, government contracts (regardless of size, whether they qualify as “subsidies” or whether they have any nexus to the EU), and grants of exclusive rights without adequate remuneration. By contrast, a foreign subsidy is a narrower concept including only FFCs conferring a benefit to their recipients that is not normally available on the market and specific to one or more companies or industries.In July 2023, the Commission adopted an implementing regulation including notification forms and details on its procedures. The Commission has also published guidance in various forms and is required to publish formal guidelines by 2026.

M&A notifications

M&A transactions in which the target or a joint venture generates EU turnover of EUR500M+ and all undertakings concerned received FFCs of EUR50M+ in the prior three years must be notified to the Commission on Form FS-CO. The thresholds and the review procedure are based on the EU Merger Regulation, with a few exceptions. The first year of FSR implementation has been busier than expected. By the end September 2024, 120 M&A deals had been prenotified and 91 formal notifications were received. This is a significant increase over the 30 formal M&A notifications the Commission estimated for each year in its 2021 legislative proposal. In order to deal with the increased workload, and ensure proper enforcement of the law, the Commission created the new Directorate K under the Directorate-General for Competition. Although not mandated by the FSR, DG Competition has started to publish information on pending notifications, presumably to increase transparency.

The Commission’s notification form for M&A transactions, Form FS-CO, requires information on the parties (including the ownership, control and sources of financing), the concentration and FFCs received groupwide during the prior three years. Only specific types of foreign subsidies that are presumptively distorted under the FSR require detailed information on each FFC. For other FFCs, the buyer or buyers only need to provide the information. The information can be summarized by country and FFC type. In practice, case teams often request more detailed information. This highlights the importance of collecting FFC data ahead of time. The new notification requirement does not affect the timeline of M&A transactions, as long as the parties have gathered the required three years’ worth of FFC groupwide information. The FSR review can take much longer than the EUMR or FDI reviews if the Commission suspects that there are distortive subsidies. It may take extensive pre-notification discussions to convince the Commission there is no need for an in-depth investigation.

Today, the Commission has opened only one in-depth investigation, which is analogous to a phase II investigation under EUMR. In this case, the Commission looked into whether a Middle Eastern buyer who wanted to buy assets from a Czech telecoms company had received foreign subsidies such as an unlimited guarantee or loans from state-controlled bank. The Commission was of the opinion that these subsidies could have negatively affected the acquisition process, and caused a distortion in competition on the EU internal market after the transaction. To address these concerns the buyer agreed that the unlimited guarantee would be removed, parent company financing of the target’s internal market activities would not be allowed, and the buyer was required to inform the Commission about future acquisitions. FSR remedies are only available in a thorough investigation, unlike in the EUMR context. The remedies could have the unintended effect of preventing a merged entity from achieving synergies by integrating the target within the buyer group. The Commission also appears to be more willing to accept behavioral commitments during an FSR review as opposed structural remedies in EUMR cases. The full text of the decision, once published, will shed light on the Commission’s substantive assessment of potentially distortive FFCs. The Commission has provided some helpful guidance in a Staff Work Document

on the concepts of distorting the internal market and how to apply the so-called “balancing” test (see our publication here

). However, comprehensive guidance on FSR theory of harm may be released before January 2026. According to the Commission’s FSR Brief in the first 100 day of application, roughly one third of transactions involved investment funds as notifying parties. The Commission believes that limited partners who are based in non-EU countries, such as sovereign wealth funds, may be able to make investments that are “presumptively distorted”. Public procurement filings

The FSR asks participants in public bids that are subject to EU rules, to submit a Form FS-PP notification when the value of the tender is over EUR250M. Notifications on Form FSPP must be submitted by the contracting authority. This authority then forwards it to DG GROW which is responsible for administering the FSR module. The Form FSPP only requires information on a narrower group of group members. This significantly reduces the amount of FFC information that must be provided. DG GROW case review teams tend to ask for more detailed information about FFCs. DG GROW did not release a policy document on procurement cases, but the SWD

contains the first indications of how the substantive assessment will be conducted for public procurement cases. Since each participant in an in-scope tender must submit a separate Form FS-PP, a single public tender may generate several notifications, in contrast to the M&A context.

Three in-depth investigations give first indications on the Commission’s priorities in procurement cases. The Commission launched its first investigation in depth on February 15, 2024 following a notification from an Asian train manufacturer regarding a Bulgarian tender concerning the procurement and maintenance of several electric “push pull” trains, as well as staff training services. On April 3, 2024 the Commission launched two investigations in-depth following notifications from two Asian controlled companies regarding a Romanian tender concerning the design and construction of a Romanian photovoltaic plant. All three investigations ended when the bidders voluntarily retracted their responses to customer tenders. Thus, in contrast to the M&A context, so far the Commission has not accepted remedies to address concerns about potentially distortive foreign subsidies.

Ex officio investigationsIn addition to situations triggering mandatory FSR notifications, the Commission has the power to conduct ex officio investigations into all potentially distortive foreign subsidies. The Commission can use its ex officio powers to investigate support provided by third countries for companies up to ten years before the investigation begins (but no more than five prior to July 2023). The Commission can also request an ad hoc notification for transactions and public procurement procedures that do not meet the thresholds but in relation to which it suspects that the companies concerned were granted foreign subsidies in the three years prior to the concentration/tender submission.To date the Commission has initiated two ex officio investigations, which are still pending. Notification procedures do not have a deadline. On April 9, 2024, the Commission launched its first ex officio investigation under the FSR regime for public procurement, which targets Asian suppliers of wind turbines and investigates the conditions for the development of wind parks in Spain, Greece, France, Romania and Bulgaria (see Speech by Executive Vice President Vestager on technology and politics at the Institute for Advanced Study

).In the same month, the Commission conducted a dawn raid at an Asian company’s premises in the Netherlands and Poland. In May 2024, the company filed an appeal against the FSR probe and sought an interim injunction as well as an annulment of Commission’s decision. In August 2024, the General Court dismissed the company’s suspension request and confirmed that the Commission is entitled to request information from all undertakings carrying out commercial activities in the EU.

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On 20 November 2024, Wolters Kluwer will co-host an in-person event on “The FSR: One Year in Review” in Brussels. More information and registration here

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