The Impact of the New Foreign Subsidies Regulation in Dealmaking in Europe
The Foreign Subsidies Regulation is a landmark regulation that aims to address the distortive effects of subsidies granted by foreign countries to companies operating within the EU, and ensure a level playing field and fair competition across the internal market. This landmark regulation is intended to address the distortive effects that foreign countries – non EU – grant to companies operating in the EU and ensure a level playing ground and fair competition throughout the internal market. Investors often express concern about the FSR’s widespread application and its chilling effect on foreign investments within the EU. Indeed, parties to any (larger) M&A transaction or public procurement must be aware of the potential application of the FSR – in addition to the merger control and Foreign Direct Investment regimes, which in themselves become increasingly complex (in this respect, see here
and here
). Contextualising the Commission’s Powers
The Commission acts as the primary enforcer of the FSR, possessing broad powers to investigate, evaluate, and intervene in transactions and public procurement that may distort competition within the EU. The Commission has the power to launch an ex-officio investigation if it suspects that foreign subsidies are distorting, including those relating to non-notifiable deals and greenfield investment. The FSR has been enforced by the Commission in its first year, with more notifications and filings than expected. The impact assessment of the Foreign Subsidies Regulation estimated that around 30 notifications would be made per year for M&A deals and 36 for public procurement. However, the number has now risen to over 100 and 1,300 respectively, just one year later as of 31 October 2024. Stakeholders therefore query the efficiency of this new tool and whether its net is indeed “designed to catch the big fish, because only big fish have the teeth to do damage to the internal market” as once put by the former Commissioner for Competition Vestager in her speech
in March 2023.
Additionally, many filings related to M&A transactions involve private equity firms and investment funds. The Commission has simplified some disclosure requirements and acknowledged that these entities have a heavier notification burden. While many cases are straightforward, firms must still evaluate foreign financial contributions across all funds and portfolio companies to determine if they meet the notification threshold or qualify for exemptions.
Highlights of FSR EnforcementIn some cases, the FSR did show its teeth. Some of the Commission’s in-depth investigations raised serious concerns and ultimately led to certain foreign investors abandoning their participation in the public procurement process – for example in respect of tenders for electric trains in Bulgaria (see here
and here
) and photovoltaic parks in Romania (see here
and here
).In an M&A context, foreign investors carefully weigh their FSR risk profile before launching bids for European targets. In some cases, certain foreign investors were made to leave the bidding process empty-handed given the uncertainty regarding the completion and timing of the transaction under their risk profile (see for example in respect of Haier’s intended acquisition of Purmo, see here).The Commission also recently conducted an in-depth investigation in an M&A context. In September 2024 it approved the purchase of PPF Telecom Group B.V., subject to commitments, by Emirates Telecommunications Group Company PJSC(e&). (See here). This case provides valuable insight into the Commission’s balancing tests on foreign subsidies that could distort competition in the EU.
First Litigation Under the FSR
Already during its first year of implementation, the FSR is subject to a significant review by the EU courts. In April 2024 the Commission used their ex-officio power to conduct an unannounced dawn raid on Nuctech, which is a company that specializes in security inspection equipment and is active in the EU. (See here or here). The Commission suspected the company had received Chinese support, which allowed it to compete unfairly within the EU. Nuctech sought interim measures to challenge these raids, but lost in August 2024 before the EU General Court (see here[1]
). The company also requested interim measures before the Court of Justice to block the use of the evidence gained by the Commission (see here
).
Impact on Business StrategiesThe FSR has significantly impacted the timing and structure of deals, with companies now required to factor in additional review periods and the possibility of interventions and ex-officio investigations by the Commission. This necessitates a strategic re-evaluation of transaction planning.Particularly, the regulation requires companies to identify and maintain records of their foreign financial contributions, posing compliance challenges because the information is not usually captured by standard accounting and reporting systems. The companies must still collect data on their foreign contributions three years before M&A transactions and public procurement notifications. Some companies collect data manually, on a sporadic basis. Others develop automated tools. Early preparation and engagement with the Commission is key to meeting filing obligations and potential ex-officio investigations. Early preparation and engaging with the Commission is key to meeting filing obligations and potential ex-officio investigations.
The regulation’s standstill obligation and potential fines for non-compliance of up to 10% of the annual global revenue underscore the importance of diligent preparation and transparency in business transactions. Companies should expect more ex-officio investigation and be prepared for competitors to use the FSR to file complaints to try to sabotage certain investments. The regulation has underscored the need for a balanced approach to addressing the challenges posed by non-EU financial contributions, ensuring that the EU market remains open and competitive while at the same time safeguarding against distortive practices.
The Commission will continue to walk this fine line while taking account of the increased calls in recent months to ease the regulatory burden on European companies. Mario Draghi’s recent report
on the future of European Competitiveness from September 2024 calls for a reduction in the regulatory burden placed on EU companies to rekindle competitiveness in the European economy. In her recent speech
of 10 December 2024, the new Commissioner for Competition Ribera emphasizes that the Commission will focus on regulation and enforcement where it matters most for competition.
While the Commission will continue to offer helpful guidance and clarifications, and increase transparency, the FSR is here to stay. Therefore, it’s important that companies develop and maintain internal procedures to improve their FSR compliance, prepare in good time and seek early guidance from the Commission when needed.
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Wolters Kluwer, Simmons & Simmons, the University of Vienna and the CELIS Institute recently organized a superb event in Brussels with representatives of the Commission. Here is a summary. The Commission was concerned about possible market distortions after the closing. Although these subsidies had no impact on the acquisition process as e& was sole bidder, they did not have any effect on the acquisition process. To address these concerns, e& proposed commitments that would last for 10 years and could be extended by a further 5 years. These include removing the unlimited State guarantee, prohibiting internal financing from EIA to PPF’s EU activities (with exceptions), ensuring transactions occur on market terms, and informing the Commission of future acquisitions not subject to FSR notification.
