Update Antitrust, March 9 2023

Further notification requirement for M&A transactions: Overview of the Foreign Subsidies Regulation ("FSR")

I. Overview

With the Regulation on Foreign Subsidies Distorting the Internal Market (Regulation (EU) 2022/2560; "Foreign Subsidies Regulation – FSR"), certain transactions will be subject to a further notification requirement to the European Commission.

For the companies involved, the assessment of the notification requirement and the notification itself means a considerable effort, as they are obliged to compile extensive data and information on financial contributions from non-EU countries if certain thresholds are exceeded.

The notification requirement must be taken into account when planning future M&A transactions: As in merger control proceedings, companies may not implement a notifiable transaction until the European Commission has granted its approval under the FSR ("standstill obligation").

The FSR entered into force on 12 January 2023 and will apply from July 12 2023. As of this date, the European Commission may initiate ex officio investigations into (and require ad hoc notifications for) matters not meeting the thresholds below where there is a suspicion of foreign subsidies distorting competition in the EU. The prior notification requirement for M&A transactions and the standstill obligation will apply from October 12 2023.

Companies involved in larger M&A transactions should thus consider the possibility of a notification requirement at an early stage.

II. Notification requirement for M&A transactions

The obligation to declare applies to transactions, i. e. when

1.    two or more previously independent undertakings or parts of undertakings merge, or

2.    one or more undertakings acquire direct or indirect control of the whole or parts of one or more other undertakings (including the creation of a joint venture),

where the following two thresholds are met:

1.    Turnover:

  • At least one of the merging undertakings, the acquired undertaking or the joint venture is established in the European Union and
  • generates an aggregate turnover in the Union of at least EUR 500 million.

2.    Financial contribution:

  • The undertakings involved in the transaction have received financial contributions of more than EUR 50 million from third countries in the last three years.

The concept of a financial contribution is extremely broad. It includes

  • The transfer of funds or liabilities (e. g. loans, loan guarantees or debt forgiveness),
  • the foregoing of revenue that is otherwise due (e. g. tax exemptions) and
  • even the provision as well as the purchase of goods and services. Even small purchases or sales to authorities or the like are covered.

The concept of financial contribution must be distinguished from the narrower concept of "foreign subsidies", which is also used in the FSR: A financial contribution is considered to be a " foreign subsidy" where a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries.

The total amount of all financial contributions to a group is decisive, i.e. the financial contributions to different subsidiaries or parent companies are aggregated. In addition, several transactions between the same parties within the last two years are treated as the same concentration.

III. Procedure

The European Commission has 25 working days to investigate whether the financial contributions constitute foreign subsidies and whether they threaten to distort the internal market:

A distortion in the internal market exists where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market.

If in this Phase I the European Commission obtains sufficient indications that a foreign subsidy distorts the internal market, it conducts an in-depth investigation in Phase II, which may take a further 90 working days (extendable by 15 working days).

The European Commission can carry out a so-called balancing test, in which it balances the positive and negative effects of foreign subsidies.

If it concludes that a foreign subsidy distorts the internal market, it can prohibit a subsidised merger or impose commitments or redressive measures on the undertakings involved.

In the event of a breach of the notification or the standstill obligation, the European Commission can impose fines of up to 10 % of an undertaking’s aggregated annual turnover.

IV. Next steps

In the last weeks, the European Commission has invited stakeholders to give feedback on a draft Implementing Regulation. The Implementing Regulation sets out the form of the notifications and provides more details on the procedure. The feedback received can be accessed via the website of the European Commission. The final version of the implementing regulation is planned for the second quarter of 2023.

Filings must be prepared thoroughly and carefully and sufficient time must be allocated as part of an M&A transaction process. In particular, companies that regularly enter into contracts with non-EU countries (including public or private entities whose actions can be attributed to such a third country) should identify and aggregate internally all financial contributions from third countries since July 2018.

Based on our experience in EU state aid law, we assist in the assessment of which of these financial contributions could be considered as foreign subsidies and which positive effects of financial contributions might have to be taken into account in the balancing test.

Due to our expertise in EU merger control law, the procedures of which are similar to the new procedures under the FSR, we also conduct the relevant proceedings before the European Commission.

V. Further Information


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