Episode 3, Competition Law and Foreign Investment in 2023 – EU Foreign Subsidies Regulation

10 May 2023

Fiona Garside, a Senior Expertise Lawyer in Ashurst's Antitrust, Foreign Investment and Regulation team, is joined by partners Christophe Lemaire and Donald Slater.

Subsidies granted by EU Member are already subject to EU State aid control, but there have been concerns about the impact of foreign subsidies on the internal market.

Fiona, Christophe and Donald discuss the anticipated impact of the FSR and potential challenges and opportunities in its application.

This is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.



Hello, and welcome to the next episode in our mini-series on anticipated trends in competition law and foreign investment in 2023. My name is Fiona Garside and I'm a Senior Expertise Lawyer in the Antitrust, Foreign Investment and Regulation team at Ashurst. I'm delighted to be joined today by Christophe Lemaire, a partner in our Paris team, and Donald Slater, a partner in our Brussels office.


Hello, Fiona.


Hi Fiona


And today we're going to be talking about the new EU Foreign Subsidies Regulation (also known as the FSR) which was published in the Official Journal of the European Union on 23 December 2022. Subsidies granted by EU Member States have already been subject to EU State aid control, but there have been concerns that foreign subsidies may also have an impact on the internal market. And to address this, the FSR offers new tools to the European Commission, which will have significant consequences for foreign and European companies. So Donald, at a high level, what does the FSR aim to do?


In a nutshell, the FSR aims are identifying situations where undertakings have received subsidies from non-EU countries, and where those subsidies distort competition on the internal market in the EU. The FSR focuses especially on the effects of those subsidies in high value mergers and high value public procurement procedures and, for those situations, it creates a compulsory notification and clearance procedure.

During those procedures, if the EU Commission identifies distortions on competition and there are insufficient positive effects to outweigh those distortions, then it can impose different remedies or even stop the merger taking place or prevent the award of the public contract. The FSR also grants the Commission broad powers to investigate potentially distorted foreign subsidies, either on its own initiative or following a complaint.

I'll just make a couple of remarks at this stage about the notions of foreign subsidy and distortion of competition. So first, the notion of foreign subsidy is a very broad one. It can include the obvious things like grants, but it can also include tax breaks, provision of loans or guarantees by the State at below market value, or supply of goods and services to the public sector above market value and so on. So any kind of financial benefit can be qualified as a subsidy. And subsidies can be granted not just by central government, but by any foreign public entity or authority.

Secondly, on distortion of competition, that occurs when a foreign subsidy could improve the competitive position of the company in the internal market and whether the potentially negative effects on competition that come from that. There's a number of factors that are taken into account in making that analysis. So for example, the purpose of the contribution, the relevant product to market, and the nature and amount of the subsidy, and the overall market position and evolution of the company.


Thanks, Donald. And thinking about that last point in more detail, does the FSR provide any examples of what types of subsidies are more or less likely to distort the market, Christophe?


Yes, indeed. The FSR provides a list of foreign subsidies that are most likely to distort the internal market. It includes subsidies:

  • granted to an ailing company, meaning a company which is likely to go out of business in the short to medium term without the subsidy;
  • in the form of an unlimited guarantee for debt or liability of the undertaking;
  • in the form of an export financing measures that is not in line with the OECD arrangement on officially supported export credits;
  • which directly facilitate a merger or a concentration; or
  • which enable a company to submit an unduly advantageous tender.

You also have an indication of subsidies, which are, the opposite, unlikely to distort the internal market. This is the case where subsidies are below EUR 4 million over a period of three years or below EUR 200,000 per third country over a same period of three years, or when subsidies are granted for natural disaster or in exceptional occurrences.


Thanks, Christophe. And now, Donald, as you mentioned earlier, the FSR grants the Commission three new tools: a merger notification regime, public procurement notification regime, and a general market investigation power. So if we look at each of these tools in a bit more detail now, starting with merger control, when will companies need to notify foreign subsidies in the context of an M&A transaction?


So companies are going to need to notify the Commission of mergers and full function joint ventures where two thresholds are met. The first one is that one of the undertakings (either the target or the joint venture) is established in the EU and generated an EU turnover of at least EUR 500 million in the previous financial year, so a very high turnover threshold is applicable. The second threshold is the companies involved in the transaction received more than EUR 50 million in financial contributions from third countries in three previous years. And I should underline here that second threshold is not EUR 50 million of subsidies, but EUR 50 million of financial contributions. I'm not going to go into any detail on that notion just now, but suffice it to say that it's a much broader notion still than the notion of subsidy and covers all forms of payments from public authorities to an undertaking whether they involve subsidies or not.

At this stages is three brief points that I would like to highlight on this notification procedure in the context of mergers. Firstly, we don't know exactly what information is going to be needed in the notification form but, based on the draft implementing regulation, this could be very significant, and most importantly, it will basically require reporting of all financial contributions from all non-EU countries over the last three years that are above a de minimis threshold. Now that obviously creates a significant practical challenge in terms of data collection and management.

The second point I'd like to make is that the notification procedure is suspensory. So just like the merger control procedure, until there's clearance from the European Commission the transaction cannot be closed. And that obviously means that in practice, there's an impact on the deal timetable that needs to be factored in. And the third point I wanted to make is in terms of review timetable, this is basically aligned with the EU merger regime. So the typical 25 working days for the simple procedures, but obviously bear in mind that there may be a long pre-notification period, which we'll come back to later.


Thanks, Donald. So this is going to be important for companies to think about alongside the EU merger control regime in general when looking at M&A transactions. Next, if we look at public procurement, Christophe, what notifications need to be made in that context?


In the context of public procurement, bidders needs to notify the contracting authority where the estimated contract value is at least EUR 250 million and where the bidder has received financial contribution of more than EUR 4 million per third country in the three previous years.

Bidders that do not need these thresholds do not need to prepare a notification, but nevertheless, they need to provide the contracting authority with the declaration, which list any non-notifiable foreign financial contributions. The contracting authority will then transfer this notification or declaration to the EU Commission that will be responsible for the assessment. Like with the merger control regime, we have seen before, the Commission can request a notification of any foreign subsidies in the three years prior in any public procurement procedures that don't meet the thresholds, if it suspects that a bidder may have received foreign subsidies.

If a bidder fails to submit the required notification or declaration, the consequences might be important. First, they can be fined, and second, they cannot be awarded the contract.

In terms of procedure, the Commission has a two-step procedure. First, an initial review period of 20 working days, and then potential in-depth review period of up to 110 working days from when the Commission received the notification. Both these periods can be, of course, extended in certain circumstances. At the end of its review, the European Commission will either prohibit the award of the contract, or issue a positive decision, meaning that it does not object to the contract, or potentially issue a decision subject to a commitment, which is rather similar to what we know in merger control.

It is finally important to note that the award procedure is not suspended during the Commission review, but the contract cannot be awarded to a party subject to such a review.


Thanks, Christophe. And then finally, if we think about the final tool, the general market investigation tool, Donald, what do we know about this so far?


Well, for the moment, not a great deal. The Regulation is very broad: it gives the Commission powers to investigate any market situation where it suspects the existence of a distortive foreign subsidy. The powers that the Commission has are quite similar to those that they have in relation to the investigation of anti-competitive behaviour, including the ability to send requests for information and to carry out inspections outside the EU, although it remains to be seen how that will work in practice and how the Commission will secure access to premises outside the EU to investigate companies that are presumably supported by local governments.


Thanks, Donald. And now, the Commission will be able to impose fines up to 10% of the parties combined worldwide turnover for failing to notify relevant transaction or bid, or breaching the standstill obligation or failing to comply with a European Commission decision. So there is a real risk of fines in this area, and there's also risk of daily fines and fines of up to 1% for failure to cooperate with the investigation. It's particularly important then that companies get this right. How many deals are we expecting to be impacted by the new rules? And it'd be great to hear from both of you what steps companies should already be thinking about in order to prepare for this regulation. Christophe, perhaps if we start with you.


Yes, I mean it's difficult to have a clear view of the numbers of a deal that may be the code like this new regulation. What we know is that the European Commission Unit is expected to be very active in that field. And we have seen Olivier Guersent, the director General of DG COMP, publicly state that he has concern about the ability of his team to manage the upcoming workload and appeal for additional resources to deal with the new regulation. In terms of numbers and deals or transaction or contract that may fall within the scope of the Foreign Subsidies Regulation, we can say that for each category, it should be below 100 per year. And if we look at the European Commission's impact assessment prepared when the Regulation was submitted, this impact assessment suggested that each year around 30 merger acquisition and JV will be notified, should be around 30 to 40 public procurement bids, and nearly the same for any ex-officio investigations.

But in terms of preparation, of course, company need to be preparing actively for implementation now, if they haven't already started. The first step, which is not the easiest one, will be to identify any financial contribution that a company or its subsidiary may have received from a non-EU country and for that, they will need to have a centralised database of these and internal reporting processes in place, as is the case, for, for example, turnover data for merger control analysis. Next, companies will have to determine which of these financial contributions constitute foreign subsidies and make an assessment as to whether they confer any benefit to them.


Yeah, that's right and that's going to be one of the potentially trickier steps in the analysis: identifying which financial contributions involve foreign subsidies, that's something that will probably have to be done in conjunction with legal counsel. Companies will have to reflect carefully on how they're going to set up their internal processes to allow ongoing monitoring, both of the issue of financial contributions as well as that of the existence of subsidies. Obviously, that's going to involve, in turn, some kind of internal training for lawyers and procurement professionals and other business people who are potentially affected by these regulations, just so that they're aware of how the new regime works and how they should comply. In that context, it's going to be important to think about which functions within the undertaking are going to need to report the receipt of financial contributions, where the decision about whether they confer a benefit, whether they constitute a subsidy, will need to be made.

Consistency of approach is another critical issue, which may, in addition to the data gathering exercise itself, be rather challenging in larger corporations. Now, all of this is a bit of a moving feat and we should expect to have iterative guidance throughout the next 12 months and even beyond, which obviously makes things rather challenging for companies. It's a large job to collect this data and prepare for potential obligations under the Regulation, which will come into effect in the next months. But given the time that these processes will take, it's important to think ahead.


Thank you both. Now we've talked about further guidance being forthcoming and also the draft implementing regulations that were recently consulted on. Are there any other points coming out of those regulations that we should highlight?


Yeah, there are some points worth highlighting, although we should bear in mind that these are still under review and we've not seen them in final form. But if we look at a couple of examples, there are a number of procedural elements that are going to be familiar to anyone who has lived through the EU merger control process. So for example, the pre-notification discussions which are not only encouraged but also likely to be systematic and potentially taking material lengths of time.

There's the possibility for waivers for certain information requirements and we're waiting with bated breath to see whether the information requirements more generally will be cut down, but the possibility of waivers also exist under the Regulation. The time period for review, very similar as we said to the EU merger control rules, and will only start running on submission of a complete notification.

There are fines for submission of misleading or incorrect information, and as is the case for efficiencies in the Form CO in the EU merger process, it's up to the notifying parties whether they want to make submissions about the positive effects that subsidies may have that could potentially counterbalance any distortions identified by the Commission.

There are nonetheless some differences compared to the merger control procedures. Obviously, the substantive information that's requested is rather different other than the basic information on the companies and the transactions. All the rest relates to, in particular, the financial contributions and the assessment of any subsidies that are identified. And obviously, there is also a focus on the distortive effects of any of those subsidies.


There are element of the form that may be quite challenging for the notifying party to complete, in addition to what Donald said. Notably, in Section 6, where for structure bidding processes, the parties are required to provide detailed information on other candidates (when they withdrew, which express interest, etc). In case of an acquisition, this may simply be information that the notifying party does not have and which the seller may be reluctant to disclose to such a notifying party, particularly in a case where there may be sufficient competition concerns that there are question marks about the deal certainty. There are also areas that will need to be closely coordinated with any merger submission. Section 6 of the Implementing Regulation requires detailed explanation of each of the different business lines or activities of the parties: any such submission will need to be aligned with the merger submissions.

We could probably do a world podcast just on this Implementing Regulation draft, but this gives a flavour of some of the key aspect. We know that the EU Commission has now received important contribution from companies and practitioners, including us. We also know that a group of international companies have alerted the Commission publicly and sent to them a letter about the importance and the burden arising from this new Regulation and the process of the notification. We still have a few months before the power of the Commission will be in place (it will start on the 12th of July) and the obligation to notify any deals will enter into force the 12th of October. So we can hope that the observations that have been submitted will be heard by the European Commission.


Thank you both. As you say, we'll need to wait and see where the final Implementing Regulation comes out. We will obviously be monitoring that closely and keep an eye on our website for further updates on that. Thank you Donald and Christophe for that really interesting overview of the new regime. As you've said, the FSR will impose new and potentially burdensome obligations on companies, so it is really important that companies start to prepare for this now.

As Christophe and Donald have highlighted, companies will need to identify and quantify financial contributions by third countries so that they're in a position to submit notifications when this requirement enters into force in October this year. But with the further guidance expected, companies will need to do this on an iterative basis, and paying close attention to the ongoing developments in this area.

Now, if you're interested in learning more about the FSR then we do have a briefing available on our website. And to keep up to date with competition law developments, watch out for the next episode in this podcast series. To ensure you don't miss out on any future podcast, do subscribe now on Apple Podcasts, Spotify, or your favourite podcast platform. And while you're there, please feel free to keep the conversation going and leave us a rating or a review. Until then, thanks for listening.

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.