The much-anticipated EU Foreign Subsidies Regulation (FSR) was formally adopted on November 28, 2022, following approval by the Council of the EU (Council) of the position previously adopted by the European Parliament (EP). This comes as countries around the world are rolling out subsidies to stimulate growth in strategic sectors, which now risk being met with redressive measures by the EU.
The FSR grants the European Commission (Commission) a broad mandate to investigate alleged distortive foreign subsidies and imposes mandatory notification and approval requirements for operators engaging in certain M&A transactions and public procurement procedures in the EU. In each case, as a first step, the Commission will identify the relevant financial contributions. In the specific context of certain M&A transactions and public procurement procedures, operators will need to self-identify their financial contribution and proactively notify them to the Commission. Following this first step, a two-phase review process kicks in. In the first phase, the Commission will conduct a preliminary assessment of whether the financial contributions qualify as foreign subsidies and whether there are indications of distortions in the EU market. If the answer is yes, the Commission will initiate the second phase and will conduct an in-depth investigation to reach a final determination on the distortive effects of the subsidies and possible remedies.
This Update is part of a series of Sidley Updates about the FSR and marks the conclusion of the legislative process; see Sidley Update of May 2021 on the Commission’s initial legislative proposal and Sidley Update of July 2022 on the provisional text agreed on by the Council and the EP in June 2022. The adopted text of the FSR largely reflects the provisional text of June 2022.
The FSR will enter into force 20 days after publication in the Official Journal of the EU (the exact date is not yet known) and will start applying after a six-month transition period, most likely in the third quarter of 2023. Notification obligations for operators engaged in M&A transactions and public procurement procedures in the EU will start applying nine months after the FSR enters into force, likely in the final quarter of 2023.
While the general scope of the FSR is confirmed in the adopted text, some crucial elements on how it will apply are yet to be determined. The Commission is still expected to publish a draft implementing regulation in December 2022 that will set out detailed rules for FSR procedures, including templates for the notification forms. The implementing regulation should be adopted by the second quarter of 2023. While the implementing regulation might offer some guidance, it is unlikely to address all situations. The Commission is also expected to issue initial clarification on the assessment of distortion, the balancing test, and its power to request notification of non-notifiable transactions one year after entry into force. Formal guidelines on these elements will be issued three years after entry into force.
However, the Commission has at numerous conferences clarified that this is a new instrument that, although in large part based on existing EU anti-subsidy, merger control, and state aid rules, is broadly drafted to allow the EU to fine-tune the instrument as appropriate. Operators active in the EU and likely to be affected by the FSR should therefore start preparing now and not wait for the Commission’s guidance in the implementing regulations, initial clarifications, or formal guidelines. Below, we set out immediate next steps that operators in the EU should take in the run-up to application of the FSR.
1. Operators engaging or likely to engage in M&A or public tenders should identify financial contributions.
The FSR M&A and public procurement notification obligations are defined with respect to the broad notion of “financial contributions” and not of the narrower “distortive foreign subsidies.” After notification, the Commission will itself assess whether a financial contribution constitutes a foreign subsidy distorting the EU market. With the notification obligations entering into force in the final quarter of 2023, operators should now focus on mapping the financial contributions they have received or anticipate receiving from non-EU countries. This will require setting up internal reporting processes to identify financial contributions from non-EU countries.
These concepts are broadly formulated in the FSR (see Sidley Update of July 2022), and there are currently no guidelines clarifying their scope. It is understood that the scope of financial contribution is intentionally very broad so that the Commission can itself determine whether they are relevant. This will allow the Commission to collect broad information and develop a practice over time. But it has also imposed on operators a heavy burden to identify financial contributions from non-EU countries. That said, there is relevant precedent from EU anti-subsidy investigations that should be helpful in identifying the broad scope of the concepts of “financial contribution” granted by a “non-EU country.” The latter concept in particular will have different application in practice depending on the jurisdiction concerned.
2. Operators engaging or likely to engage in M&A or public tenders should assess the risk of mandatory notification obligations and identify other risks for a call-in or ex-officio investigation where mandatory notification thresholds are not met.
Assess risk of being subject to mandatory notification obligations: The mandatory notification obligations for M&A transactions (i.e., mergers, acquisitions, and joint ventures where there is a lasting change of control) and EU public procurement procedures are triggered when specific thresholds are met (see Sidley Update of July 2022 – notifications of M&A deals and notifications in public tenders). For M&A transactions, operators should note that notification thresholds (turnover and financial contribution) are calculated by aggregating values of an entire group. For EU public procurement procedures, operators should note that when the notification thresholds are not met, the FSR still requires operators to submit a declaration listing all foreign financial contributions received and indicate that they are not notifiable.
Assess risk of a call-in for transactions not meeting the mandatory notification thresholds: The Commission can also request a notification of transactions and public procurement procedures falling below specified threshold at any time before implementation of the transaction of the award of the tender if it suspects that the operators may have received foreign subsidies. Operators should therefore consider the risks of a call-in in relation to certain transactions, taking into account inter alia the sector concerned, the non-EU country (-ies) providing the financial contributions, and the amount of contributions.
Assess risk of review under the general ex-officio investigation tool: The Commission will be able, at its own initiative, to investigate suspected distortive subsidies in the context of any market situation, including, among others, services, greenfield investments, portfolio investments, and M&A transactions or public procurement procedures falling below the aforementioned thresholds. Operators should therefore consider the risks of a general investigation taking into account the sector at issue, the type and amount of financial contributions received, and the non-EU country granting the financial contribution. Operators should also track all publicly available information on FSR notifications, industry-specific foreign subsidies, and market investigations initiated by the Commission.
In assessing these risks, operators should consider the potential penalties in case of noncompliance. Operators that fail to respect notification obligations or try to circumvent such obligations through financial or contractual arrangements will be liable for a fine of up to 10% of the group annual turnover. Furthermore, an operator that intentionally or negligently provides incorrect or misleading information to the Commission may be subject to a fine of up to 1% of its group annual turnover.
3. Operators should consider proactively preparing for FSR investigations.
Given the complexity of investigations under the FSR, it is recommended especially for operators in higher-risk sectors to proactively prepare for an investigation. This entails taking account of the implications of the review procedures under each FSR tool on their EU operations (e.g., timelines) and preparing mitigating or rebuttal arguments preempting findings of distortive subsidies. Operators subject to investigation will also need to reply to information requests and submit to on-site inspections, both within and outside the EU. Experience from EU anti-subsidy investigation shows that operators may need to work together with the non-EU countries granting financial contributions to provide complete and consistent information. Noncooperation would allow the Commission to decide based on facts available, which could lead to adverse results.
4. Operators should assess the likelihood of being subject to remedial measures.
The FSR grants the Commission extensive powers to impose remedies if (1) there is a foreign subsidy (2) that distorts competition on the EU market, and (3) the negative effects of the foreign subsidy outweigh the positive ones for the EU — the so-called balancing test.
The assessment of distortion relies on a set of broad indicators. The FSR also identifies categories of subsidies that are deemed to be more or less distortive (see Sidley Update of July 2022). The Commission is expected to issue initial clarification on this one year after the FSR enters into force and to publish formal guidelines within three years.
The remedies available to counter distortive foreign subsidies are broad and vary depending on the review tool applied. Under the M&A and public procurement notification tools, the Commission can prohibit the implementation of M&A transactions and the participation of operators in public tenders or accept commitments offered by an operator. Under the general investigative tool, the Commission can accept commitments, order repayment of foreign subsidies, or impose structural and behavioural remedies. For instance, it can order operators to reduce capacity or market presence, refrain from investment, or divest certain assets.
Given how far-reaching the remedies are, operators should assess the potential effect of foreign subsidies on their EU operations. Such preemptive actions could also help operators make informed decisions when accepting foreign subsidies.
In conclusion … prepare!
Despite the final adoption of the FSR, there is still great uncertainty around its key elements. The Commission has indicated that it will issue clarification of these elements, but such clarifications will likely come after obligations start applying and in any event are unlikely to address all concerns that operators have. Operators should therefore start assessing the impact of foreign subsidies on their EU operations and set up effective compliance processes now, which can be fine-tuned once the Commission issues more detailed rules and/or guidance.
The FSR is a complex and unprecedented instrument, bringing together concepts from different areas of EU law. With our market-recognized leading experience in EU anti-subsidy investigations, EU state aid investigations, and World Trade Organization anti-subsidy law, combined with our specific expertise in investment screening and antitrust filings in the context of M&A transactions and in government procurement,