The Foreign Subsidies Regulation…

Companies receiving subsidies from member states of the Union can distort competition. Comparable ­effects can also arise from third-country companies, as well as from companies that, although based in the EU, have received aid from third countries. European subsidy law and WTO rules have not addressed these ­cases. The “Foreign Subsidies Regulation” (FSR) in force since 12 July 2023, attempts to close this regulatory gap and imposes extensive documentation requirements on companies that have received foreign aid. In the event of a violation, sanctions in the form of fines and, even more important, significant legal uncertainty, such as the ­voidness of a transaction or its possible reversal, can be threatened.

Points of reference for the FSR

The FSR is applicable in case of M&A transactions or participation in procurement procedures. Both activities may trigger notification obligations in a separate examination procedure with the European Commission. A transaction has had to be notified since 12 October 2023, if the target company is established in the European Union and achieved a turnover of at least €500 million in the previous financial year, and the companies involved have received third-country aid totaling at least €50 million in the last three financial years. In connection with public procurement procedures, the submission of certain offers is subject to notification to the European Commission if the contract value exceeds €250 million and the bidder, ­including its affiliated companies (and possibly even ­including the main subcontractors and main suppliers), has received third-country financial aid totaling at least ­€4  million in the last three financial years. In addition to this, the European Commission may also examine market situations ex officio.

The broad scope of application

The concept of aid is broader than that of a subsidy. It can range from the transfer of funds or liabilities, to the waiver of otherwise due revenues, or the granting of special or exclusive rights, to the mere provision or acquisition of goods or services. All relations with third-country actors must be identified by companies in anticipation of a possible notification obligation in the context of a transaction or participation in a tender and be checked for their relevance. In the event of a transaction or participation in a public procurement procedure, all financial grants must be taken into account – regardless of whether they may have to be disclosed in the context of an examination procedure, and regardless of whether they will be significant for the assessment of a possible distortion of competition. In addition, the period of 36 months before the event means a significant amount of information is required. As a consequence, the internal assessment of whether the thresholds are met cannot be event-driven but will need to be executed in advance. And relevant information will have to be collected on a continuous basis.

Ultimately, only those companies that can categorically exclude that they will ever be concerned by the scope of application of a transaction covered by the threshold will be able to refrain from doing so. In any case, many small and medium-sized companies will not be able to do so, at least not in a sales scenario. The same applies to participation in tenders. The threshold for the tender volume may seem high, but a main bidder will require clear confirmations from its subcontractors – sometimes small and ­medium-sized companies – regarding their third-country subsidies, in order to be able to participate in the tender procedure without running the risk of making wrongful statements.

The enforcement power of the FSR

The FSR has teeth as it benefits from its significant legal consequences: Transactions that fall within the scope of application must not be consummated before clearance. If a transaction that is subject to notification has already been completed and if market-distorting effects of third-country subsidies are determined, the European Commission can require the reversal and dissolution of the transaction. The European Commission can also ­impose fines of up to 10% of a company’s total annual turnover if it fails to comply with the obligations of the FSR. It is also authorized to impose fines on companies of up to 1% of global turnover and regular penalty payments of up to 5% of the average daily total turnover for each business day of delay if companies provide false, incomplete, or misleading information. And here too, the Commission can also act ex officio if it believes that a company should have made an FSR-filing.

What needs to be done?

The requirement for the continuous collection and evaluation of data and information requires companies to ­establish internal processes to continuously monitor ­financial contributions from non-EU countries. Continuous protocols for obtaining information should be implemented, which should also enable relevant information from co-investors and limited partnerships. The FSR will be relevant throughout the transaction process, especially in due diligence but also for the negotiations on the purchase agreement. In case of substantial subsidies, where a preliminary assessment suggests that an impact on competition cannot be ruled out, the timeline will also be significantly affected. The duration of a review, which may include pre-notification discussions, may be hardly foreseeable without further experience. There may be delays of up to 150 days, which must be taken into account in the determination of a long-stop date. The Commission will provide assistance in critical cases. The risk of making an uncertain forecast can be mitigated, for example, by (informal) consultation with the Commission in advance. Conversely, in simpler cases, the effort of notification can be reduced through waivers.

Conclusion

Apart from the cases that actually need to be notified to the Commission, the FSR will require companies to provide a great deal of documentation and make a high level of evaluation effort in the future. This is the flip side of the politically understandable goal of protecting the internal market from competition-distorting contributions from third countries. German and European companies, with international reference points, even if only through sales to third countries, will have to find a pragmatic approach to avoid disproportionate effort on the one hand and on the other, be prepared for a quick determination of ­whether their transaction or tender participation may trigger a filing requirement.