Implementing the EU foreign subsidies regime

The European Commission has published for consultation a draft Implementing Regulation for the new Foreign Subsidies Regulation (FSR). The consultation period ends on 6 March 2023.

The consultation can be accessed here.

The FSR entered into force on 12 January 2023 and gives the Commission a suite of new powers regarding potential foreign subsidies that threaten to distort the EU internal market through the receipt of financial contributions received from non-EU countries (including in connection with activities unrelated to the EU).

Companies must therefore brace themselves to comply with the FSR's mandatory filing regime which will become effective on 12 October 2023 and which comprises:

1. A compulsory notification system for M&A transactions that meet specified turnover (€500m or more) and financial contribution (€50m or more) thresholds, and
2. A compulsory notification system for companies bidding to obtain large public tenders (tender value of €250m or more or, where a tender is divided into lots, the value of the lots applied for is at €125m or more) where those companies have received foreign financial contributions (€4m and above).

After a notification is made, the Commission will examine if the notified financial contributions are subsidies and if so, whether they could distort the internal market, in which case remedies can be imposed or the relevant transaction/tender can be prohibited. Our earlier article, published here, provides a more detailed analysis of the FSR and its practical implications.

Against this background, the draft Implementing Regulation sets out the procedural aspects governing the application of the FSR and contains provisions relating to:

1. the notification procedure and the calculation of time limits, including standard notification forms, for transactions and public tender bids captured by the FSR's mandatory notification regime;
2. the conduct of inspections and interviews during the course of an in-depth investigation;
3. the conditions pursuant to which access will be granted to the Commission's file and other related aspects of the parties' rights of defence; and
4. the procedure and time limits for submitting proposed remedies to address any potential market distortions identified by the Commission.

The draft Implementing Regulation suggests that extensive information will have to be provided when making an FSR filing. Collating that information is likely to be burdensome and cause practical difficulties.

For example, according to the draft Implementing Regulation, details will have to be provided of all foreign financial contributions received by the parties (unless falling below certain limited de minimis thresholds). The notion of financial contributions under the FSR is cast broadly and information will need to be provided on:

1. the specific form of each financial contribution (e.g. loans, tax exemptions, capital injections, fiscal incentives or contributions in kind) even if that contribution is unrelated to the relevant transaction or public tender;
2. the identity of the granting entity;
3. the purpose and rationale behind the financial contribution and any conditions attached to it; and
4. whether the financial contribution confers a benefit on the notifying party (i.e. which could not have been obtained under normal market conditions) and is selective (i.e. limited in law or in fact to certain undertakings).

In addition, all supporting documents (including translations) will also need to be submitted to the Commission, a potentially onerous task, particularly where some of the relevant information is not readily available to the notifying parties.

Furthermore, when a transaction is notified under the FSR, all sources of finance used to fund that transaction will need to be identified together with the conditions attached to the financing. Due diligence reports related to the transaction will also need to be disclosed and the draft Implementing Regulation further stipulates that where a transaction occurs in the context of a structured bidding process, detailed information about that process will need to be provided, including the identity and profile of all other bidders (notwithstanding the fact that such information will generally not be readily available to the notifying parties).

Notifying parties will be able to engage in pre-notification discussions with the Commission who will be able to grant waivers dispensing parties from the obligation of having to provide certain information (though the draft Implementing Regulation suggests that the circumstances in which such waivers will be available are likely to be limited, which would be unfortunate).

Pre-notification discussions are common in merger control proceedings. It is therefore logical to also have the opportunity to have such discussions when notifying transactions under the FSR. It is less clear, however, how easy it will be to have pre-notification discussions for public tender notifications, given the strict deadlines that apply in the context of public procurement processes which could leave little room to engage meaningfully with the Commission prior to making a formal filing.

These are just some of the issues that are likely to be raised during the public consultation, which will hopefully allow the Commission to reconsider and refine certain aspects of the Implementing Regulation before publishing a final version during the second quarter of 2023.