New Reporting Obligation for Businesses Under the Foreign Subsidies Regulation
As from October 12, 2023, certain undertakings within the European Union ("EU") that have received direct or indirect subsidies from non-EU member states are required to make a notification to the European Commission if they are involved in mergers, acquisitions, public procurement procedures or the establishment of joint ventures. This obligation arises from Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market ("Foreign Subsidies Regulation" or “FSR”), which came into effect on January 12, 2023. The primary objective of the FSR is to reduce the distortive effect of foreign subsidies on the European internal market.
The Foreign Subsidies Regulation applies to enterprises involved in mergers, acquisitions, joint ventures or public procurement procedures, which have received subsidies from non-EU member states. The term “foreign subsidy”, in the context of the FSR, should be understood as a financial contribution which is provided directly or indirectly by a third country, which confers a benefit and which is limited to one or more undertakings or industries. The FSR is not limited to subsidies directly provided by foreign government authorities but also covers subsidies provided by private entities whose actions can in fact be attributed to a non-EU member state.
For mergers, acquisitions and joint ventures, the notification requirement applies if at least one of the companies involved is based in the EU and has an annual turnover of at least €500 million in the EU and the total amount of subsidies from outside the EU in the preceding three years exceeded €50 million. When determining whether these thresholds are exceeded, the amount received by all enterprises involved is taken as the subsidy amount. In the case of an acquisition, the enterprises involved include the acquirer (or acquirers) and the acquired enterprise, in the case of a merger the merging enterprises and in the case of a joint venture, it encompasses the enterprises establishing the joint venture and the joint venture itself.
In case of public procurement, a notification is required if the estimated value of the public contract equals or exceeds €250 million, and the undertaking has received financial contributions from a non-EU member state exceeding €4 million per third country in the three years prior to the notification.
Procedure; Ex officio review
A notification pursuant to the FSR must be made to the European Commission. Upon receipt of the notification, the European Commission will investigate whether the subsidies genuinely or potentially negatively affect competition in the internal market. If the European Commission determines that the internal market is distorted by the relevant subsidy, it can decide, inter alia, to prohibit the transaction or public procurement procedures.
In addition to assessing planned transactions and public procurement procedures based on notifications by undertakings, the European Commission also has the authority to start an investigation on its own initiative regarding alleged foreign subsidies distorting the internal market. An ex officio review also extends to foreign subsidies that do not exceed the FRS thresholds.
Under the stand-still provisions in the FSR, a notifiable transaction or tender cannot proceed until a European Commission has made a decision or until 25 working days following receipt of a complete notification have past.
In case of non-compliance with the FSR provisions, including the stand-still provisions, the European Commission may impose a fine of up to 10% of the annual revenue.
With the implementation of the Foreign Subsidies Regulation, the European Commission has a new tool to control the distortive effects of subsidies from outside the EU. The FSR will operate alongside existing state aid rules and the EU FDI Screening Regulation. It is anticipated that especially in larger international M&A transactions, the notification and stand-still obligations in the Foreign Subsidies Regulation may result in delays.