C. Financial contributions and foreign subsidies
Notification requirements are tied to “financial contributions” granted (directly or indirectly) by non-EU countries. The term refers to more than just “foreign subsidies” and is defined very broadly.
A “financial contribution” can include but is not limited to:
(i) transferring funds or liabilities (such as capital injections, grants, loans, loan guarantees, fiscal incentives, setting off operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps, or rescheduling),
(ii) the foregoing of revenue that is otherwise due (such as tax exemptions, or granting special or exclusive rights without adequate remuneration), or
(iii) providing goods or services or purchasing goods or services where a foreign subsidy necessitates finding a foreign financial contribution with:
(a) a benefit for a company engaging in an economic activity in the internal market, and
(b) a limitation of the benefit, in law or in fact, to one or more companies or industries.
Once notified, the EC will assess whether the foreign financial contribution constitutes a foreign subsidy and evaluate whether it has any distorting effect on the EU market. Finally, the EC may carry out a balancing act, taking into account all positive and negative effects of the foreign subsidy. The actual test criteria to be applied remain unclear and will only be further clarified by the EC in the coming years. The EC is expected to choose an approach inspired by well-established principles and jurisprudence regarding EU state aid law.
D. What do companies need in order to be prepared?
Because the FSR creates new notification requirements, companies are facing additional administrative burdens to ensure M&A compliance and be M&A-ready (i.e., collecting the necessary data and preparing a compliance system). The FSR will impact deal timelines and transaction security by creating one more regulatory filing that will have to be considered in addition to merger control and foreign direct investment filings.
The FSR also provides companies with new options to use the FSR itself against competitors. Companies can complain to the EC, which can result in an ex officio investigation. For example, such informal complaints over distortive subsidies from Qatar and the United Arab Emirates were raised by EU soccer clubs and associations earlier this year. So far, the EC has reacted with restraint.
Because of the FSR’s wide scope, implementing the duties resulting from the FSR is a topic that also matters to US companies. Just to mention one example: according to the parties, the merger between the two US fashion companies Tapestry and Capri is subject to the FSR M&A notification obligation. Capri has a well-established business in Europe (brands such as Michael Kors, Jimmy Choo, or Versace). Hence, according to the EC Implementing Regulation it is deemed to be “established in the EU.” Therefore, the transaction is covered by the FSR regardless of the fact that Tapestry and Capri are both US—and not EU—companies.
Although concrete effects of the FSR may not have been strongly felt so far, this may change soon. According to the EC’s department for competition and its Director-General Olivier Guersent, the new EU reviewing power and the EC’s FSR activities will be “ramped up” over the next few months.
Specifically, FSR investigations may be initiated in the wind power industry in the near future. The EC recently encouraged the industry to submit information on potential unfair practices distorting competition in the wind power market. In its European Wind Power Action Plan of October 24, 2023, the EC explicitly announced that it intends to make use of the tools provided to it by the FSR. Another sector that could attract the EC’s interest is the electric vehicle industry: President of the European Commission Ursula von der Leyen announced in her State of the Union speech on September 12, 2023, the launch of anti-subsidy investigations into electric vehicles from China. FSR investigations could follow, although this is uncertain.
However, the situation remains very dynamic. So far, seventeen M&A deals have been pre-notified to the EC in order to discuss and determine jointly whether they will be covered by the FSR. More FSR (pre-)notifications to the EC will certainly follow soon. The EC can also be expected to extend its ex officio FSR activities sooner or later—in general and in regard to other specific sectors.