On February 6, 2023, the European Commission (EC) published a draft Implementing Regulation (the Implementing Regulation) setting out rules and procedures for the application of the Foreign Subsidies Regulation (FSR).¹ The FSR, which entered into force last month and will start applying on July 12, 2023, allows the EC to investigate financial contributions granted by non-EU countries to companies operating in the EU and redress their distortive effects (see our client alert). Noncompliance can trigger fines of up to 10% of the groupwide aggregate turnover (aside from reputational risks).

The Implementing Regulation clarifies important aspects relating to the FSR’s application regarding, among other things, the EC’s powers of investigation, deadlines and the calculation of time limits, commitments and redressive measures, access to file, confidentiality, and the parties’ rights of defense. It also provides important guidance on FSR notifications within the context of M&A transactions and public procurement procedures. The EC launched a four-week public consultation period, so interested parties have until March 6, 2023, to share their views on the draft.²

I. Main Provisions of the Implementing Regulation

The Implementing Regulation consists of a main document and two annexes/notification forms: one for M&A transactions and one for public procurement procedures. These documents show how the EC intends to implement the new FSR and give an idea of the potential practical and legal difficulties that may arise in that connection.

The main provisions of the Implementing Regulation are as follows: 

• Foreign financial contribution.³ In principle, companies will have to submit a detailed list of all groupwide “foreign financial contributions” they received from non-EU countries or from public or private entities that can be attributed to non-EU countries in the past three years. The concept of “foreign financial contribution” remains very broad and includes, among other things, loans, tax exemptions, capital injections, fiscal incentives and contributions in kind. Contributions are considered granted from the moment the company obtains a legal entitlement to receive them, even if no disbursement has taken place. The EC has stressed that this broad concept was deliberately chosen in order to cover all types of public support granted to companies and thus avoid creating another regulatory gap or leaving room for circumvention of the rules. Companies need to provide information regarding the receiving entity, granting authority, type of financial contribution, award procedure, amount, date, conditions, rationale of measures in question, and sector concerned. It remains to be seen whether the EC might limit these information requirements following the consultation process. 
• Limited exceptions: de minimis financial contributions. The draft notification forms, provided for in Annexes 1 and 2, foresee some limited exceptions from disclosure in the case of small foreign financial contributions:

For M&A, detailed information on financial contributions is only required if (i) the individual amount of the contribution is or exceeds EUR 200,000 and (ii) the total amount of contributions per third country and per year is or exceeds EUR 4 million. 

For public procurement, the reporting obligation is similarly restricted to where the financial contribution granted to any notifying party (i) falls into certain listed categories considered “most likely to distort the internal market” or relates to operating costs; and (ii) in aggregate, is or exceeds EUR 4 million per third country in the three years prior to notification.

Although this exception seems to simplify the process to some extent, its importance should not be overstated: these smaller amounts will still need to be considered in internal compliance checks in terms of whether notification thresholds are met.

• Pre-notification contacts. The EC stresses the importance of the pre-notification phase and encourages parties to engage in relevant discussions, which mirrors the procedure under the EU Merger Regulation.⁴  Experience from the merger control context has shown that these pre-notification discussions will be important in practice for determining the precise amount of information required in a subsequent notification form.

• Waiver request. A potentially important tool is the ability of notifying parties to request a waiver during the pre-notification phase regarding information that is not reasonably available or is unnecessary for the examination of the case. This would, in theory, contribute to a more efficient procedure. However, it is to be seen how the EC will handle these requests and thus whether this possibility is as promising in practice as it seems to be on paper. 
  
• Alignment with the EU Merger Regulation. The process set out in the Implementing Regulation and its annexes mirrors, to some extent, EU merger control rules: there is alignment as regards the timelines and the pre-notification phase, and the notification form for M&A transactions is largely modeled on Form CO, which is used for merger control. However, this is the only alignment across the two legal frameworks that notifying parties can depend on. The information required under the Implementing Regulation is not only extensive but also different from what the parties have to submit in an EU merger control context. This applies, for instance, to the information requirements regarding the received financial contributions, the context and sources of financing for the transaction, and the potential positive effects of subsidies received.
• Information relating to the impact of the foreign financial contribution. The draft notification form for M&A requires, in the case of concentrations that occurred in the context of competitive bidding processes, a huge amount of highly sensitive and confidential information on alternative bidders. This includes, among other things, a detailed description of the bidding process, the number of candidates that were contacted, the number of other candidates who expressed interest and the profiles of other bidders.⁵  Some of that information will be difficult to obtain for the notifying party and is considered very sensitive by sellers.

These requirements are likely to have implications for the drafting of M&A agreements, which, from now on, may include clauses stipulating the provision of this information by the seller. In addition, the obligations in question are another factor that may effectively exclude foreign entities from participating in public procurement tenders, as sellers may consider selecting another bidder in order to avoid such disclosure obligations (see our previous discussion of this risk here).

The draft notification form also requires a description of the due diligence that was carried out in relation to the transaction, as well as the production of related documents such as due diligence reports or any equivalent documents prepared by external parties assessing the transaction from a strategic, legal, economic or tax point of view, including documents discussing the value of the transaction.⁶ This is another far-reaching obligation imposed on parties. Moreover, companies will need to explain the “different business lines” or activities of each of the parties to the concentration.⁷

• Commitments. In the case of concentrations, commitments must be submitted to the EC within 65 working days from the date on which the in-depth investigation was initiated.⁸ For public procurement procedures, commitments must be submitted within 50 working days from the date of initiation of the in-depth investigation.⁹ 
• Rights of defense. Neither the draft Implementing Regulation nor the draft notification forms provide a possibility for companies to have an oral hearing.

Overall, the procedural requirements provided in the draft Implementing Regulation place a significant burden on companies. It is to be expected that preparing the notification form and going through the process will be an intensive exercise for parties that entails extensive additional work, high administrative costs and, often, practical difficulties (e.g., as regards the information on competitive bidding processes noted above).

II. Missed Opportunities in the Implementing Regulation 

 In addition to the extensive set of rules explained above, there are some missed opportunities.

For instance, the section on “possible positive effects” in both draft notification forms¹⁰ remains extremely vague as to what could constitute such a possible positive effect on the development of the relevant subsidized economic activity on the EU internal market or, more broadly, in relation to the relevant policy objectives, in particular those of the EU. This means that the implementation of this requirement (which mirrors the already vague “balancing test” provision in Art. 6 of the FSR) is, in practice, left up to the parties, undermining legal certainty.

As noted above, there also does not seem to be a possibility for companies to have an oral hearing. This is not the case in the EU merger rules, where such a possibility exists, even if companies over time have made less use of that right.

III. What Is Next? 

 The draft Implementing Regulation confirms what was already made clear by the FSR itself: the administrative burden for notifying parties will be immense, and will likely cause M&A transactions to be more rigid and costs to increase significantly.

Interested parties should take advantage of the chance to take part in the consultation process and submit their views. The feedback will be considered by the EC when deciding on the final text of the Implementing Regulation. This will be adopted prior to the commencement of application of the FSR on July 12, 2023.

In addition, as we have previously reported, the EC will publish additional guidelines at the latest three years after the entry into force of the FSR, after consultations with stakeholders and EU Member States. These guidelines will be regularly updated after publication. The EC also committed to providing initial clarifications as regards certain aspects of the FSR at the latest 12 months after the date of application.

In the meantime, in-house counsel may want to start establishing tools to collect the groupwide financial contribution and subsidy information needed to comply with the notification obligations in order to be ready for October 2023, given that this information may not be readily available.

IV. How Can WilmerHale Help?

WilmerHale has extensive experience in regard to the substantive issues raised by the FSR and the Implementing Regulation—whether subsidies are distortive under EU State aid rules, clearance of transactions under the merger control rules, advice and representation in regard to compliance with procurement rules, the interpretation and application of World Trade Organization and other international rules that intersect with the FSR and the Implementing Regulation, and disputes and enforcement proceedings in international trade. We have been involved in hundreds of EU and Member State proceedings of the type on which the rules in the FSR are based—e.g., State aid, merger control, foreign direct investment, public procurement and international trade investigations—as well as multiple high-profile trade disputes between the United States and the EU.

WilmerHale has extensive experience advising clients in a wide range of sectors and a solid understanding of relevant political drivers and sensitivities, as well as the potential remedies that may be required to address any EC concerns. We can assist clients in making representations to the EC, in voicing concerns that they may have and in seeking solutions before the final Implementing Regulation is adopted.

For further information, please contact a member of our European team in this area or a member of our trade team in the United States.