The EU’s Foreign Subsidies Regulation (FSR) was adopted in late 2022. Its stated aim is to combat the effects of competitive distortions caused by foreign subsidies in the EU internal market and thereby level the playing field for EU companies, which are generally subject to strict EU State aid/subsidy rules (see our earlier client alert). 

The FSR started to apply beginning July 12, 2023. If companies meet the applicable thresholds, they will have to submit FSR notifications for M&A deals and for public procurement procedures in which they participate, as of October 12, 2023. This notification obligation also covers:

• M&A deals signed after July 12, 2023, that have not closed before October 12, 2023. (Pre-notification is already possible as of July 12, 2023.) 
• Public procurement procedures initiated after July 12, 2023, for which the contract has not been awarded before October 12, 2023.

Recently, after a public consultation (see our client alert), the European Commission (EC) adopted a set of rules to implement the FSR, including publishing the notification forms for notifying qualifying M&A transactions (Form FS-CO) and public procurement participations (Form FS-PP). The Implementing Regulation sets out the procedural steps and various practicalities relating to the FSR. It contains detailed rules on the notification requirements, the EC’s investigation process, the parties’ procedural rights, and the calculation and suspension of time limits. The EC has also issued a Q&A document and a Communication on how to share documents with the EC.¹

I. Main Changes Compared to Draft Rules

Crucially, the Implementing Regulation specifies what information notifying parties must provide to the EC to comply with their reporting obligations. Many companies had expressed concerns about the draft Implementing Regulation’s potential regulatory burden. In response, the EC has sought to relax the requirements, reduce the amount of information that must be provided and make the notification process more efficient.

For instance, the Implementing Regulation increases the thresholds that determine which foreign financial contributions (FFCs) are reportable. It also broadens the scope of potential exemptions:

• Calculation of the FSR notification threshold. All FFCs (even exempted ones) count when determining whether the FSR’s €4 million public procurement notification threshold or its €50 million M&A deal notification threshold is met; in each case, the threshold refers to amounts of FFCs received in the preceding three years. When either notification threshold is met, the relevant deal cannot be closed or the relevant procurement contract cannot be awarded until the EC has given FSR clearance.
• “Likely distortive” FFCs. The notification form does not require detailed information on all FFCs. Rather, detailed information must be provided on FFCs that are equal to or exceed €1 million, and which the FSR deems as being in the “likely distortive” category. Likely distortive FFCs are those that: (i) support a failing business; (ii) give unlimited guarantees; (iii) directly facilitate a merger/acquisition; (iv) are an export financing measure that does not comply with the OECD Arrangement on Officially Supported Export Credits;² or (v) enable a company to submit an “unduly advantageous” tender.
• Increased de minimis threshold. For M&A transactions, the de minimis threshold for reportable not “likely distortive” FFC per country has been significantly increased from €4 million in the draft Implementing Regulation to €45 million. This means that if the aggregate amount of these FFCs in the preceding three years is less than €45 million in the relevant country, no reporting obligation arises. However, as noted above, all FFCs (including those arising from the sale of products or services to a public entity) must be counted to determine whether the overall €50 million threshold for the notification requirement is met. 

• Exclusions. The Implementing Regulation lowers the administrative burden on parties by excluding the need to provide information on certain types of FFCs, namely:
  • Supply/purchase of goods/services (except financial services, such as loans by public banks) at market terms and in the ordinary course of business; 
  • Tax deferrals, social security contributions, tax holidays as well as normal depreciation and loss-carry forward rules unless limited, for example, to certain sectors, regions or (types of) companies. This appears to call upon the concept of selective taxation in EU State aid rules;³
  • Tax relief to avoid double taxation; and
  • FFC below the individual amount of €1 million.

Special exemption for investment funds. In the case of acquisitions by an investment fund, FFCs granted to other investment funds managed by the same company do not need to be included in the summary table, provided that:

(i) the fund controlling the acquiring entity is subject to the Directive on Alternative Investment Fund Managers⁴ or equivalent foreign legislation; and

(ii) there are no, or only limited, economic and commercial transactions (such as sale of assets and credit lines) between the acquiring fund and other funds managed by the same acquiring investment company.

• M&A and structured bidding processes. Under the EC’s draft proposals, M&A deals occurring in competitive bidding processes would have required the submission of a huge amount of potentially highly sensitive and confidential information on alternative bidders. The Implementing Regulation alleviates these concerns. It no longer requires companies to provide information on how many other candidates were contacted or expressed interest. It also does not require that a party indicate how many letters of intent and non-binding offers were received and removes the need to specify how many and which bidders withdrew at what stage of the process. 
• National security or defense. The Q&A confirms that the FSR also applies to contracts in the national security or defense field, even if those were subject to confidentiality obligations under the laws of the relevant third country. During pre-notification contacts, however, the EC may dispense with the obligation to provide information, given, among other things, the scope of application and obligations imposed by the laws of a third country.
• Pre-notification contacts. As already emphasized in the initial draft, the EC encourages companies to engage early in pre-notification discussions. These discussions will be similar to those that take place before companies notify transactions to the EC under the EU Merger Regulation. In merger control proceedings, these pre-notification discussions are important and help determine the level of information required in the subsequent notification form. Sometimes these pre-notification contacts can significantly reduce the amount of information required, due to the EC granting waivers. More generally, it will be interesting to see how the FSR process interacts with the EU’s merger control process.
• One month deadline to comment. Third parties, including EU Member States and third countries, have a one-month deadline to submit comments on the EC’s decision to open an in-depth investigation into the existence of a foreign subsidy and the actual or potential distortion in the internal market. This period runs from the date of publication of a summary notice of the EC decision in the Official Journal of the EU. For parties to M&A transactions or public procurement procedures, the one-month period starts when they have been informed of the EC decision.

II. Missed Opportunities

Our previous client alert drew attention to missed opportunities in the draft Implementing Regulation, such as in the section on “possible positive effects” in both notification forms, which was extremely vague about what is actually required, and the fact that an oral hearing does not seem to be possible. Unfortunately, these issues have not been addressed in the Implementing Regulation. 

III. Next Steps and Recommendations 

The EC may initiate ex officio investigations into foreign subsidies granted since July 12, 2018. Furthermore, FSR notifications will be required for qualifying transactions initiated after July 12, 2023, and not implemented by October 12, 2023, as noted above. 

Even though the notification forms have been simplified and require less information, the new FSR rules result in a significant administrative burden on businesses, in addition to preexisting merger control and FDI notifications.

It will also be critical to include FSR requirements as conditions precedent in transaction documents. Holding companies should also put in place, as soon as possible, an internal process or system to gather all relevant information (COVID loans, grants of exclusive rights, tax incentives, etc.) on an ongoing and global basis from all their subsidiaries. They could also prepare justifications for past and new subsidies. In addition to internal due diligence, deciding whether a notification is necessary may require some complex legal assessments and, in some cases, contacting the EC for clarification.

In that regard, the EC has emphasized that the application of the FSR rules will evolve as practice and experience grow, which will make it very important to track all developments in this area. For instance, a Belgian football club recently filed a complaint with the EC about alleged Middle Eastern subsidies (Abu Dhabi United Group) given to its competitors.

IV. How Can WilmerHale Help?

WilmerHale has extensive experience regarding the substantive issues raised by the FSR and the Implementing Regulation. Our lawyers have significant experience advising on whether subsidies are distortive under EU State aid rules, clearing transactions under EU merger control rules, and advising on compliance with public procurement law and on the interpretation and application of other international rules that may intersect with the FSR, as well as representing clients in international trade disputes and enforcement proceedings.

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.