New notification obligation under the Foreign Subsidies Regulation
This is the Competition Newsflash by bureau Brandeis (see the original version here).
Would you like to receive Competition Flashback by e-mail in the future? You can subscribe to our mailing list here.
New notification obligation onder de Foreign Subsidies Regulation
From 12 October 2023, companies are required to report large concentrations or participations in public procurement procedures involving funding from non-European public authorities (“third countries”) to the European Commission (Commission”). This notification obligation is set out in the Foreign Subsidies Regulation (FSR”), and applies if certain financial thresholds are met. The FSR has been in force since 12 July 2023, but the notification obligation only applies since 12 October 2023.
The FSR marks another significant step by the European Union in strengthening its merger control regime (detailed in our blog). In recent years, the Commission has introduced the Foreign Direct Investments Regulation (“FDI”, detailed in our blog), and has eased its policy regarding the referral of non-notifiable mergers by national authorities under Article 22 of the European Merger Regulation (detailed in our blog). In addition, the European Court of Justice’s recent judgement in Towercast clarified that a non-notifiable concentration can constitute an abuse of a dominant position. All of the above shows that competition authorities have rapidly acquired an expanding toolkit to evaluate the effects of concentrations on the competitive landscape.
By answering ten questions, we offer a concise overview of the primary changes introduced by the new rules of the FSR.
Ten questions and answers
- What is the purpose of the FSR?
- When are companies obliged to notify under the FSR?
- What financial contributions qualify as foreign (non-European) subsidies?
- Can the Commission also launch ex officio investigations?
- What is the assessment procedure of the Commission, and what are its powers?
- Does the FSR include a standstill obligation?
- What is the Commission’s time limit when investigating?
- What happens if a company does not fulfil its notifying obligation?
- Does the FSR apply to concentrations or public procurement procedures that took place before 12 October 2023?
- What can companies do to make the M&A or public procurement process as smooth as possible?
1. What is the purpose of the FSR?
According to the European Commission, subsidies from non-European public authorities (“foreign subsidies“), such as interest-free loans or tax breaks, have regularly distorted competition in the European market in recent years. Such foreign subsidies were able to be provided unlimitedly to companies in the European Union, while subsidies from European governments (“European subsidies“) are subject to the stringent rules on state aid (see our blog).
Recent examples have occurred in the soccer industry. In August 2023, Spain’s La Liga has filed a complaint with the Commission, alleging that Paris Saint-Germain (“PSG”) has been benefiting from foreign subsidies provided by the Qatar government. These subsidies allegedly enabled PSG to “sign top players and coaches well above its potential in a normal market situation.”
In the past foreign subsidies have created an uneven playing field between those who receive foreign subsidies, and those who do not (as outlined in the Commission’s White Paper). The FSR aims to address this imbalance by regulating the beneficiaries of foreign subsidies, thereby fostering a level playing field for all companies operating in the European Union.
2. When are companies obliged to notify under the FSR?
The FSR contains a notification obligation for certain concentrations or participations in public procurement procedures.
Notification threshold for concentrations
Companies acquiring, merging or setting up a joint venture with another company must notify the Commission if they meet the following two conditions:
- at least one of the merging undertakings (in the case of mergers), the acquired undertaking (in the case of acquisitions), or the joint venture is established in the European Union and generates an aggregated turnover in the Union of at least € 500 million; and
- the relevant undertakings were granted combined aggregated financial contributions of more that € 50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest. For mergers, relevant undertakings include the merging parties; for acquisitions, both the buyer(s) and the target; and for joint ventures, the joint venture partners and the joint venture itself.
The notification obligation must be satisfied prior to the completion of a concentration.
Notification threshold for public procurement procedures
Companies participating in public procurement procedures are required to notify the Commission of foreign financial contributions if the following thresholds are met:
- the estimated value of the public procurement is at least € 250 million; and
- the bidder, including its subsidiaries, holding companies, and main subcontractors and suppliers involved in the bid, was granted aggregate financial contributions of at least € 4 million per third country. These contribution(s) have been granted in the three years prior to participation.
In public procurement procedures, companies subject to the notification obligation must submit the notification to the contracting authority together with its bid. The contracting authority will then transfer the notification to the Commission without delay.
3. What financial contributions qualify as foreign (non-European) subsidies?
Under the FSR, a foreign subsidy is a financial contribution that is provided directly or indirectly by a third country, conferring an indirect or direct benefit to the receiving company which is limited in law or in fact to one or more companies or industries.
A foreign financial contribution is a broad concept, including capital injections, interest-free loans, unlimited guarantees, preferential tax treatment, grants or tax credits. Furthermore, if an undertaking sells its products or services to a third country, the sales income is considered to be a foreign financial contribution. These foreign financial contributions do not necessarily qualify as foreign subsidies under the FSR, but do count for the FSR’s notification threshold.
The concept of a “third country” includes the central government of a country, but also other non-European government entities whose actions can be attributed to the central government. These may include, for example, municipalities, or private entities acting on behalf of the government.
4. Can the Commission also launch ex officio investigations?
The Commission may on its own initiative examine information from any source, including Member States, a natural or legal person or association, regarding alleged foreign subsidies distorting the internal market. The Commission can still do so after a concentration is implemented. In regard to public procurement procedures, the Commission can only launch ex officio investigations if the public contract has already been awarded. These powers of the Commission are limited to ten years after the foreign subsidy has been awarded.
After an ex officio investigation, the Commission can prohibit a proposed concentration or require the undertakings to dissolve the completed concentration. The latter can be realised through the restoration of the situation prevailing prior to the concentration, or if not possible, by adopting measures appropriate to achieve such restoration as far as possible. In the context of ex officio investigations into public procurement procedures, the Commission cannot revoke the decision awarding a contract, nor can it terminate a contract. Timewise, the Commission must aim to adopt a decision within 18 months from the opening of the in-depth investigation. No standstill obligation applies during an ex officio investigation.
5. What is the assessment procedure of the Commission, and what are its powers?
Commission’s investigations involve a preliminary review and, if there is sufficient evidence of a distortive foreign subsidy, an in-depth investigation. In its investigations, the Commission will assess whether a financial contribution qualifies as a foreign subsidy within the meaning of the FSR and whether it (will) distort(s) the Single Market. To determine whether a distortion exists, the Commission can take various elements into account, such as the size of the foreign subsidy or the goal of the foreign subsidy. For example, if a foreign subsidy covers a substantial part of the purchase price in case of concentrations, it is considered to likely cause a distortion. A foreign subsidy granted for operating costs is more likely to cause a distortion than a subsidy that is granted for investment costs. The characteristics of the market, and in particular the competitive conditions on the market should be taken into account when investigating potential distortions.
If the Commission finds that a foreign subsidy (will) distort(s) the Single Market, it will balance the negative effects of the (potential) distortion against the positive effects of the foreign subsidy on the development of the relevant subsidised economic activity. Member States, as well as any natural or legal person can submit information on the positive effects, on which the Commission must base its considerations. Positive effects relate to the development of the subsidised economic activity and (the Union’s) relevant policy objectives, such as sustainability and R&D. The negative effects are the effects of the established (potential) distortion.
If the negative effects outweigh the positive effects, the Commission can accept commitments from the companies concerned to remedy the (potential) distortion. If no (adequate) commitments are offered, the Commission may impose redressive measures itself. Commitments as well as redressive measures must fully and effectively address the (potential) distortion and be proportionate. They can be structural, such as divestiture of certain assets, or behavioural, such as reduction of market capacity, sharing of critical infrastructure or business information, or licensing.
The most far-reaching power of the Commission is to prohibit the concentration or award of a public contract before it takes place. If a concentration has already been implemented and remedial measures cannot remedy the disruption, the Commission can order to dissolve the concentration. During the investigations, the Commission has the power to impose interim measures if that is necessary to prevent irreparable harm to the internal market.
6. Does the FSR include a standstill obligation?
Yes, the FSR contains a standstill obligation during the Commission’s investigations, if not initiated ex officio. A concentration cannot be completed until it has been authorised by the Commission. A public contract cannot be awarded to the notifying company until the Commission has approved its participation.
7. What is the Commission’s time limit when investigating?
In regard to concentrations, the Commission has 25 working days after the notification to decide whether to open an in-depth investigation. This in-depth investigation can take up to 90 working days. This period can be extended by 15 working days. M&A processes could thus be delayed by 130 working days.
In regard to public procurement procedures, the Commission has 20 working days after the notification to decide whether to launch an in-depth investigation. This period can be extended by 10 working days. The in-depth investigation can take 110 working days, and can be extended by 20 working days. Public procurement procedures could thus be delayed by 160 working days.
8. What happens if a company does not fulfill its notifying obligation?
If the notifying obligation is not fulfilled, the Commission may impose a fine of 10% of the total turnover or 5% of the average daily turnover. If incorrect information is provided, the Commission may impose a fine of 1% of the total turnover or 5% of the average daily turnover. In imposing fines, the Commission shall take due account of the principles of proportionality and appropriateness.
9. Does the FSR apply to concentrations or public procurement procedures that took place before 12 Octrober 2023?
The notification obligation also applies to concentrations that were concluded on or after 12 July 2023, but had not yet been implemented before 12 October 2023. For participations in public procurement procedures, the notification obligation only applies from 12 October 2023.
10. What can companies do to make the M&A process or public procurement procedure as smooth as possible?
Companies that regularly receive financial contributions from non-European governments should be aware of potential delays in M&A processes or public procurement procedures due to the Commission’s extensive decision deadlines and the substantial efforts required for fulfilling a notification obligation.
To minimise delays, thorough preparation is essential. The gathering of the information required for FSR notifications is not part of standard business operations. It is therefore advisable for companies to organise their records related to foreign financial contributions in order. This proactive approach facilitates the quick gathering of the required information for notifications.
When a concentration needs to be notified to the Commission under regular merger control, it is prudent to do this concurrently with the FSR notification. The FSR decision deadlines are roughly the same as those applicable in merger control, enabling them to run in parallel. This approach helps minimise potential delays in the M&A process.
Last, companies are able to consult with the Commission prior to the submission of an actual notification. Such pre-notifications serve as informal preparation for FSR notifications and speed up the notification process. Currently, the Commission has already conducted 17 pre-notification meetings with companies concerning an FSR notification related to concentrations.