The Foreign Subsidies Regulation

Answer

According to the Organisation for Economic Cooperation and Development (or the OECD), the number and size of government subsidies implemented worldwide is steadily increasing, driven by several factors including covid-19 recovery, climate change, the war in Ukraine and its impact on global value chains, and digital transformation.

In the EU, the State aid rules restrict EU member states from subsidising EU companies to maintain a level playing field for competition within the EU. Meanwhile, subsidies granted by non-EU governments (so-called ‘foreign subsidies’) have historically faced no equivalent EU controls or oversight. The EU’s power to conduct specific anti-subsidy investigations (based on World Trade Organisation (or WTO) rules) only allow it to tackle subsidies that distort the EU market through imports of goods but don’t cover other scenarios like trade in services or investments, including the facilitation (through direct funding or otherwise) of acquisitions of EU companies. The EU’s foreign investment screening mechanism is no help either, given that its reach is limited to security and public order concerns, not distortions of competition.

Concerns about the impact of this regulatory asymmetry between the treatment of EU and foreign subsidies have been growing in the EU – in particular, that foreign subsidies could distort competition and threaten the EU level playing field, with no obvious tools to redress the balance. Several factors have heightened these concerns, including:

• Brexit and the desire for compliance with EU subsidy rules even when “a major partner” leaves the EU;
• the economic impact of the covid-19 pandemic, which has produced more opportunities for foreign subsidised companies to acquire financially weakened EU targets; and
• intensifying mistrust of foreign regimes acquiring control of EU businesses, from football clubs to tech companies.

In an attempt to better tackle distortive foreign subsidies and to better scrutinise foreign-subsidy-backed acquisitions in the future, the EU has adopted the EU Foreign Subsidies Regulation (FSR), which gives the commission extensive powers to investigate and address distortions via three new enforcement tools:

• A mandatory pre-closing merger regime for M&A transactions meeting certain thresholds.
• A mandatory notification for tenders where the estimated contract value is €250 million.
• A ‘catch-all’ power for the European Commission to investigate all other market situations (including M&A and public tenders otherwise falling below the thresholds).

The FSR gives the commission yet another regulatory toolbox with which to protect the EU internal market, including to scrutinise M&A transactions with effects in the EU. Failure to notify relevant M&A deals will carry significant penalties, including fines of up to 10% of the parties’ global annual turnover. Given the legislation began to apply only on 12 July 2023, the full impact of the FSR is yet to be felt. In particular, it remains to be seen the extent to which it can stymie the acquisition of EU businesses by foreign-subsidised buyers, and it's still unclear as to the overall level of scrutiny the commission will place on less obviously ‘high-risk’ foreign financial contributions. However, the FSR will doubtlessly constitute yet another regulatory hurdle, alongside merger control and foreign investment control, for European dealmakers to factor into their deal strategy. Forward planning will be key to securing approvals as quickly as possible and avoiding the FSR becoming the long pole of M&A transactions.

Patrick May is an associate at Weil, Gotshal & Manges (London) LLP.