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The EUs New Foreign Subsidies Regime Will Soon Be A Reality – Contracts and Commercial Law

On 30 June 2022, the
European Parliament
and the
reached political agreement on a draft EU regulation
aimed at preventing foreign subsidies from distorting competition
in the EU single market (Foreign Subsidies Regulation, FSR), which
the European Commission had proposed in May 2021. The final legal
text of the FSR is expected to be formally adopted in Q4 2022.
Mandatory notification obligations for M&A transactions and
public procurement tenders will apply from nine months after the
FSR enters into force (i.e., from some time in mid-2023).

This alert recaps the key features of the new regime, highlights
the main, substantive changes to the Commission’s initial
proposals and sets out the practical considerations for businesses
prior to the FSR’s entry into force.

For more detailed background information on the EU’s new
foreign subsidies regime, see our prior alerts on the Commission proposal of 5 May 2021 and its White Paper of 17 June 2020.

Scope of the FSR

The new regime will affect companies engaging in M&A
transactions (mergers, acquisitions and joint ventures) or
participating in public procurement procedures in the EU that have
received financial contributions from non-EU governments or
state-owned entities.

Financial contributions cover a wide range of economic benefits,
including public grants, loans, guarantees, fiscal incentives,
compensation, certain forms of export financing, preferential tax
treatment, tax credits and government contracts. Importantly,
financial contributions provided by a non-EU country include not
only contributions provided by the country’s central government
and government authorities at all other levels, but also all
foreign public or private entities whose actions can be attributed
to the third country.

The new regime will comprise three tools for reviewing foreign
subsidies in M&A scenarios (i.e., mergers, acquisitions and
joint ventures), public procurement bids and ex officio

Mandatory notification of M&A transactions

Under the final agreement, M&A transactions will need to be
notified to the European Commission if they meet the following

  1. The transaction constitutes a concentration,
    i.e., a merger or an acquisition of (sole or joint) control over
    another business. In contrast, the acquisition of a non-controlling
    minority stake in another business would not trigger a review.

  2. One of the merging undertakings (in case of mergers),
    the acquired business (target) or the joint venture generates
    turnover within the EU of at least ?500 million.
    Under the
    initial Commission proposal, the EU turnover of at least one of the
    joint venture parents would have been sufficient to trigger a
    filing obligation (irrespective of the EU turnover of the joint
    venture). The European Parliament and the Council subsequently
    agreed to limit the EU turnover-based notification threshold to the
    joint venture itself, which will significantly reduce the number of
    likely filings compared to the initial Commission proposal.

  3. All undertakings concerned (e.g., the acquirer and the target,
    the merging parties, or the joint venture and its parent companies)
    received from third countries an aggregate financial
    contribution exceeding ?50 million in the last three

M&A transactions that meet this test will need to be
notified to the Commission and have to await Commission clearance
prior to closing (standstill obligation). Once notified, the
Commission will have 25 working days to review the transaction and,
if the Commission opens an in-depth investigation, an additional 90
working days (subject to further extension).

Where a company fails to notify a subsidised concentration, the
Commission will have the power to impose fines (of up to 10 per
cent of the company’s aggregate worldwide turnover) and review
the transaction as if it had been notified. In addition, the
Commission can prohibit a subsidised concentration.

Mandatory notification of public procurement bids

A notification obligation will arise for tenders in public
procurement procedures in the EU where:

  1. the estimated contract value is at least ?250
    ; and

  2. the economic operator participating in the tender was
    granted aggregate foreign financial contributions in the three
    calendar years
    prior to the notification of at
    least ?4 million per third country

Under the final agreement, the European Parliament and the
Council significantly narrowed down the notification obligation to
bidders that received aggregate financial contributions of at least
?4 million per third country over a three-year period. Under the
Commission’s initial proposal, a notification obligation
applied to all bidders participating in tenders with a contract
value of ?250 million or more.

If a bidder is under investigation by the Commission, they
cannot be awarded a contract under the new regime prior to
completion of the Commission’s review. Where a company fails to
notify the financial contribution in a public tender, the
Commission can impose a fine (of up to 10 per cent of aggregate
worldwide turnover). In addition, the Commission can prohibit the
award of a public procurement contract to the subsidised

General (ex officio) market investigation of any other
subsidised activity

The new regime will also empower the Commission to investigate,
on its own initiative, all other market situations and to request
ad hoc notification of smaller concentrations and public
procurement procedures that do not meet the thresholds for
mandatory filings (see above), if it suspects that a distortive
foreign subsidy may be involved.

Under the final agreement, the Commission will be
empowered to investigate subsidies granted up to five years before
the entry into force of the FSR
that distorted the
internal market after its entry into force (the Commission’s
initial proposal had envisaged a 10-year limitation period).

Practical considerations and next steps

It is expected that the final legal text of the FSR will
be formally adopted in Q4 2022
. Once adopted, the FSR will
be published in the EU’s Official Journal and enter into force
20 days thereafter.

Notification of M&A transactions and public
procurement bids will become mandatory from nine months after the
entry into force
of the FSR (i.e., from some time
in mid-2023

To assess whether transactions (and public procurement
bids) are subject to notification requirements
, businesses
with direct or indirect commercial or other links with non-EU
states, irrespective of whether they are based in or outside the
EU, are recommended to take the following steps prior to the
FSR’s entry into force:

  1. Start identifying and compiling a record of financial
    contributions received from non-EU states since at least
    The term ‘financial contribution’ is very
    broad and includes any transfer of funds or liabilities, the
    foregoing of revenues (including tax exemptions), and the provision
    or purchase of goods or services to or from non-EU states.
    Businesses are therefore advised to establish systems for the
    collection of group-wide information relating to relevant
    contracts, grants, tax incentives, etc., on a global basis to
    ensure that financial contributions can be tracked and quantified
    over a rolling three-year period.

  2. Check whether financial contributions were received on
    market terms.
    The financial contribution threshold can be
    exceeded (and a notification be required) irrespective of whether
    the financial contribution was granted on market terms. Financial
    contributions granted on market terms will however avoid being
    classified as foreign subsidies, which the FSR aims to prevent and
    may result in the Commission requiring remedies or prohibiting an
    M&A transaction or public tender.

  3. Where it is not clear whether a financial contribution
    qualifies as a foreign subsidy or has distortive effects in the EU,
    consider its impact on any activities in the EU and whether
    the policy aims of the non-EU state are supported in the
    as this could serve as possible justification and
    defense against Commission intervention.

Once in force, the new regime will significantly
increase the regulatory and administrative burden for closing
M&A transactions by state-supported investors in
that will be caught by the new regime. Businesses
will potentially have to file parallel notifications under
the Commission’s new foreign subsidy regime, EU or national
merger control rules and/or foreign direct investment rules in the
This will need to be addressed in transaction
documentation (conditions precedent, representations and
warranties, break fees, etc.), deal timing/planning and due
diligence reviews.

The new regime will also lead to significant legal uncertainty
for M&A transactions falling below the notification thresholds
but for which the Commission has the right to request notification
prior to closing. It can also be expected that third parties will
increasingly use the Commission’s new investigation toolbox as
a sword to oppose deals that are not in their strategic

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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