The new EU Foreign Subsidies Regulation (FSR)

On 28 November 2022, the Council of the European Union (“EU”) adopted the Foreign Subsidies Regulation (“FSR”), which purpose is to vest the Commission (“EC”) with the exclusive powers to tackle distortions to the European market caused by subsidies granted by non-EU States to companies operating within the EU. The FSR entered into force on 12 January 2023 and will become effective from 12 July 2023, announcing a major change in the monitoring of non-EU State subsidies due to its extraterritorial reach. On 12 October 2023, the new FSR filing requirements will apply (as detailed below), following which FSR Guidelines will tentatively be issued in July 2024. 

With a strict focus on foreign subsidies, the FSR establishes a separate procedure that comes in addition to the EU merger control and the FDI proceedings.  

Under the FSR, any form of direct or indirect financial contribution from a non-EU State can trigger an investigation by the EC for merger & acquisitions (“M&A”) transactions or public tenders taking place in the EU. In this context, the concept of “financial contribution” concerns, inter alia, any transfer of State funds or form of State revenue (e.g. taxes) from a central public administration, in addition to any public or private corporation linked to a non-EU State, such as a sovereign fund. The FSR equally covers foreign companies operating in the EU and multinational companies headquartered in the EU benefiting from foreign financial contributions. 

To attract the EC’s attention, a financial contribution must procure a competitive advantage on the company active in the EU. Pursuant to the FSR, a financial contribution is likely to be distortive if it (i) supports a failing business, (ii) grants unlimited guarantees, (iii) facilitates a concentration, or (iv) enables a company to submit an unduly advantageous tender, among others.  

Conversely, under the FSR, a financial contribution is unlikely to be distortive if (i) the aggregate amount of foreign contribution is less than €4 million in the three calendar years preceding the notification or (ii) aims at repairing damage caused by exceptional circumstances, among others.  

In the event of a distortion, the EC will carry out a balancing test by analyzing whether there are any positive effects of the foreign contribution on the internal market or in relation to an EU policy objective, such as Environmental, Social and Governance standards, before implementing any remedial measures. 

Pursuant to its investigative role, the EC will review a multitude of financial contributions following (i) mandatory notifications of M&A transactions and public procurement bids assuming these fulfill certain formal pre-requisites or (ii) ex-officio investigations for any other transactions.  

• Mandatory regime for M&A transactions and public procurement procedures:  

In the context of M&A transactions, the FSR imposes a mandatory notification obligation for companies engaging in concentrations, when (i) at least one of the merging companies for a merger, the target for an acquisition, or the joint venture established in the EU, generates an aggregate EU-wide turnover of at least €500 million in the previous financial year; and (ii) the parties (i.e. the buyer and target together or all JV partners, at group level) to the transaction have received combined foreign financial contributions exceeding €50 million in the three years prior to the conclusion of the agreement, announcement of the bid, or the acquisition.  

For public procurements in the EU, the FSR imposes a mandatory notification obligation for companies if the contract value is equal or above €250 million (or the aggregate value of the tender lots is equal or above €125 million).  

• Ex officio investigation by the EC:  

The FSR grants powers to the ECC to investigate all potentially distortive foreign subsidies on its own initiative, or following information from EU Member States or an applicant. Ex officio investigations are usually carried out within a maximum period of 18 months, and the EC can investigate any foreign contribution issued ten years from its issuance date. 

As regards its temporal scope, the FSR applies to M&A transaction signed on or after 12 July 2023 with a closing occurring after 12 October 2023. In the context of public procurement procedures, the FSR applies when the procedure has been initiated on or after 12 July 2023, and the contracts are yet to be awarded by 12 October 2023. 

The review of the FSR is two-tiered depending on whether the mandatory notification regime applies, or the investigation is ex officio. First, the EC will proceed with a preliminary review of the allegedly distorting foreign subsidy. If this subsidy is not labelled as distorting, the investigation will be closed with a “no objection” decision. If, however, the subsidy is considered to have a distorting effect, an-depth investigation will be launched, following which the EC can adopt either a no objection decision, or some more penalizing measures.  

Financial contributions qualifying as distortive after review will trigger a wide variety of remedial measures which can be structural or non-structural. These include, among others, heavy fines for non- compliance of up to 10% of the company’s annual aggregate turnover, preemptive blocking of M&As deals or awards of public procurements or the dissolving of concentrations already in place, or even asset divestments or reduction of market presence, among others. 

On 6 February 2023, the EC published the Draft Implementing Regulation setting out detailed rules and procedures on the application of the FSR. This regulation provides further guidance on, inter alia, the following items: 

• the thresholds for foreign financial contributions and other information that are to be notified in the context of M&A transactions and public procurement procedures; and 
• interviews, related time limits, access to the investigation file, and potential remedies in the context of in-depth investigations.  

Upon its application slated for 12 July 2023, the FSR will compel companies benefitting from non-EU States’ financial contributions to ensure proper compliance with the EU regulatory framework when entering new transactions involving foreign financial contributions. 

Article 22 of the EU Merger Control Regulation (EUMR) 

Further to the Illumina/Grail ruling of the ECJ, and in application of Article 22 of the EU Merger Control Regulation (“EUMR”), the EC can take merger control jurisdiction over a transaction following a referral request by an EU Member State, despite such transaction not fulfilling the notification thresholds under the EUMR or the EU member states’ national merger control laws (see the earlier coverage of this case in the EU Law Newsletter No. 14 of December 2022).  

Building on its previous guidelines under Article 22 of the EUMR issued in 2021, the EC has published additional guidance in December 2022 touching upon the various features a transaction must fulfill for the EC to consider Article 22 applicable to it, in addition to related procedural issues (the “Note”). The Note also addresses the EC’s steps to review requests submitted by merging parties or third parties to determine whether cases are suitable for referral under Article 22. 

Importantly, the Note provides guidance for considering when a transaction shall not be categorized as one significantly affecting competition within the territory of the Member State or States making the request, thus not being eligible for referral under Article 22. 

Case C-680/20, Unilever Italia Mkt. Operations 

The ECJ has recently issued a fourth judgment overturning lower court decisions that exclusivity provisions were anti-competitive, after the rulings in Intel (C/413-14), Qualcomm (C/466-19) and Google v. Android (T-604/18). 

On 19 January 2023, the ECJ issued a preliminary ruling regarding Unilever’s penalty imposed upon by AGCM, the Italian Competition and Markets Authority, for unlawfully inducing ice-cream sellers not to supply rival brands.  

Building on its line of cases, the ECJ applied the Intel Test and ruled that: “where there are exclusivity clauses in distribution contracts, a competition authority is required, in order to find an abuse of a dominant position, to establish, in light of all the relevant circumstances and in view of, where applicable, the economic analyses produced by the undertaking in a dominant position as regards the inability of the conduct at issue to exclude competitors that are as efficient as the dominant undertaking from the market, that those clauses are capable of restricting competition.” 

In addition, the ECJ underlined that the ‘as-efficient’ competitor test applies to both rebate practices and exclusivity clauses, which can both be based on objective grounds. In furtherance of this test, evidence of the exclusionary effects must be assessed by local competition authorities by way of investigation. 

By Anderson Mori Tomotsune, Japan, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact japan@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 42 Brook Street, London W1K 5DB, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.