EU Foreign Subsidies Regulation to Impact EU and Cross-Border M&A Antitrust Review Starting in 2023 - McDermott Will & Emery

EU Foreign Subsidies Regulation to Impact EU and Cross-Border M&A Antitrust Review Starting in 2023



On June 30, 2022, the Council of the European Union (Council) and the European Parliament (Parliament) reached a political agreement on the Regulation on foreign subsidies distorting the internal market (FSR or Regulation).

The FSR aims to redress the perceived regulatory gaps left by current EU competition law and trade defence rules which, at present, risk subsidies granted by third countries (foreign subsidies) distorting the EU internal market and undermining the level playing field level between companies active in the European Union that receive subsidies from EU member states, and those that receive subsidies from third countries.

The Regulation is expected to enter into force by the end of this year, which would mean it will be applicable by mid-2023 (i.e. six months after entry into force) save for certain exceptions such as the prior notification obligations in relation to M&A and public procurement. These obligations will only start applying nine months after entry into force, thus more towards Q3 – Q4 of 2023.

In summary, the Regulation ushers in (i) obligations to notify the European Commission (Commission) on M&A deals and public procurement offers which meet certain criteria, suspending implementation of the M&A deal or the award of the contract respectively, and (ii) a market investigation tool for the Commission. In addition, the Regulation also provides the Commission with extensive investigatory and punitive fiscal powers.

It is important to note that the FSR supplements existing EU competition rules (including those regulating merger control and State aid) and foreign direct investment rules in the various EU Member States. The Regulation is therefore expected to have a significant impact on M&A deals and public tender offers that benefit from subsidies granted by non-EU countries, as additional obligations and limitations (on top of the already applicable EU rules) may apply.

The Regulation increases regulatory scrutiny for companies that benefit from foreign subsidies and are looking to do business in the European Union. These companies will need to carefully assess the rules as they may be met with these additional obligations when doing business in the European Union

In Depth


In June 2020, the Commission adopted a White paper on levelling the playing field as regards foreign subsidies (White Paper), which kicked off a public debate on the topic of distortive foreign subsidies.

In its White Paper, the Commission stated that “[i]n today’s intertwined global economy, foreign subsidies can […] distort the EU internal market and undermine the level playing field.” In particular, the Commission referred to the fact that foreign subsidies appear to have increasingly facilitated the acquisition of EU undertakings, influenced investment decisions and have distorted the market behaviour of their beneficiaries. The Commission went on to explain that within the European Union, the Single Market and its rule book ensure a level playing field for all Member States and economic operators through well-enforced competition rules.

Notably, EU State aid rules (which form part of the European Union’s competition rules) ensure that subsidies by Member States are compatible with the internal market. The concept of State aid in the European Union refers to an advantage in any form whatsoever (e.g. direct grant, loan, guarantee, etc.) conferred by Member States to undertakings on a selective basis. In principle, and except for limited circumstances, State aid is prohibited in the European Union.

As EU State aid rules only apply to public support granted by EU Member States, whilst subsidies granted by non-EU authorities fall outside EU State aid control, the Commission considered that there is a risk that such subsidies would distort competition in the European Union’s internal market and result in an uneven playing field between European and non-European companies active in the market.

Apart from the general concerns about foreign subsidies provided to undertakings in the European Union, the Commission also highlighted in its White Paper the specific concerns about foreign subsidies in an M&A context. It explained, inter alia, that foreign subsidies may lead to excessive purchase prices (outbidding) as the subsidised acquirer is able to pay a higher price to acquire the asset than it would otherwise have paid, thus possibly distorting the valuation of EU assets, and at the same time preventing non-subsidised acquirers from achieving efficiency gains or accessing key technologies.

The Commission also highlighted the impact of foreign subsidies on public procurement, explaining that although the EU procurement markets are largely open to third country bidders, EU companies do not always compete on an equal footing with companies benefiting from foreign subsidies. Subsidised companies may be able to make more advantageous offers, thus either discouraging non-subsidised companies from participating in the first place, or winning contracts to the detriment of non-subsidised, yet more efficient, companies.

The Commission therefore sought to close the above-summarized regulatory gaps highlighted in its White Paper by proposing a new legislative tool to ensure a level playing field between European and non-European companies active in the European Union.

The Regulation

Under the FSR, the Commission will have the power to investigate non-EU financial contributions which benefit companies engaging in economic activity in the European Union in order to redress any distortive effects. The Regulation includes rules relating to State aid, merger control, public procurement and trade. Specifically, the Regulation provides three tools aimed at redressing distortive effects of foreign subsidies, each of which are outlined below.

(i) Who does the Regulation Target?

The Regulation is essentially aimed at undertakings (including public undertakings (in)directly controlled by the state) that engage in an economic activity in the European Union’s internal market and that receive(d) a foreign subsidy. In turn, a foreign subsidy is defined in the Regulation as (i) a direct or indirect financial contribution by a third country (i.e. non-EU), which (ii) confers a benefit to an undertaking engaging in an economic activity in the internal market and which (iii) is limited, in law or in fact, to one or more undertakings or industries. This definition of “foreign subsidy” is broadly in line with the definition of “State aid”, applicable to EU Member States.

As per the Regulation, “financial contributions” include, inter alia, (i) the transfer of funds or liabilities (e.g. capital injections, grants, loans, loan guarantees, debt forgiveness, fiscal incentives, etc.), (ii) the foregoing of revenue otherwise due (e.g. tax exemptions), and (iii) the provision or purchase of goods or services.

In addition, the Regulation sets out categories of foreign subsidies that are considered either “most likely” or “unlikely” to distort the internal market:

  • A foreign subsidy is “unlikely” to distort the internal market if its total amount does not exceed EUR 4 million over any consecutive period of three financial years.
  • Examples of foreign subsidies “most likely” to distort the internal market are those granted to ailing undertakings, those granted in the form of unlimited guarantees, foreign subsidies enabling an undertaking to submit an unduly advantageous tender, foreign subsidies directly facilitating a transaction, or an export financing measure that is not in line with the OECD Arrangement on officially supported export credits.

(ii) The Commission’s Powers under the Regulation in a Nutshell

The Commission will enjoy broad powers under the Regulation. It will have the power to:

  • Investigate and request information (including from third countries)
  • Interview natural or legal persons (insofar as consent is provided)
  • Carry out inspections (within and outside the European Union although the latter requires consent from the government concerned)
  • Impose interim measures (but not when public procurement procedures are concerned)
  • Launch market investigations
  • Approve or block deals
  • Accept commitments or impose redressive measures (such as reducing capacity/market presence, divestments, repayments of foreign subsidies, ordering the dissolution of a transaction, the licensing on FRAND-terms, requiring the undertaking to adapt its governance structure, ordering the publication of R&D results, ordering the companies to refrain from making certain investments, etc.)
  • Impose fines.

In terms of its power to impose fines, the Commission will be able to impose:

  • Fines of up to 1% of the aggregate turnover of the undertaking or association of undertakings concerned in the preceding financial year for providing incorrect, incomplete or misleading information in response to an information request or in a notification of a transaction, or for not supplying the information within the prescribed time limit, refusing to submit to inspections, providing incorrect or misleading answers in interviews, failing to provide required books or other records during inspections or failure to comply with the conditions for access to the file or the terms of disclosure imposed by the Commission.
  • Fines of up to 10% of the aggregate turnover of the undertaking concerned in the preceding financial year for non-compliance with a Commission decision imposing commitments, interim or redressive measures, or for certain infringements relating to notifications of transactions or public procurement procedures (as described in further detail below).
  • Periodic penalty payments of up to 5% of the average daily aggregate turnover of the undertaking or association of undertakings concerned in the preceding financial year for each working day of delay or non-compliance for the cases mentioned in the first two bullet points above.

Notifications of M&A Deals

The FSR provides for a “notification-based” tool for the Commission with which it will be able to investigate (and thus approve or block) “notifiable transactions”, i.e. those involving a financial contribution by a non-EU government, and where:

  • The target (in the case of acquisitions), at least one of the merging parties (in the case of mergers) or the JV (in the case of a joint venture) is established in the European Union and generates an EU turnover of at least EUR 500 million, and
  • All undertakings involved in the transaction were granted combined aggregate financial contributions in the three financial years prior to notification of more than EUR 50 million from third countries.

Apart from these “notifiable concentrations”, the Commission may also request prior notification of any transaction at any time prior to its implementation where the Commission suspects that foreign subsidies may have been granted to the undertakings concerned in the three years prior to the transaction – in which case, that concentration is deemed a “notifiable concentration”.

Much as in EU merger control, M&A deals that meet these criteria will need to approved by the Commission before they can be closed (known as the standstill obligation). In another similarity with EU merger control, the timing of the Commission’s review for a phase I investigation is 25 working days, and 90 working days for an in-depth review.

Failing to notify a notifiable transaction, implementing a notified transaction in breach of the standstill obligation, implementing a prohibited transaction or circumventing or attempting to circumvent the notification requirements may be met with fines of up to 10% of aggregate turnover of the undertakings concerned in the preceding financial year. In addition, the Commission may impose fines of up to 1 % of the aggregate turnover of the undertakings concerned in the preceding financial year where they, intentionally or negligently, supply incorrect or misleading information in a notification.

Notifications in Public Tenders

According to the Regulation, foreign subsidies that cause or risk causing a distortion in a public procurement procedure are those that enable an economic operator to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned.

Foreign financial contributions in an EU public procurement procedure need to be notified when the following two conditions are met:

  • The estimated value of the public procurement or framework agreement net of VAT amounts to at least EUR 250 million, and
  • The economic operator (including its subsidiary companies without commercial autonomy, its holding companies, and, where applicable, its main subcontractors and suppliers involved in the same tender in the public procurement procedure) was granted aggregate financial contributions in the three financial years prior to notification of at least EUR 4 million per third country.

Where the procurement is divided into lots, and in addition to the two conditions set out above, the value of the lot, or the aggregate value of all the lots to which the tenderer applies, needs to amount to at least EUR 125 million. Even if these thresholds are not met, participants must declare all foreign financial contributions received in the last three financial years.

When the conditions for the notification of financial contributions as set out above are met, the economic operators participating in a public procurement procedure need to notify the contracting authority or contracting entity of all foreign financial contributions as defined in the Regulation. In all other cases, economic operators need to list in a declaration all foreign financial contributions received and confirm that the foreign financial contributions received are not notifiable in accordance with the Regulation. However, where the Commission suspects that an economic operator taking part in a public procurement procedure may have benefitted from foreign subsidies in the three years prior to the submission of the tender, or the request to participate in the public procurement procedure, it may, before the award of the contract, request the notification of the foreign financial contributions provided by third countries to that economic operator. If the Commission has requested the notification of any such financial contribution, it is deemed to be a notifiable foreign financial contribution in a public procurement procedure.

Once the notification or declaration is submitted, the contracting authority or the contracting entity is required to transfer the notification or declaration to the Commission without delay. The Commission then has 20 working days to carry out a preliminary review. In duly justified cases, the Commission may extend this time limit by a one-time extension of 10 working days. If the Commission decides to open an in-depth investigation, it has 110 working days from the date of notification. This period may be extended only once by 20 working days, after consultation with the contracting authority or contracting entity, in justified exceptional cases. The Regulation highlights that during the preliminary review, and the in-depth investigation, all procedural steps in the public procurement procedure may continue, except for the award of the contract.

Following the in-depth investigation, the Commission may prohibit the award of the contract, accept firm commitments offered by the economic operator or issue a “no objection” decision.

In addition to the power to fine as described above, the Commission may impose fines of up to 1% of the aggregate turnover in the preceding year if the economic operators concerned intentionally or negligently supply incorrect or misleading information in a notification or declaration, and fines of up to 10% of their aggregate turnover in the preceding year if they fail to notify any notifiable foreign financial contributions during the public procurement procedure or circumvent or attempt to circumvent notification requirements.

Market Investigation Tool

Where the information available substantiates a reasonable suspicion that foreign subsidies in a particular sector, for a particular type of economic activity or based on a particular subsidy instrument, may distort the internal market, the Commission may conduct a market investigation into the particular sector, the particular type of economic activity or into the use of the subsidy instrument concerned. In the course of that market investigation, the Commission may request the undertakings or associations of undertakings concerned to supply any information deemed necessary to carry out any inspections deemed necessary. The Commission may also request Member States or the third country concerned to supply information.

When making use of the market investigation tool, the Commission may also impose fines as described above.

Transitional Provisions

The FSR shall apply to foreign subsidies granted in the five years prior to the date of application of the Regulation, where such foreign subsidies distort the internal market after the start of application of this Regulation. The five-year period is limited to three in the case where foreign financial contributions were granted to an undertaking notifying a transaction, or financial contributions in the context of a public procurement procedure pursuant to the Regulation.

The Regulation does not apply to transactions for which the agreement was concluded, the public bid announced, or a controlling interest acquired before the date of application of the Regulation, nor shall it apply to public procurement contracts that have been awarded or procedures initiated before the date of application of the Regulation.

Making Sense of the New Regulation

The requirements under the FSR and additional powers of the European Commission outlined above impact significantly on how companies do business within the European Union, imposing additional obligations and a requirement to be hyper-vigilant before, during and after transactions.

Our Brussels EU Competition team is on hand to guide you through the complex regulatory landscape. We provide end-to-end antitrust and competition counsel, drawing on extensive experience working with many of the world’s top manufacturers, suppliers, distributors and service providers –many of which are household names.

We also have first-hand experience with the industries in which our clients operate, including life sciences, chemicals, energy, food and beverages, manufacturing, technology and networks to name but a few.

McDermott’s top-ranked global antitrust and competition practice is composed of talented colleagues throughout the United States and Europe, offering seamless multijurisdictional counsel. To clear your path and help you achieve your objectives, we deliver practical, results-oriented counsel on the full spectrum of competition issues including State aid, merger control and international trade.