Foreign subsidies have had an unfair and distortive impact in the European Union. State-backed foreign companies have, according to the EU, benefited from an unfair advantage when acquiring EU targets or obtaining public procurement contracts. This, in the eyes of the EU, has come at the expense of fair competition. As things stand, however, financial contributions granted by non-EU governments to an individual company, industry or category (“foreign subsidies”) fly under the enforcement radar.
Foreign subsidies now under EU’s critical eye. New tools have been proposed to allow the European Commission (“EC”) to effectively address foreign subsidies that actually or potentially cause distortions and undermine a level playing field in the EU. The new tools would apply to all economic sectors and to a broad spectrum of situations and would sit alongside the EU State aid rules, which deal with distortions in the EU caused by Member State subsidies. Further, the new tools proposed by the EC should be seen within the linked, yet broader, context of ongoing efforts by the EU and its Member States to protect strategic European assets.
The European Commission Envisages a Three-Pronged Approach
Mergers. A mandatory ex-ante notification-based tool to investigate mergers involving a foreign subsidy, where the EU turnover of the target (or of at least one of the merging parties) is equal to or higher than EUR 500 million and the foreign subsidy (calculated over the last 3 years) is at least EUR 50 million.
Public tenders. A mandatory ex-ante notification-based tool to investigate bids in EU public procurements involving a foreign subsidy (received in the 3 previous years), where the estimated value of the procurement is equal to or higher than EUR 250 million.
All other market situations. A general tool to investigate all other market situations, and mergers and public procurement procedures below the mandatory notification thresholds, which the EC can use on its own initiative (ex-officio) and on the basis of which can request a notification on an ad-hoc basis (“General Tool”). In this case, the EC can take into account foreign subsidies granted in the 10 years prior to launching its ex officio investigation.
De minimis exemption. Foreign subsidies amounting to less than EUR 5 million in the previous 3 years will unlikely be considered distortive. However, this is not an absolute guarantee.
Acquire And Bidder Beware
Pending EC review: No closing/no award of contract
Failure to notify = fines of up to 10% of aggregate turnover
Implemented deals / awarded contracts can be called in for review
EC can go back up to 10 years to assess level of subsidy granted
Subsidies granted by different countries to different companies within group can be totted up
“Foreign Subsidies” – A Concept that Casts a Wide Net
A “foreign subsidy” encompasses a vast swathe of measures. Foreign subsidies include, but are not limited to, interest-free loans, unlimited guarantees, capital injections, preferential tax treatment, tax credits and grants. Indeed, any type of third-country measure which confers a benefit to a company engaging in an economic activity in the EU risks being caught. It is very similar to the concept of State aid under EU law.
A “third country” covers a wide group of foreign backers. Entities granting foreign subsidies can be the central government and government authorities at all levels, but it also includes foreign public and private entities when their actions can be attributed to the third country in question. Again, these concepts are derived from EU State aid law.
Distortive Effects in the European Union – When And How?
Foreign subsidy identified. Does it have a distortive effect? Whether a foreign subsidy has actual or potential distortive effects (i.e. negatively affects competition) in the EU is to be determined on the basis of a series of general indicators, including, but not limited to, the amount of the subsidy, the nature of the subsidy and the level of economic activity of the company in question in the EU. The looseness of these parameters therefore confers on the EC a very wide margin of appreciation.
Foreign subsidies that will in all likelihood be considered distortive. Building on the EC’s State aid practice, subsidies granted to an ailing firm (without a restructuring plan), facilitating a merger or enabling an unduly advantageous tender and unlimited guarantees will likely not escape being considered distortive.
Balancing test. The distortive effects of a foreign subsidy will be balanced against its positive effects on the development of the economic activity in question with a view to determining the appropriate remedial measure (structural / behavioral / repayment) or accept commitments. How the EC will conduct such balancing exercise in practice remains open and the risk that the EC will require very far-reaching – and even deal-killing – remedies is real.
Acquirer and Bidder Beware:
On-the-Spot checks foreseen (even outside the EU)
Adverse inferences” drawn in the face of insufficient facts
Deal and Award Timing – Be Braced for Uncertainty!
Mergers. For ‘notifiable’ mergers the foreign subsidy review timetable is similar to that under the EU Merger Regulation (“EUMR”): phase I = 25 working days / phase II = 90 working days (+ possibility for extensions). While consistency with the EUMR is in this respect to welcomed, companies can expect a long and labour intensive – not to mention – disruptive pre-notification procedure. Getting the green light to file on the basis of a complete notification will not be easy.
Public tenders. The EC has 60 days following receipt of a notification to carry out a preliminary review, and it must complete any in-depth investigation no later than 200 days after it received the notification. Risks abound, however: for example, will a tender procedure “wait” for the outcome of the EC investigation with the attendant risk that the procedure in question will not be as competitive as it would (and in fact should) otherwise be.
All other market situations. The General Tool is conspicuous for not having a review deadline attached to it. Moreover, closed deals and awarded contracts risk being unwound out of the blue.
M&A: considerable scope for parallel investigations and diverging outcomes. Time sensitive deals risk facing unacceptable uncertainty. In parallel with a foreign subsidies investigation, deals could potentially also face being investigated under EU/national merger control rules and, possibly, under the different foreign direct investment regimes operating in the EU. The possibility for (vastly) differing outcomes risks being unpalatable and the timing of these different investigations may vary considerably – the apparent inability to offer phase 1 remedies in a foreign subsidies investigation being a contributing factor. Despite such uncertainty, a decision not to file under the new rules risks incurring fines of up to 10% of aggregate turnover.