On 6 February 2023, the European Commission (“the Commission”) published an eagerly awaited Draft Implementing Regulation (“Draft Implementing Regulation”) setting out detailed rules and procedures on the application of the EU’s Regulation on Foreign Subsidies Distorting the Internal Market (“Foreign Subsidies Regulation” or “FSR”, see Mayer Brown Legal Update of December 15, 2022).1
The Draft Implementing Regulation goes some way to clarifying the thresholds for foreign financial contributions that are to be notified in the context of M&A transactions and public procurement procedures. It also contains provisions on aspects including information required in the notification forms; inspections and interviews in the context of in-depth investigations; time limits; access to the file; and remedies. These clarifications are welcome given the complexity of this new regime, both in its own right and in its interplay with other existing regimes including those relating to merger control, public procurement and foreign direct investment (“FDI”). However, significant questions remain. Once the FSR is applicable in July 2023, businesses will need to be ready to provide the Commission with the detailed information required in order to minimise the risk of prohibition of transactions, or of the award of public contracts, or the need for onerous remedies.
The Draft Implementing Regulation is now open for public consultation until 6 March 2023 (Commission launches public consultation (europa.eu).
The need for implementing rules
The FSR2 itself entered into force on 12 January 2023 and will apply from 12 July 2023, marking a major change in the control by the EU of State subsidies. The new regime extends the powers of the Commission to address, for the first time, distortions in the EU internal market caused by subsidies granted by public authorities outside the EU to companies operating in the EU. This extraterritorial reach is backed by the power to impose heavy fines for non-compliance (of up to 10% of the company's annual aggregate turnover). A number of parallels exist between the provisions set out in the Draft Implementing Regulation and those applicable under the EU Merger Regulation (“EUMR”) but the regimes are distinct and there are important differences between them.
In particular, the Draft Implementing Regulation contains detailed rules on:
- The submission of notifications concerning (i) mergers, acquisitions or other concentrations; and (ii) foreign financial contributions in the context of public procurement procedures;
- The conduct of inspections and interviews in the context of in-depth investigations;
- The offer of proposed remedies to address potential distortions of the internal market; and
- Access to the Commission's file, and rights of defence more generally.
After reaching a decision, the Commission will have to grant non-confidential access to all of the documents on which it relied, but companies will not be allowed to access internal Commission documents or files involving correspondence between the Commission and EU Member States, non-EU countries and national competition authorities.
The Draft includes standardised notification forms, contained in two annexes to the Draft:
- A notification form for mergers, acquisitions or other concentrations; and
- A notification form for foreign financial contributions in public procurement procedures.
The information required by the Draft Implementing Regulation differs significantly from that required under the EUMR or national merger control regimes. Generating certain of that information will involve extensive additional work and may present practical difficulties.
Notification thresholds for foreign financial contributions
The Draft Implementing Regulation sets out the thresholds that will apply to foreign financial contributions for the purpose of determining whether notification is required:
- In the case of concentrations, a foreign financial contribution must be reported if the individual amount of the contribution is EUR 200,000 or more, and the total amount of contributions per third country and per year is EUR 4 million or more.
- In the case of public procurement procedures, if the aggregate amount of the foreign financial contribution is EUR 4 million or more per third country in the three years prior to notification.
In respect of foreign financial contributions, notifying parties will have to report, inter alia, the following: the form (e.g., loans, tax exemptions, capital injections, fiscal incentives or contributions in kind); the identity of the granting entity; the purpose and economic rationale of the contribution; whether conditions were attached to the use thereof; whether a benefit is conferred on a notifying party; and whether the contribution is limited (in law or in fact) to certain undertakings or enterprises.
Whilst the notification thresholds might appear clear on paper, in practice, ascertaining that the threshold of EUR 4 million over three years in the relevant country is not met is likely to be challenging. This will be even more difficult where all financial contributions need to be included – even if unrelated to the concentration, or to each other, and including financial assistance such as loans, investments or guarantees by State owned undertakings or other public bodies.
The Draft Implementing Regulation explains that a company may submit remedy proposals within 65 days after the Commission has launched an in-depth investigation into a merger involving foreign investment, and within 50 days in the case of participation in public tender procedures. A global approach will have to be adopted in this area, to ensure that remedies address both subsidy control and merger control concerns in the EU, as well as other relevant jurisdictions. The Draft explains that the application of the FSR and the EU’s merger control rules are aligned in terms of pre-notification and review timelines, but the actual reviews are distinct.
Early engagement with the Commission
As is the case under the EUMR, the Commission explicitly offers notifying parties the opportunity to “engage in pre-notification discussions on the basis of a draft Notification Form”. Such contacts are not mandatory, but are described as “extremely valuable to both the notifying party(ies) and the Commission in determining, among other things, the precise amount of information required in a Notification Form and may result in a significant reduction in the information required”. Experience from the merger control context shows that such pre notification discussions will be extremely important in practice. As under the EUMR, the Draft explicitly provides for the Commission to dispense with certain notification and or information requirements in limited circumstances, and the best time to discuss such waivers will be at an early stage. The Commission has indicated that unless it can properly staff this new function, it might need to rely on its discretion to decline to review notifications. It remains to be seen what this will mean in practice, as the notification system established by the FSR is mandatory.
Following the consultation period, the Commission will analyse the comments received on the Draft Implementing Regulation and prepare the final version of the Implementing Regulation for adoption in Q2/2023, prior to commencement of application of the FSR in July 2023. Guidelines on the substantive aspects of the application of the FSR, e.g., the balancing test, are due to be published and should provide businesses and their advisers with greater clarity on the operation of the new regime. At this stage, one theme is clear, namely the importance of early engagement with the Commission prior to submission of formal notifications. Similarly, companies and their advisers will need to address the impact of the FSR on their transaction planning and reporting obligations as early as possible.
Mayer Brown offers a distinctive combination of in-depth experience in fields that inspired the FSR regime and procedures, namely (i) involvement in EU anti-subsidy investigations concerning subsidised imports of goods from third countries, including as counsel to exporters in the most recent EU anti-subsidy investigations; and (ii) involvement in EU State aid investigations, FDI screening procedures, highly complex merger control proceedings and antitrust investigations, and public procurement procedures. With the benefit of our established relationships with key Commission officials, we are well-placed to assist multinational corporations in navigating the field of ever-increasing EU notification and reporting obligations.
1 European Commission, “Distortive foreign subsidies – procedural rules for assessing them”. Available at https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13602-Distortive-foreign-subsidies-procedural-rules-for-assessing-them_en.