M&A transactions have so far been subject to merger control and foreign investment control in the EU. With the EU’s Regulation on Foreign Subsidies (FSR) having entered into force today (and its rules fully applying from 12 July 2023), the EU has now effectively introduced an additional merger control regime for certain M&A deals. The new rules will have a significant impact, and it is advisable for companies to start preparations even absent an ongoing deal.
Purpose of the FSR
The FSR introduces a review regime for transactions (and public procurement) where the parties involved have benefitted from certain foreign “financial contributions” in the past. It aims to ensure a level playing field for all companies – European or foreign – active in the EU.
The concept and definition of a “financial contribution” is very broad. The term includes, inter alia, capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses etc. – so, it does not only refer to subsidies in the narrower sense. It also covers contributions from private entities whose actions can be attributed to foreign countries outside the EU. And, the list included in the FSR is not exhaustive. In general, a financial contribution is everything conferring a benefit to a company engaging in an economic activity in the EU.
Notification requirements for M&A deals
Under the FSR, a transaction is notifiable to the EU Commission where:
· at least one of the merging companies (in case of a merger), the target (in case of an acquisition) or the joint venture (in case of a JV formation) is established in the EU and generates an aggregate EU turnover of at least EUR 500 million; and
· the acquirer/acquirers and the target (in case of an acquisition), the merging companies (in case of a merger) or the companies creating a joint venture and the joint venture (in case of a JV formation) were granted combined financial contributions of more than EUR 50 million from third countries outside the EU in the three years preceding the conclusion of the transaction agreement,the announcement of the public bid, or the acquisition of a controlling interest.
Where a notification is required, a transaction cannot be closed prior to clearance – the FSR regime has a suspensory effect.
Even where the filing thresholds are not met, the EU Commission may request the prior notification of non-notifiable transactions where the EU Commission suspects that foreign subsidies may have been granted to the companies concerned.
The review timeline of the EU Commissionis modelled after the EU’s merger control regime:
· Phase I: 25 working days from the date of notification.
· Phase II: 90 working days (if the EU Commission decides to initiate anin-depth investigation). This period may be extended by another 15 working days should the parties offer commitments.
Actual review proceedings might well take longer, as the FSR foresees the possibility of prenotification. This is similar to merger control, where prenotification discussions with the EU Commission are obligatory in practice. More information on that is expected to be included in an Implementing Regulation to the FSR, of which a draft is expected in the coming weeks.
Other relevant areas
The FSR also captures public procurements procedures where certain financial thresholds are met.
In addition, the EU Commission has the power to pro-actively investigate any other situation where it suspects the existence of a distortive foreign subsidy. In doing so, the EU Commission is vested with broad investigative powers, including sending requests for information and carrying out inspections.
Again, similar to merger control, the EU Commission has the power to impose significant fines of up to 10% of the parties'combined worldwide turnover for failure to notify a relevant transaction and for failure to comply with an EU Commission decision.
The Commission may also impose fines of up to 1% of the parties' combined worldwide turnover for providing incomplete, incorrect or misleading information in response to a request for information and for failure to cooperate during an inspection.
The FSR introduces an additional merger control regime for M&A deals. As the FSR also applies to past foreign contributions, it is highly advisable for companies that might benefit from foreign financial contributions to implement an internal system for processing and storing information on foreign contributions over the past three years. As the definition of “financial contribution” is very broad, gathering the relevant data will be a challenge for international companies, in particular for conglomerates and financial investors.
Parties to M&A deals that might be covered by the FSR should make the review procedure and the corresponding information gathering part of their deal planning and should include FSR clearance as a condition precedent in the transaction documents, alongside appropriate covenants for cooperation and risk sharing between the parties.