EU Tackles Unfair Competition Caused by Foreign Subsidies

With the introduction of the EU Foreign Subsidies Regulation—the FSR—in January, the European Commission has gained far-reaching powers to tackle foreign subsidies that may distort competition in the internal market.

The FSR establishes new reporting and notification obligations for all businesses involved in large public tenders or merger and acquisition deals in the EU. The commission also is empowered to conduct investigations into any market situation where it suspects that foreign subsidies may distort the internal market.

This will create additional regulatory obligations alongside the merger control and national foreign direct investment control regimes for businesses operating or investing within the EU that are the beneficiaries of foreign subsidies.

Closing a Regulatory Gap

The purpose of the FSR is to close a regulatory gap that may have allowed foreign businesses operating in the internal market to compete unfairly. EU member state subsidies have been subject to EU state aid regulation since the establishment of the European Economic Community in 1957. However, until now, no EU laws existed to regulate comparable subsidies granted by third countries outside the EU that may nonetheless have an adverse impact on internal market competition.

In seeking to close this regulatory gap, the FSR introduces three investigatory tools for the commission:

Prior notification of certain M&A transactions where the target or at least one of the merging parties is based in the EU and achieved EU turnover of at least 500 million euros ($541 million), and the businesses involved in the transaction received foreign financial contributions of more than 50 million euros in the last three years.
Prior notification of public procurement procedures with an estimated value of at least 250 million euros and where the bidder has received foreign financial contributions of more than 4 million euros per third country in the last three years.
Ad hoc notification of M&A transactions that have already been completed, completed public procurement procedures, and any other market situations (within 10 years of a foreign subsidy being granted) where the European Commission suspects that this may have caused distortions of competition in the internal market.

The commission’s power to require ad hoc notifications and conduct so-called ex officio investigations will come into effect as of July 12, while the prior notification requirements for businesses will take effect three months later.

Where the transaction or procurement procedure is still ongoing, the notification requirement is accompanied by a standstill obligation: M&A transactions may not be completed, and public contracts may not be awarded, until the commission has carried out its investigation. Violations of the notification and/or the standstill obligation can result in substantial fines—up to 10% of the group turnover of the companies involved.

The Procedure

The FSR procedure is closely modeled on the EU merger control procedure. Transactions are scrutinized by the European Commission in two phases. First, following notification, a preliminary examination is conducted (taking up to 25 working days for M&A and 30 working days for public procurement), where the commission determines whether the foreign financial contributions in question qualify as foreign subsidies and if they have the potential to distort competition in the internal market.

If these conditions are met, the commission commences an in-depth investigation, which can take up to 125 working days for M&A transactions and 130 working days for public procurements.

Key Element—Foreign Subsidies

A foreign subsidy is deemed to exist where a third country provides, directly or indirectly, a financial contribution that confers a benefit on an undertaking (a business) engaged in an economic activity in the internal market and that is limited, in law or in fact, to one or more undertakings or industries.

“Financial contribution” is broadly defined and includes the transfer of funds or liabilities, the forgoing of revenue that is otherwise due, or the provision or purchase of goods or services. A financial contribution can be provided by a government or public authority, or a public or private entity if the financial contribution can be attributed to a third country.

In determining whether a foreign subsidy is capable of distorting internal market competition, the European Commission will evaluate factors such as the subsidy amount and type, the terms and conditions associated with it, how it is used, and the overall market conditions. If the subsidy directly contributes to a merger or enables a company to submit an unduly advantageous bid in a procurement procedure, it is likely to be considered as distorting the internal market.

How Should Businesses Prepare?

The FSR is set to have a significant impact on businesses operating within the EU as of Oct. 12, when the notification obligations will become effective.

To prepare for the new regime, businesses must take several important steps:

First, they need to ensure that relevant stakeholders in the business, including commercial and legal teams, understand the reporting and other obligations that the FSR will create, so they may assess what additional resource or processes they need to put in place to ensure compliance.
Businesses also need to start tracking any foreign contributions received by them, dating back to 2018—the earliest time in relation to which the European Commission may initiate an investigation under the FSR’s transnational provisions. This will enable them to retrieve records more easily in the event of an FSR mandatory notification or an ad hoc investigation. This is likely to be a significant task, especially for larger companies, so organizations should begin developing internal systems for tracking foreign contributions as soon as possible.
Finally, businesses should evaluate the implications of the FSR on any active or contemplated M&A or procurement activity, including analyzing deal timing and any related transactional and procurement documentation. This will help them identify any potential FSR-related issues and take the necessary steps to mitigate risks.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Arkadius Strohoff is an associate with Pinsent Masons, advising national and international clients on a broad range of competition law issues.

Totis Kotsonis is a partner with Pinsent Masons, advising on both compliance and contentious matters on all aspects of competition and international trade law, public procurement and subsidies, including EU state aid law.