Amid geopolitical tensions and increased scrutiny into foreign (i.e. non-EU) influence on the EU markets, the EU Foreign Subsidies Regulations and the Implementation Regulations (“FSR”)¹ were conceived to address the perceived gap between the existing EU state aid rules² and the recently implemented EU Foreign Direct Investment Screening Regulations.³

On 12 October 2023, the FSR will introduce a new mandatory and suspensory notification obligation on parties to large transaction/public procurement processes. The notification requirement will apply to all relevant transactions signed on or after 12 July 2023 that have not closed before 12 October 2023. 

The FSR also grants the European Commission (“EC”) wide powers to gather information and launch ‘own initiative’ investigations in respect of transactions that do not meet the revenues and other monetary thresholds, though we expect the EC will exercise its ex-officio powers only in respect of the most distortive foreign subsidies. It is worth noting that although the EC received powers in July 2023 to open ad hoc investigations into transactions, tenders or investments that have received distortive subsidies from non-EU countries, it has not yet chosen to do so. The EC received a number of complaints in July and August 2023 under the FSR in the football sector, including from La Liga in Spain against subsidies granted by Qatar to Paris Saint-German⁴ and from Belgian club Royal Excelsior Virton against its competitor SK Lommel who allegedly received distortive foreign subsidies via a capital injection of EUR 16.8 million from the Emirate of Abu Dhabi.⁵  Although these complaints may not have been what the EC had in mind when it implemented the FSR, it remains to be seen what approach the EC will take. 

Ten key takeaways 

1. Aim of the FSR: The FSR grants the EC wide ranging powers to redress the distortive effects of certain foreign subsidies (i.e. money received from non-EU Member States) on the EU market.  The EC considers that ‘foreign subsidies can give their recipients an unfair advantage to acquire companies or to obtain public procurement contracts in the EU’.⁶ 
2.  D-Day is coming: From 12 October 2023, businesses active in the EU involved in a sizeable transaction that concerns the (joint or sole) acquisition of control will need to notify the EC of foreign financial contributions (“FFCs”) received from a non-EU state entity.
3. Transactions that require notification: FSR notification is triggered by transactions that meet the following thresholds:

 a. there is a ‘change of control’ and

b. and the EU turnover of the target in an acquisition/ at least one of the merging parties or the joint venture is at least €500 million; and 

c. the foreign financial contribution reaches at least €50 million. 

The assessment of any ‘change of control’ and calculation of turnover follows the existing EU merger control rules.  

4. Public procurement contracts that require notification: The FSR also applies to public procurement processes where: 

a. the contract value is at least €250 million, and 

b. the bid involves a foreign financial contribution of at least €4 million per non-EU country. 

5. Mandatory, suspensory regime with severe sanctions for non-compliance: An FSR clearance from the EC is required for applicable transactions and public procurement processes prior to closing. Failure to notify, closing before receiving clearance and/or non-compliance with the FSR can all result in fines and sanctions of up to 10% of the annual worldwide group revenues of the businesses involved. The EC can also dissolve and unwind any transaction closed in breach of the FSR. 

6. Transactions involving large companies in concentrated and/or politically sensitive markets that receive distortive and high value FFCs are at the highest risk: The EC considers that the most distortive FFCs involve the following:   

a. unlimited guarantees,  

b. subsidies to an ailing company without a restructuring plan,  

c. subsidies directly facilitating a concentration (i.e. an M&A transaction or JV),  

d. subsidies enabling an unduly advantageous tender and  

e. export financing not in line with an OECD Arrangement on officially supported export credits.⁷  

Parties in receipt of these types of FFCs should be more alert to scrutiny.  

7. “FFC” is a ‘catch-all’ for any financial contribution by a non-EU state entity: FFCs are defined widely and include, but are not limited to, interest-free loans, unlimited guarantees, capital injections, preferential tax treatment, tax credits and grants or similar funds granted by a relevant foreign entity.  An applicable foreign entity could include state-owned enterprises and sovereign wealth funds. 

8. The EC can request ad hoc notifications in respect of any transaction: Even where the financial thresholds are not met, the EC can request businesses to make an ad hoc notification prior to closing. 

9. The EC can launch ‘own initiative’ investigations into any type of economic activity: The EC also has the power to carry out an investigation of any type of economic activity and market situations that involves FFC, such as greenfield investment or the provision of services.  

10. A ‘safe harbour’ is available: The FSR will not apply where another legislation already applies to the FFC, for example to activities falling under the remit of the EU Anti-Subsidy Regulation. For instance, the EC announced on 4 October 2023 that it has opened an ex officio investigation into the import of battery electric vehicles from China under the EU Anti-Subsidy Regulation⁸ and not the FSR.  

The EC considers that an FFC is unlikely to have distortive effects on the EU market where: 

a. it is less than a cumulative total of €4 million over 3 years, or  

b. it is less than the thresholds for de minimis aid under EU State aid rules over 3 years, or  

c. the subsidies aimed at making good damages caused by natural disasters or exceptional occurrences.  

Impact on deal timetable 

The FSR process is similar to EU merger notification with pre-notification followed by a 25-working day Phase 1 review period once the notification is deemed complete. If substantive concerns are found at Phase 1, the EC can open an in-depth review that has a 90-working day review period. The EC has the power to ‘stop the clock’ at any time and extend the review period. Remedies are only available at Phase 2 and there is no conditional clearance at Phase 1.  

Information required to complete the FSR notification is more onerous than that required under the EU Merger Regulations. Information is required on transaction financing and valuation, detail of the FFCs themselves (including those not linked to the transaction), detail of the bidding process and other bidders (if applicable) and supporting documents. The FSR recognises that parties may negotiate waivers with the EC to limit the information to what is necessary and relevant for the EC to carry out its assessment and keep the FSR notification process for transaction parties manageable.  

Three key practical considerations 

• Forewarned is forearmed: Completing the notification and the review period may have a significant effect on the deal timeline. Additional due diligence and early screening for FSR (alongside merger control, National Security and Investment Act and other foreign direct investment notifications) is essential. 
• Early engagement with the EC: The EC encourages early engagement with parties to a transaction to discuss pre-notification. If a mandatory notification is triggered, all parties to the transaction need to start collecting relevant information and, if needed, to engage with the EC to discuss information waivers to avoid delaying the notification from being accepted. 
• Impact on transaction timing and deal documentation: Parties need to take account of the impact of FSR on deal timing and on the commercial negotiations (e.g. condition precedents, ‘hell or highwater’ clause, long stop dates). 

 Please get in touch with your usual Bristows contact or a member of our Competition team and we would be happy to have a discussion to review what this regulation could mean for your business. 

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[1] Regulation (EU) 2022/2560 of 14 December 2022 on foreign subsidies distorting the internal market came into force on 12 January 2023 and On 10 July 2023, the EC adopted the Implementing Regulation (EU) 2023/1441 . 

[2] Article 107 of the Treaty for the Functioning of the EU

[3] Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union  

[4] LALIGA files complaint against PSG with European Commission

[5] Foreign subsidies to certain football clubs (“State Clubs”) in the EU

[6] Foreign Subsidies Regulation

[7] Such arrangement can be found here

[8] Commission launches investigation on subsidised electric cars from China