New EU regulation on foreign subsidies in M&A transactions
On 12 January 2023 , the so-called FSR Regulation, or more precisely Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market, entered into force.
It represents an important step towards the Commission's agenda of ensuring equal treatment for all companies operating within the EU.
The aim of the FSR is to close a loophole in the rules governing the single market so that not only support granted by EU governments, but also the one coming from outside of the EU, is subject to scrutiny. The expected effect will be to counter market inequalities and the disadvantages of EU operators having to compete with those receiving foreign subsidies.
Instruments introduced by the FSR Regulation
In order to achieve its objective, the FSR Regulation provides:
- obligation to notify the concentration to the European Commission;
- the obligation for companies to declare their participation in public procurement procedures (where certain conditions are met);
- the possibility for the Commission to begin on its own initiative investigations in regard to all market situations, if foreign subsidies are suspected.
Below, we will focus on the first instrument mentioned, i.e. the obligation to notify a concentration.
According to the provisions of the FSR, a concentration is deemed to occur where there is a permanent change of control of an entity as a result of any of the following:
- merger of at least two undertakings or parts of undertakings (previously independent);
- the acquisition of direct or indirect control by (i) a person already controlling at least one undertaking, or by (ii) by an undertaking over another undertaking or part of it, whether by purchase of securities or assets or by contract or by any other means.
The FSR also explicitly refers to the formation of a joint venture, providing that it is also a subject to notification (as an event giving rise to a concentration).
Not every transaction is subject to notification
The obligation to notify a concentration will not apply to every transaction, but only to those that exceed a certain value threshold. The Regulation provides that a 'notifiable concentration' will be the following situations:
- at least one of the merging undertakings, acquired undertakings or joint ventures is established in the EU and generates in the EU an aggregate turnover of at least EUR 500 million; and
- the following undertakings have together received an aggregate financial contribution of more than EUR 50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest:
- in the case of an acquisition - the acquirer(s) and the acquired undertaking;
- in the case of a merger - the merging undertakings;
- in the case of a joint venture - the undertakings forming the joint venture and that joint venture.
Entry into force
This FSR Regulation will apply from 12 July 2023 and from that date the Commission will have the power to initiate investigations ex officio; while the obligation of notification on companies will apply from 12 October 2023.
According to Commission estimates, around 30 entities per year may be affected by the merger notification obligation . If the Commission's estimations turn out to be correct, the number is indeed not large (especially given the number of M&A processes and their variation in scale across the EU).
The new notification obligation must therefore be taken into account already when preparing and scheduling the transaction in order to take into account its possible impact on the planned process. It is worth noting that the need to notify a concentration to the Commission may extend the entire transaction by up to several months. Moreover, the Commission's final decision ('imposing obligations' or 'prohibiting the concentration') may determine the failure of the entire project.