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Risk minimisation for internal market distortions: Mandatory declaration obligations under the Foreign Subsidies Regulation (FSR)

The Foreign Subsidies Regulation (FSR) requires companies receiving government subsidies from non-European Union (EU) member states to make prior declarations when participating in large M&A transactions and public procurement tenders. Mandatory declaration obligations under FSR came into effect on 12 October 2023.

The background to the regulation is the increasing global imbalance between companies from the EU and those from non-EU countries. While subsidies from EU countries have been scrutinised in detail to date, there were no comparable regulations for subsidies from non-EU countries. The new legislation is intended to eliminate regulatory differences between subsidies from EU member states and subsidies from non-EU countries (third-country subsidies) and ensure a level playing field for all companies operating in the internal market.

What is a foreign subsidy?

A “foreign subsidy” is a direct or indirect financial contribution from a non-EU country (foreign subsidy) that is limited to one or more companies or economic sectors and provides a benefit to the company operating on the internal market.

New responsibilities of the European Commission under the FSR

Similarly to EU antitrust review, the FSR prohibits parties from completing deliveries (or participating in tenders) before obtaining European Commission (EC) approval. The FSR also gives the EC new powers to initiate investigations and impose remedies. In addition, the EC can use a general market investigation tool and act ex officio, even if there is no obligation to notify. As part of such investigations, the EC can obtain information from all sources and, on this basis, scrutinize the flow of allegedly competition-distorting financial resources.

On 23 April, the EC carried out its first unannounced inspection at the premises of a Chinese safety equipment manufacturer. The Commission had indications that the company under investigation may have received foreign subsidies that distort the internal market. IT equipment, mobile phones, documents, and other data were seized. This latest measure by the European Commission clearly shows that it is already utilizing all the means at its disposal shortly after the FSR came into force. The Commission is obviously already prepared to initiate ex officio investigations and, in cases of suspicion, to carry out on-site searches at companies. It is to be expected that further such investigations will follow.

Under the FSR, the EC also has the power to block M&A transactions or public procurement tenders involving foreign subsidies that distort competition. By distortion of competition, it is meant that such subsidies improve the competitive position of undertakings and can have a negative impact on competition in the EU internal market. The EC will conduct a trade-off test to assess the positive and negative effects of such foreign subsidies. If the negative effects outweigh the positive effects, the EC is authorized to take redressive measures or to accept commitments from undertakings to correct the distorting effects.

What redressive measures can companies expect?

– Providing access to infrastructure

– Reduction in capacity or market presence, including temporary restrictions on business activities

– Renunciation of certain investments

– Disposal of certain assets

– Publication of research and development results

– Reverse the merger in question

– Repayment of the foreign subsidy

– Adjustment of the governance structure

Control mechanisms for subsidised mergers and public procurement

The risk of distortions in the internal market exists in cases where mergers lead to a change of corporate control in the Union, where they are fully or partly financed by foreign subsidies, or where economic operators benefiting from foreign subsidies are awarded contracts in the Union in the context of public procurement procedures. For this reason, the Regulation highlights these two areas in particular:

  1. Obligation to notify mergers and acquisitions with financial contributions from third countries in advance if certain thresholds are exceeded. This concerns cases in which at least one of the merging companies, the acquired company or the joint venture is based in the EU and has a turnover of at least EUR 500 million in the EU and the following companies have received foreign subsidies of at least EUR 50 million during the three years prior to the conclusion of the agreement.
  2. Obligation for companies to notify their participation in public procurement procedures to the European Commission in advance if the contract amount is at least EUR 250 million and the economic operators have been granted financial contributions of at least EUR 4 million per third country in the three years prior to notification as part of the public procurement procedure.

If you have further questions or need support in this matter, contact Ning Zhou, our Head of China Business Department, who can assist you through:

– Advanced check on the obligation of report and possibility of inspection before potential deal or investment.

– Submit the report of foreign subsidies during the deal

– Advise the client when they were questioned or inspected due to FSR

– Advise the client to appeal against adverse results due to FSR

– Provide training on Dawn Raid

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