The first months of notifications under the EU Foreign Subsidies Regulation (FSR) have shown that more transactions and public procurement procedures than anticipated by the European Commission (EC) fall within the regime and must be notified. The EC has also demonstrated that it is ready to use its new wide-ranging powers under the regime to scrutinise M&A activity and public procurement procedures, having opened its first Phase II investigation after only a little over four months of notifications.
We set out below our key observations on the first months of dealing with notifications under the FSR:
1. More FSR notifications than expected
The number of M&A notifications under the FSR is significantly above the EC’s estimated approx. 33 cases per year.[1] At the end of January, i.e. a little over three months after M&A notifications under the regime became mandatory and suspensory (12 October 2023) and a little over six months since the FSR started to apply (12 July 2023), the EC announced that it had already engaged in pre-notification discussions in 53 cases.[2] Of these, 14 had been notified, nine cleared and one notification withdrawn, with the remainder still being in pre-notification. Under the public procurement tool more than 100 notifications were made, which is nearly three times the EC’s estimate of 36 cases annually.[3]
To deal with the unexpected number of FSR notifications, the EC is ramping up its number of personnel. On 1 March 2024, a new directorate consisting of three teams dedicated to enforcing the FSR will be formed.[4]
2. Public procurement: First Phase II review in just over four months of notifications
On 16 February, the EC opened its first in-depth investigation.[5] This case concerns a notification by CRRC, a Chinese state-owned train manufacturer, in relation to a public procurement procedure launched by Bulgaria's Ministry of Transport and Communications for the provision of several electric ‘push-pull’ trains as well as related maintenance and staff training services. In its press release, the EC states that there are sufficient indications that CRRC was granted a foreign subsidy that distorts the internal market. During the in-depth investigation, the EC will further assess the alleged foreign subsidies and whether they may have allowed CRRC to submit an unduly advantageous offer in the Bulgarian tender. The EC has until 2 July to take a final decision.
The case does not come as a surprise when looking at the genesis of the FSR. When the EC prohibited the merger of European train makers Siemens and Alstom back in February 2019, European industrials and politicians demanded more scrutiny of the activities of Chinese state-owned enterprises in the EU, which ultimately resulted in pressure on the EU to adopt the FSR. Given that many aspects of the substantive test are unclear, all eyes are now on this first in-depth investigation.
3. M&A: Thorough scrutiny of foreign financial contributions
The EC shared some practical learnings from notifications under the M&A tool in its ‘FSR brief’[6]. Our experience over the past months is very much aligned with the EC’s update, but we have some nuances to add from the perspective of clients facing the new FSR notification regime.[7]
In our experience, the EC understands that the regime is still new with only limited guidance available and that gathering information on foreign financial contributions (FFCs) is an administratively challenging task for businesses. While we have often received a number of detailed questions in pre-notification for M&A deals, sometimes far beyond the information required in the notification form, EC case teams are generally open to partly reducing the scope of the required answers. We would expect that as the EC’s case teams gain more experience that processes will run more smoothly.
Our key observations on the M&A procedure are:
- The duration of pre-notification depends on the complexity of the case. In straightforward cases with no disclosable FFCs, we concluded pre-notification in approx. four weeks after the draft notification was submitted with one or two pre-notification requests for information (RFIs). In cases with low to medium complexity (no ‘most likely distortive’ FFCs but some reportable FFCs) pre-notification takes at least 2-3 months with several pre-notification RFIs. The overall timing also depends on how quickly responses are provided to the EC.
- It usually takes the EC around one week after the parties submit the first draft notification to send their first RFI. The EC seems to be using template RFIs, as we’ve seen similar questions across multiple RFIs and cases.
- Once a formal notification is submitted (provided no issues have been detected in pre-notification), the EC typically does not ask further questions. The suspension obligation expires after the waiting period of 25 working days elapses without the EC commencing an in-depth review.[8] Note that compared to EUMR proceedings, the parties do not receive a decision but merely an administrative letter in which the EC confirms that it will not initiate an in-depth investigation.[9]
- The initial hope that the EC would accept a light touch approach in unproblematic cases to minimise the administrative burden on companies to gather relevant information has largely not materialised. Case teams frequently ask very detailed questions (including follow up questions), in particular on: (i) how the transaction is financed, (ii) reportable FFCs, and (iii) the M&A auction process (if applicable).
- Notably, the EC frequently requests information that goes beyond the reporting obligations in the notification forms (e.g. information on FFCs below the EUR1m reporting threshold). This seems disproportionate, especially in cases which do not involve FFCs in the the ‘most likely distortive’ categories.[10] At the same time, in a few cases, a general summary of the FFCs received was sufficient. This is welcome and should be the way forward for cases that do not raise any concerns.
- A high number of notifications relate to private equity funds or other financial sponsors. In this context, the EC typically asks detailed questions on limited partners (LPs), including a detailed breakdown of all LP commitments (even those without state-links) and whether any LPs hold any special rights that could give them the ability to influence the fund’s investment decisions. The context to these questions is that in a fund deal, the EC will typically consider that LP commitments by state-linked entities directly facilitate a transaction and therefore, in principle, are ‘most likely distortive’.[11] If the parties rely on the fund exemption (which limits the reporting obligations to the funds involved in the transaction), the EC will typically ask detailed questions to assess whether the requirements of the exemption are met, including on any inter-fund transactions and arrangements between funds (and in some instances also between portfolio companies of funds). Co-investors that are state-linked can be expected to be scrutinised even more closely than state-linked LPs. This level of scrutiny for financial sponsor type investments appears to be disproportionate to the type of investments and caution should be taken to keep this process manageable.
Practical tips:
This initial experience underlines the importance for businesses contemplating M&A and public procurement activity to prepare carefully for any FSR notification.
Please reach out to us if you would like assistance preparing your business for the FSR. Insofar as this has not been done yet, steps to consider include:
- conducting preliminary assessments if a FSR notification will be required for deals / public procurement procedures in the pipeline;
- conducting internal screening for financial contributions received (noting the likely difficulty in identifying these in some cases);
- setting up an internal register to track future, reportable financial contributions;
- conducting an FSR risk assessment for specific transactions / public procurement procedures, and
- in case of M&A deals, considering additional terms required in transaction documents.
To find out more about our thoughts on the key trends and developments to be aware of in the coming year, read our Global antitrust in 2024: 10 key themes report.
[1] Commission Staff Working Document, Impact Assessment, 5 May 2021, SWD(2021)99 final, p. 53 (FSR Impact Assessment)
[2] EC, L. Moscoso & I. Stoyanova, Competition FSR brief, ‘The Foreign Subsidies Regulation – 100 days since the start of the notification obligation for concentrations’, Issue 1, February 2024, p.1, available at: 22197012-2036-4b1e-8b02-0eb8b2d6e666_en (europa.eu) (FSR Brief).
[3] FSR Impact Assessment, p. 60.
[4] FSR Brief, p. 6.
[5] EC, Press Release, 16 February 2024, available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_887.
[6] FSR Brief, footnote 2.
[7] See here for a more detailed summary of the notification obligations.
[8] Art. 24(1)(a) FSR.
[9] FSR Brief, p. 2.
[10] These include certain FFCs granted to ailing undertakings, unlimited guarantees for debts or liabilities, export financing measures not in line with the respective OECD Arrangements and FFCs directly facilitating a concentration.
[11] FSR Brief, p. 5.
