More than one year after the EU’s Foreign Subsidies Regulation (FSR) started to apply, many elements of the EC’s substantive assessment still remain unclear. On 26 July 2024, the European Commission (EC) published a Staff Working Document (SWD; available here) that sheds some light on the EC’s substantive test under the FSR.
While these clarifications are not binding, the SWD provides a useful roadmap on how the EC will conduct an FSR assessment, which is largely also in line with our experience of dealing with the EC in FSR investigations. The SWD will help businesses better calibrate their FSR risk assessment of an M&A transaction or public procurement procedure.
Key takeaways for businesses include:
1. The substantive test differs between the M&A and public procurement tool
The EC clarified that its substantive assessment differs between the M&A and public procurement tool. While the EC’s assessment in a public procurement investigation will be limited to the bidding process, in an M&A investigation, in addition to reviewing distortions to the bidding process, the EC will also consider distortions in the markets the merged entity will be active in.
- M&A investigations: The EC confirmed that it assesses market distortions on (i) the acquisition process, i.e. if a foreign subsidy provided an advantage to the acquirer which allowed it to outbid potential competitors and (ii) the relevant product market in respect to the merged entity’s activities. The EC also highlighted that its assessment under the FSR differs from its assessment under the EUMR and that the results of the two processes might differ.
- Public procurement investigations: By contrast, in an FSR public procurement investigation, the EC’s assessment is limited to the public procedure in question and entails two steps. The EC will assess: (i) if the tender submitted by the subsidised economic operator (i.e. not the whole group to which it belongs) is unduly advantageous in relation to the works, supplies or services concerned and (ii) if there is a link between the granting of the subsidy and the tender, demonstrating a caused or risked distortion in a public procurement procedure.
Until the Union courts confirm or reject this approach, businesses should reflect these differences in their initial FSR risk assessments and should consider FSR risks separately for each public procurement procedure and M&A transaction.
2. Unlimited guarantees in the EC’s spotlight
The SWD also draws attention to one type of ‘most likely distortive’ foreign subsidies: unlimited guarantees. Such special mention might not come as a surprise given that the only in-depth investigation under the M&A tool so far focuses on an unlimited guarantee that the telecommunications group e& would have allegedly received from the United Arab Emirates.
The SWD clarifies that unlimited guarantees can take many forms, including an exemption from ordinary bankruptcy law, such as in cases where “the State might intervene in case of illiquidity”.
Such guarantees are considered problematic if they enable the acquirer to obtain more favourable funding terms because creditors do not need to fear the acquirer’s insolvency. The EC is also concerned about such unlimited guarantees extending to the internal market if they apply to European targets after the completion of a deal.
3. No presumption of distortion under the FSR
The EC confirmed that under the FSR there is no presumption that a foreign subsidy distorts the internal market. This differs from the assessment under EU state aid law, where the EC will presume a distortion of competition if an EU Member State measure confers a selective advantage on the beneficiary.
Instead, the EC will in a first step assess if there is a prima facie link between the foreign subsidy and the beneficiary’s activity in the EU. We expect this step to be of significant practical relevance and reduce the FSR risk profile of many multinational companies, who may have received large amounts of foreign subsidies, most of which are unconnected to the internal market. However, as the EC noted that it will also consider if subsidies can be used to ‘cross-subsidise activities in the internal market’ (i.e. that a subsidy unrelated to the internal market indirectly benefits activities in the internal market), it remains to be seen whether a defence relying on limited effects on the internal market will be viable – in our experience so far, some case teams have been reluctant to rule out a risk of cross-subsidisation.
In a second step, the EC will assess whether the foreign subsidy improves the competitive position of the beneficiary, thus actually or potentially affecting competition in the internal market.
The EC’s further assessment will depend on whether a foreign subsidy falls within the categories of Article 5 FSR and therefore considered ‘most likely distortive’ or not:
- Subsidies not falling under Article 5 FSR: The EC will on a case-by-case basis using the indicators listed in the FSR (Article 4 (1) FSR) have to assess whether a foreign subsidy distorts the internal market.
- Subsidies falling under Article 5 FSR: The EC confirmed that “it will normally” consider that a subsidy that falls within scope of Article 5 FSR distorts the internal market. However, beneficiaries will always have the opportunity to show that the foreign subsidy in question, even if falling under one of the categories of Article 5 FSR, would not distort the internal market in the specific circumstances of the case.
The EC will then, in a third step, have to balance any negative effects on the internal market with possible positive effects, although the EC noted that it has not yet gathered substantial experience on how this balancing test would work in practice. The main test thus remains vague.
