Did you know that the Foreign Subsidies Regulation (“FSR”) becomes applicable in July? The FSR will become applicable in two steps – the FSR becomes generally applicable on 12 July 2023, and on 12 October 2023 the notification obligations regarding concentrations and public procurements above certain thresholds starts to apply.
Key implications and findings of the FSR
The FSR aims to combat distortions in the internal market that are caused by subsidies granted by third countries. Until now, foreign companies may have been able to carry out acquisitions or make lofty investments in the EU with a sovereign financial backing whereas the EU Member States are bound by the State aid rules – which may result in a potentially tilted playing field between the homegrown undertakings and the others having a foreign sovereign backing.
As such, the FSR creates two new notification obligations to the European Commission, one for M&A transactions and another for large public procurement tenders. Failing to notify may lead to significant fines.
The FSR also gives the Commission ex officio investigatory powers, and a wide range of enforcement tools. Finally, the FRS has also triggered some of the national legislatures that are now creating some of the enforcement and investigatory frameworks needed for the proper functioning of the FSR.
Under the draft government bill, the Finnish Competition and Consumer Authority (“FCCA”) would act as the Commission’s contact point in Finland. This entails that the FCCA would also have the right to receive information from other public agencies and other contracting authorities in cases relating to foreign subsidies. Most importantly, the FCCA would be empowered to assist the Commission in investigations or conclude investigations on its behalf. The draft government bill is currently on a consultation round.
New concepts introduced
The FSR distinguishes between three key concepts: foreign subsidies, financial contributions and distortion.
- A foreign subsidy is at hand when a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries.
- In order to understand a foreign subsidy, one must understand what a financial contribution is. These are essentially any kinds of measures the origin of which can be traced back to a third state. It is important to note that instead of the legal form of the entity granting the financial contributions, the entity’s general links to the third state are considered decisive in this context.
Moreover, the FSR does not include an exhaustive definition of financial contributions, but it provides some examples instead, e.g. transfers of funds and foregoing revenue. As such, the scope of measures that may be deemed to constitute financial contributions is wide and likely to encompass a variety of measures.
- A distortion is at hand when a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market.
This is effectively the crux in the Commission’s analysis whereby it decides if redressive measures are needed. The assessment is a balancing exercise where the Commission analyses multiple aspects of the matter, e.g. the amount or the nature of the foreign subsidy. It is also possible that the distortion entails positive effects in the internal market, and as such the Commission can take these into account in its balancing exercise, e.g. when deciding on the need for redressive measures.
The FSR provides an exemplary blacklist of foreign subsidies that are most likely to distort the internal market, such as granting a foreign subsidy to an ailing undertaking or to facilitate a merger. It is important to note that whilst e.g. in State aid, all aid is prohibited unless it is exempted, the foreign subsidies are by default not prohibited, but only when they cause, or are liable to cause, a distortion in the internal market.
Ex officio review
The FSR gives the Commission the power to conduct investigations on its own initiative regarding allegedly distortive foreign subsidies. In contrast to the two notification regimes outlined below, this would cover other types of market situations such as greenfield investments or concentrations and public procurements below the notification thresholds.
The process resembles the Commission’s other administrative processes whereby it first carries out a preliminary view as to whether an undertaking has been granted a foreign subsidy that distorts the internal market.
- If the answer is yes, the Commission may open an in-depth investigation.
- If the distortion persists and it is not remedied by the subsidies’ positive effects, the Commission may impose redressive measures, or accept commitments. These may include e.g. refraining from certain investments, divestments, undoing a concentration (e.g. a merger) or a repayment of the foreign subsidy.
The Commission’s investigatory and enforcement tools are coupled with the ability to impose fines and periodic penalty payments in the event the undertaking subject to investigation e.g. violates the provisions governing the investigation process or deviates from its commitments.
Relating to the Commission’s investigatory powers, the FCCA would receive the power to conduct FSR-related investigations in Finland on the Commission’s behalf. Moreover, the FCCA is set to act as the national contact point for the Commission.
Mergers and acquisitions
Certain concentrations in which the parties have foreign financial backing need to be notified to the Commission for a mandatory ex ante review. The concentration must be notified, if
- at least one of the parties (or the to-be-established joint venture) is established within the EU and generates EUR 500 million turnover, and
- the parties to the transaction have received combined foreign financial contributions exceeding EUR 50 million during the three years prior to the conclusion of the agreement, the announcement of the bid, or the acquisition.
Notably, the Commission can request for concentrations that do not meet these requirements to be notified, as well. The process resembles the EU’s merger control review, as e.g. the time limits are streamlined with those of the Commission’s merger control, and gun-jumping provisions apply – i.e. a notifiable concentration must not be implemented before the Commission’s approval. Essentially, what the Commission will be looking at in its review is whether the subsidies in a concentration distort the internal market.
A fine may also be imposed for failing to notify a transaction to the Commission, the violation of which may result in a fine, amounting up to 10% of the undertaking’s aggregate turnover in the preceding financial year.
Under the FSR, bidders participating in a public procurement process may need to notify or declare their received foreign financial contributions. An economic operator must notify the contracting authority or entity of the received foreign financial contributions, if
- the estimated value of the procurement is equal to or greater than EUR 250 million, and
- the economic operator, including its subsidiaries, holding companies, and where applicable, main subcontractors and suppliers, have received foreign financial contributions equal to or exceeding EUR 4 million per third country during the past three years prior to the notification.
- The notification obligation applies also, if the procurement is divided into lots, and the procurement’s value exceeds EUR 250 million, and the value of all the lots to which the bidder applies, is equal to or greater than EUR 125 million.
The bidder may need to either notify the contracting authority of all the foreign contributions received, or the bidder must declare a listing of all foreign contributions received and confirm that they are not notifiable.
The notification or declaration is then transferred from the contracting authority to the Commission. Importantly, the bidder must list all foreign financial contributions received, and even though the contributions would fall under the EUR 4 million threshold, it is still required to submit a declaration of the contributions.
Here, as well as in mergers, the Commission has the power to request for the bidder to notify the suspected foreign financial contributions, even though such foreign financial contributions would not need to be otherwise notified. This is also possible even though the value of the procurement would fall under the above thresholds.
The Commission’s analysis on the existence of a distortion in the context of the public procurement entails effectively discerning whether the economic operator is able to submit a tender that is unduly advantageous as a result of a foreign financial backing.
Similarly to the obligation to notify concentrations, the failure to notify financial contributions in connection with a public procurement process may carry a penalty of a fine.
Borenius lawyers named below are more than happy to answer any questions you may have regarding this new FSR. Please do not hesitate to contact us for more information.