EU Commission publishes Policy Brief on the first 100 days of its new FSR regime

The Commission has published a Policy Brief on the first 100 days since the start of the obligation to notify qualifying concentrations under the new Foreign Subsidies Regulation (FSR) regime.  The Policy Brief covers the period from 12 October 2023, when notifications became mandatory, to 20 January 2024. It provides statistics on the numbers and types of cases with which the Commission has so far engaged, drawing out general trends to date.  It also provides clarification around the information to be provided when notifying, the different types of foreign financial contributions (FFCs) and their reporting requirements and how to interpret some of the exceptions to the reporting obligations.

The statistics indicate that the number of cases expected to be notified will exceed the estimated average of 30 cases per year predicted by the Commission when it proposed the legislation.  The creation of a new Directorate K within DG Competition was recently announced, which from 1 March 2024 will be responsible for the assessment of concentration under the regime.

The Policy Brief does not deal with qualifying public procurement bids which are also subject to a notification obligation.  Interestingly, the Commission's first detailed investigation under the FSR regime, launched on 16 February 2024, relates to the potentially market distortive role of foreign subsidies in a public procurement case. It follows notification to the Commission by CRRC Qingdao Sifang Locomotive Co, a subsidiary of Chinese state-owned train manufacturer CRRC Corporation, in relation to a public procurement procedure launched by the Ministry of Transport and Communications in Bulgaria.  A similar Policy Brief dealing with the public procurement side of the regime would therefore also be welcome.

The FSR regime – a brief summary

The FSR creates a new regulatory regime for the Commission to address subsidies granted by non-EU countries. It is intended to “level the playing field” on the EU internal market and to close the regulatory gap for non-EU subsidies which are not subject to the same strict rules as subsidies granted by EU Member States under EU State aid rules.

The FSR regime applies to subsidies granted by non-EU countries to businesses engaged in economic activity in the EU internal market. It creates three new subsidy control tools for the Commission to address foreign subsidies: a concentrations notification tool, a public procurement notification tool and a general ex officio tool, under which the Commission will have wide-ranging powers to impose redressive measures, prohibit concentrations or the award of public procurement contracts, and require completed concentrations to be unwound.

It is worth noting that there are two key concepts for the purpose of the application of the subsidy control tools: foreign subsidy and foreign financial contribution. Whereas the purpose of the FSR is to address foreign subsidies and the Commission can only take action against foreign subsidies, the notification tools are not triggered by “foreign subsidies” but by “financial contributions”. The concept of “financial contributions” is much wider in scope and covers any transfer of financial resources from or directed by foreign public authorities.

Concentrations need to be notified where:

• The undertaking to be acquired, at least one of the merging undertakings (in the case of a legal merger), or the joint venture, is established in the EU and has aggregate EU turnover of €500 million or more (including turnover generated by undertakings controlled by the undertaking in question); and
• The aggregate amount of the foreign financial contributions received by the undertakings concerned is more than €50 million over the past three years.

Notifiable concentrations must be notified to the Commission prior to their completion and cannot be completed before the relevant timeframes for the Commission’s investigation have elapsed. Failure to notify a transaction or breach of the standstill obligation could in principle result in fines of up to 10% of the relevant undertakings’ aggregate turnover in the preceding financial year.

Under the public procurement tool, bidders need to notify all foreign financial contributions where:

• The estimated value of the procurement at issue is €250 million or more; and
• The bidder group has received financial contributions amounting to at least €4 million per third country over the three years prior to notification.

The Implementing Regulation contains the detailed arrangements for the conduct of the Commission’s proceedings under the FSR and includes the notification forms for concentrations and public procurements, with detailed guidance on the information and supporting documents that will need to be provided.  Detailed information and supporting documents will only need to be provided in relation to foreign financial contributions that fall within the specific categories considered as being most distortive under the FSR. For other types of foreign financial contributions, only summary, aggregated information needs to be provided.  The Implementing Regulation also specifies certain types of financial contributions that are excluded from notification.

Overview of the cases during the first 100 days

During the period under review the Commission received case team allocation requests and engaged in pre-notification discussions in 53 cases, of which 14 have been notified and 9 went to an initial investigation.  So far, no concentrations have been referred for a detailed investigation.

Out of the 53 cases 33 involved cross-border EU to non-EU transactions, 7 involved a cross-border transaction within the EU, 7 involved a cross-border transactions outside the EU, and 6 involved  transactions within the same EU Member State.  The majority of these cases (42 out of the 53 pre-notified cases) were also subject to a parallel assessment under the EU Merger Regulation and 5 of the cases were subject to national merger control procedures.  About a third of the cases involved an investment fund as a notifying party.

The Commission has so far not identified any cases where there were sufficient indications to warrant the opening of a detailed, second phase investigation.  Unlike under the EU Merger Regulation, the FSR does not provide for the publication of notifications or of the closing of investigations in the preliminary review stage.  Where the Commission opens a detailed investigation, it will publish a summary notice of its final decision in the Official Journal.

The most common types of FFCs assessed so far relate to the sources of financing of the notified transactions, such as capital injections and equity contributions and loans from financial institutions which could be considered to be linked to a third country.  Other frequently recurring types of FFC so far include state guarantees, direct grants for specific projects and tax benefits (in particular for R&D costs and investment projects).

Notification obligation and information to be provided

Both the notification obligation and the information to be reported are based on FFCs, not on foreign subsidies, and the fact that some (or even all) of the relevant FFCs have been provided on market terms and do not confer a benefit, is irrelevant to determine whether a concentration should be notified.

The notification threshold under the FSR is set at €50 million of FFCs granted to the parties to the transaction during the three years prior to notification, and the Implementing Regulation introduces an aggregate threshold of €45 million of FFCs per third country to report FFCs granted to the notifying party.

A common question raised with the Commission in pre-notification discussions is which FFCs have to be considered for the notification threshold and which for the reporting threshold per country under the notification form.  The Policy Brief makes it clear that all FFCs received from third countries, in the three years preceding conclusion of the transaction (as set out in Article 20(3)(b) of the FSR), including FFCs excluded from reporting obligations, must be taken into account to determine whether the notification threshold is met.  In order to determine whether the reporting threshold of €45 million per third country is met, the FFCs that are excluded from the reporting obligation do not need to be taken into account.

As a result of the difference in the calculation for both thresholds, there have been instances where the notifying parties concluded that they did meet the notification threshold but that none of the  FFCs received needed to be reported.  In such cases the notifying parties are expected to explain in their notification why the €50 million notification threshold is met and to set out the reasons for not reporting any FFCs.  Failure to do so will result in requests for further information from the case team which may lead to delays in the review process.

Different types of foreign financial contributions and reporting obligations

Form FS-CO, the notification form for concentrations under the FSR regime, requires detailed information about FFCs that are most likely to distort the internal market (listed in Article 5 FSR) should the FFC qualify as a subsidy.  The parties can always explain in the notification form why such FFCs do not qualify as subsidies.  For other types of FFCs, only summary, aggregated information needs to be provided in a table format.

If in doubt about the correct qualification of a subsidy the parties are encouraged to discuss this with the case team during pre-notification.  The Policy Brief makes it clear that the reporting of an FFC listed in Article 5 FSR as potentially falling under one of the most distortive categories does not prejudice whether the FFC constitutes a subsidy and whether it is distortive.  It is simply a matter of correctly delineating the type of FFC received.

Categorisation of the FFCs also affects the undertakings to be considered.  Information on FFCs that do not fall under Article 5 FSR does not have to be provided in respect of targets or joint ventures.

The Policy Brief also provides some further guidance on the categories of FFCs most likely to distort the internal market.  In the case of bail-outs without an adequate restructuring plan, the assessment of whether an entity is "ailing" should be done by legal entity, not by undertaking. Therefore if one of the legal entities in the group of the acquiring undertaking meets the conditions to be considered ailing, this should be disclosed here, even if overall the group as such is not in financial difficulties.

For FFCs under the category of subsidies directly facilitating the concentration, the parties should disclose all FFCs used to finance the transaction or from which the transaction benefits.  The intention of the granting country to facilitate a specific transaction is not decisive here.  Therefore, FFCs granted by third countries as limited partner investments in an acquiring investment fund should in principle be reported under this category, as the purpose of the investments is typically to provide resources which are used by the funds to make the acquisitions.  The notifying party will have to explain in the notification whether or not these investments have been made at market conditions, and provide information on the conditions attached to the investments.

Exceptions to the reporting obligations

Certain FFCs are excluded from the reporting obligations.  These are listed in points 6 and 7 of the Commission's Instructions to provide information on FFCs that do not qualify as most likely to be distortive (Table 1 to Form FS-CO).

The Policy Brief makes it clear that, as these are exceptions to the general rule, they need to be interpreted narrowly.  For example, the list of tax measures in point 6 (Generally applicable tax / social security contributions deferrals, tax amnesties, tax holidays, and normal depreciation and loss carry forward rules) is exhaustive and any other tax measures should be reported, regardless of whether the parties consider them to be of general or limited application.  Also, where an FFC is covered by an exception, the case team may still ask the parties to substantiate why certain measures qualify as exceptions and to disclose these FFCs if necessary for the assessment of the transaction.

It is up to the parties to self-assess whether an exception applies to their specific circumstances.  However, for the exception set out in point 7 in relation to acquisitions by an investment fund, where FFCs received by other funds within the group can be excluded in certain circumstances, the parties will need to claim that the conditions for the exception are met and substantiate why.  The Policy Brief expands on the conditions to be met in order to demonstrate that a possible cross-subsidisation from other funds to the acquiring fund is either unlikely or that there are mechanisms in place to minimise this risk.

Conclusion

The Policy Brief concludes that the Commission as well as the notifying parties are gaining experience with the new regime and from 1 March 2024 the review of concentrations under the FSR will be carried out by the new Directorate K in DG Competition, which was specifically created to deal with the enforcement of the new regime.

In order to ensure a timely and efficient processing of their notifications, parties should make sure they provide complete and correct information requested in the Form FS-CO.  This includes the correct identification of reportable FFCs, including those that may fall within the categories of most likely to be distortive and a careful interpretation of the exceptions.  When in doubt and to avoid any unnecessary delays, parties should approach the case team as soon as possible.