First Phase 2 M&A investigation launched under the EU Foreign Subsidies Regulation

Background

Under the Foreign Subsidies Regulation or "FSR" (for more background see our briefings here, here and here) M&A transactions need to be notified to and assessed by the European Commission ("Commission") before they can be implemented, where:

• (i) the undertaking to be acquired, one of the merging undertakings (in the case of a true merger), or the joint venture, is established in the EU and has aggregate EU turnover of €500 million or more; and
• (ii) the aggregate amount of the "foreign financial contributions" (essentially financial transfers from non-EU States / public authorities) received by the undertakings concerned is more than €50 million over the three past years.

According to the latest publicly available figures from February this year the Commission received case team allocation requests and engaged in pre-notification discussions in 53 cases, of which 14 were formally notified and 9 of which had been approved at that point. We understand that the Commission has since examined and approved a significant number of cases in the preliminary review phase, or Phase 1.  

Now, the Commission has opened its first in-depth investigation, or Phase 2 investigation.

M&A transaction that is subject to the investigation

The investigation relates to the proposed acquisition by Emirates Telecommunications Group Company PJSC ("e&") of sole control over PPF Telecom Group B.V. ("PPF"). PPF runs telecom operations (telecom service providers and underlying infrastructure) in Bulgaria, Hungary, Serbia and Slovakia.

e& formally notified the proposed transaction to the Commission on 26 April 2024 under the FSR. On 10 June 2024, the Commission opened a Phase 2 investigation on the basis that it considered there were sufficient indications that e& may have been granted foreign subsidies that distort the internal market.

Alleged foreign subsidies that are being assessed

According to the Commission's press release and summary notice, the Commission is assessing the following measures as potential foreign subsidies within the scope of the FSR:

• An alleged unlimited guarantee, granted by the UAE, which derives from the application of UAE Bankruptcy Law. The Commission asserts that this measure is liable to enable e& to obtain more favourable financial terms in its negotiations with financial institutions and that this has materialised in the three years preceding the transaction.
• A term loan, granted in November 2022 by a syndicate of 5 banks, whose actions the Commission considers can be attributed to the UAE. The Commission claims there are sufficient indications that the loan was not obtained under normal market conditions. According to the Commission, the term loan is being used by e& to finance the transaction.

In addition, the Commission notes that it has identified other measures that may qualify as foreign subsidies, notably in relation to contracts awarded to e&. The Commission will further assess these in the course of the investigation.

Distortion of the EU internal market

Based on the information available to it at this stage, the Commission takes the preliminary view that the notified transaction involves the specific categories of foreign subsidies under Article 5 FSR that are considered as being "most likely to distort the internal market". This applies to the alleged unlimited guarantee and the term loan, which the Commission considers may have directly facilitated the transaction.

The Commission also takes the preliminary view that the alleged foreign subsidies could distort competition in the internal market in two ways:

• By improving e&’s competitive position in the acquisition process. The Commission will further assess whether those alleged foreign subsidies have had actual or potential negative effects on the acquisition process, in particular in view of the existence of possible other parties interested in the acquisition of PFF, or whether e& would have been able to perform the acquisition at the same conditions absent the alleged foreign subsidies.
• By improving the competitive position of the new merged entity following the transaction, by allowing that financially integrated entity to raise financing for its EU activities at preferential terms. The Commission will further assess whether the transaction would allow the new merged entity access to subsidised services.

The Commission will therefore be assessing not only the impact of the alleged subsidies on the acquisition process, i.e. potential competitive distortions in the market for the acquisition, but also potential competitive distortions on the underlying markets on which the undertakings concerned operate.  It was not entirely clear that this second category of distortion would be within the scope of the Commission's assessment under the FSR and it remains to be seen how the Commission will approach this analysis, including how it will differentiate its assessment from the kind of competition analysis typically done as part of merger control investigations under the EU Merger Regulation.   

Next steps

Interested third parties now have a limited timeframe, until 5 July, to provide written comments in relation to the investigation. The timeframe for the complete investigation ends, in principle, on 15 October 2024.

In terms of the Commission's assessment, if the Commission establishes the existence of distortive foreign subsidies, it should balance the negative effects of those subsidies in terms of distortion against any relevant positive effects of those subsidies ("balancing test") in order to consider appropriate remedies, i.e. commitments. It is also possible, in principle, that the Commission could reach the view that no commitments are required altogether as a result of the balancing test.

With respect to the potential commitments, the FSR includes a non-exhaustive and illustrative list of structural or non-structural remedies (Article 7 FSR). If the notifying parties do not propose effective commitments to remedy the distortion, the Commission can also prohibit the transaction.

Comment

The case is a stark reminder that the FSR regime is fully operational and the Commission is enforcing it vigorously.  Companies that are involved in M&A need to take the FSR into account when devising their filing strategy to make sure that the FSR process does not impact the corporate timetable negatively and, even more importantly, that it does not affect deliverability of the deal either because of onerous remedies or an ultimate prohibition of the deal.