EU Foreign Subsidies Regulation: Key takeaways for private capital

Since 12 October 2023, the EU Foreign Subsidies Regulation (FSR) has required certain large transactions to be notified to the EU Commission to assess whether the transaction involves a subsidy granted by a non-EU country that distorts the EU internal market. Combined with notification requirements for potentially subsidised public procurement bids and wide-ranging ex-officio investigation powers, this 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).

While the FSR regime is still in its infancy, it is a critical piece of the regulatory jigsaw for private capital transactions, alongside merger control and foreign direct investment regulation. This update summarises the key takeaways for the private capital community to date, focussing on its application to transactions.

Notifiable transactions under the FSR – A brief summary

A transaction must be notified under the FSR where two cumulative conditions are met:

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

The EU Commission can also require notification of a below-threshold transaction where it suspects that the parties have benefitted from foreign subsidies during the past three years.

If the notification obligation is triggered, a significant amount of information must be provided. The transaction also cannot be completed until the relevant timeframes for the investigation have elapsed – at least 25 working days, and potentially much longer (115 working days+) if an in-depth investigation is initiated. Failure to notify a transaction or breach of the standstill obligation may result in fines of up to 10% of the relevant undertakings' aggregate turnover. If the EU Commission ultimately concludes that the transaction involves a foreign subsidy that distorts the EU internal market, it may prohibit (or unwind) the transaction if satisfactory remedies cannot be agreed.

Important distinction between "foreign subsidies" and "foreign financial contributions" (FFCs)

Two distinct concepts are key to the application of the FSR:

• Foreign subsidy: A financial contribution from or directed by foreign public authorities which is selective and confers a benefit on an undertaking engaged in economic activity on the EU internal market; and
• Foreign financial contribution: a much wider concept, which covers any transfer of financial resources from or directed by foreign public authorities, even if the transfer is on market terms and therefore does not confer a benefit, or if it is generally available.

The EU Commission can only take action under the FSR against foreign subsidies that distort the EU internal market. However, the notification threshold for transactions is based on FFCs not foreign subsidies (and it is anticipated that the €50 million FFCs notification threshold will be easily exceeded by many investment funds).

Interesting trends for private capital emerging from the first notified cases

A Policy Brief published by the EU Commission in February 2024 identified a number of interesting trends in the first notified cases. Of particular relevance to private capital:

• around one-third of the 53 cases in which the EU Commission received a case team allocation request and engaged in pre-notification discussions involved an investment fund as a notifying party;  
• whilst the majority of cases (33) involved a cross-border EU-non-EU transaction, the EU Commission also considered cross-border transactions within the EU (seven cases), cross-border transactions outside the EU (seven cases), and transactions within the same EU Member State (six cases);
• most cases considered were also the subject of parallel assessment under the EU Merger Regulation and/or foreign direct investment screening in one or more EU Member States;
• only 14 of the 53 cases in which the EU Commission engaged in pre-notification discussions were subsequently formally notified, of which nine were fully assessed and none resulted in the opening of an in-depth investigation.

Key takeaways for the private capital community

• Pre-emptive due diligence should be considered to gather detailed information regarding any FFCs granted by third countries as LP investments in funds. Some funds are adopting an approach where they update their FFC information every six or 12 months on an ongoing basis, rather than at the time of each investment requiring a FSR notification.
• Deal structure and proper qualification of a transaction as an acquisition, legal merger or creation of a joint venture may be crucial to determining whether the FSR notification thresholds are met (and what type of FFCs need to be reported for each party).  
• Deal documentation should include relevant conditions precedent and warranties, and specific questions relating to the potential application of the FSR regime should be included in due diligence questionnaires.
• Where both the turnover and FFC notification thresholds are met, careful consideration should be given to what information needs to be included in the notification form regarding FFCs received by the parties to the transaction – not all FFCs need to be reported:
  • Detailed information relating to all FFCs > €1 million granted by third countries as LP investments in an acquiring fund should in principle be included, as these may fall within the category of subsidies most likely to be distortive (on the basis that they may directly facilitate the concentration).
  • This will include explaining whether those investments have been made on market conditions and details of conditions attached to those investments (eg, LP rights relating to decisions on investments). However, the EU Commission has on occasion accepted, without making further enquiries, a more general description of LP investments eg, identification of the third country and general description of the LP rather than requesting more detail. It is also possible to request waivers from the case team from providing more detailed information.
  • The relevant undertaking will usually be formed by the investment company and all the funds it manages, as well as all the portfolio companies controlled by those funds.
  • However, when reporting FFCs which fall outside the categories most likely to distort the internal market, there is a key exception for investment funds which allows parties to limit the information they provide to FFCs granted to the acquiring fund and the portfolio companies of that fund. FFCs granted to other funds and their portfolio companies do not need to be included, provided certain conditions relating to the risk of cross-subsidisation are met.
• Publicity under the FSR is limited compared to EU merger control, with no routine publication of notifications received and no formal clearance decision at the end of the preliminary review phase (the lapsing of the standstill period allows parties to proceed with the transaction). However, if an in-depth investigation is initiated, a formal decision must be adopted, and a summary notice including the main elements of the decision must be published.
• The EU Commission has not yet opened an in-depth investigation into a concentration under the FSR, but it is clearly committed to enforcement of the new regime: it has already opened three investigations into potentially distortive subsidies granted in the context of public procurement procedures and recently announced two ex officio (i.e. own initiative) investigations into suspected distortive foreign subsidies, one of which saw it use its dawn raid powers under the FSR for the first time.

This article was originally published in the May edition of the BVCA Policy & Technical Bulletin.