Merger control, FDI and FSR – The triple impact

FSR – New kid on the block

With the entry into force of the EU Foreign Subsidies Regulation (FSR), designed to try to address the impact of subsidies granted by non-EU countries (including the UK), it will be critical for dealmakers to consider the FSR regime in the context of cross-border M&A, alongside merger control and foreign direct investment (FDI) regimes, as a new key piece of the regulatory jigsaw.

The FSR regime introduces a new mandatory suspensory notification for larger transactions – but the European Commission is able to investigate and require notifications for transactions below the thresholds (and examine any other allegedly distortive foreign subsidies under a general 'ex officio' tool). M&A transactions and joint ventures will have to be notified to the European Commission, and clearance obtained prior to completion, if:

• the undertaking to be acquired, one of the merging undertakings or the joint venture is established in the EU and has aggregate EU turnover of €500 million or more (including via one or more subsidiaries); and
• the aggregate amount of the foreign financial contributions received by the undertakings concerned is more than €50 million over the three years prior to notification.

Whilst the purpose of the FSR is to address (and the Commission can only take action against) foreign subsidies, the notification is not triggered by “foreign subsidies” but by “financial contributions” received from any non-EU public entity. The concept of “financial contributions” is much wider in scope and covers any transfer of financial resources from, or directed by, foreign public authorities. It includes, for example, payments for goods and services, even if the price is in line with normal market rates and therefore there is no actual “subsidy”.

Impact on timing

The key impact of these regulatory regimes is on the deal timetable. The timelines for investigation under the FSR are aligned with those under the EU Merger Regulation to allow the two processes to run in parallel, although it remains to be seen how well this will work in practice – the two clearance processes are distinct and it will not always be possible to synchronise the timings. Combined with merger control regimes in other jurisdictions and FDI screening regimes that may apply to the deal, many of which are suspensory, there are many regulatory considerations that need to be factored into the deal timetable and long stop date.

It’s all in the screening

Parties and their advisers are well used to merger control analysis where it is relatively easy to work through turnover information in order to assess in which jurisdictions to notify.

The FSR regime, which requires information about financial contributions going back over a period of three years preceding the transaction, will be much more burdensome. Given this need for extensive background work, companies most likely to be affected by the FSR regime should already be gathering the information and creating tracking systems for foreign financial contributions, as this will avoid any unnecessary delays.

For FDI, the increasingly broad scope of many of the regimes, and the global trend towards mandatory notification requirements alongside greater use of "call-in" powers, mean that it is critical to understand the scope of the target company's activities, and where they are undertaken, in order to assess at the outset whether any filings are required and whether potential national security concerns could arise. Which sectors are in scope varies between different regimes and there can also be important differences in the activities within a sector that are in scope. It is therefore essential to ask the right questions of the target at an early stage - and what those questions should be will differ from country to country.