The EU’s new Foreign Subsidies Regulation (FSR) has kicked in, adding a further layer of regulatory complexity to large European investments. The new regime, which took effect on July 12, seeks to police subsidies granted by non-EU country governments, and stop them from tilting the competitive balance in the EU’s internal market. There are four key points that investors pursuing a merger and acquisition (M&A) deal or joint venture in the EU must bear in mind to ensure they comply with the FSR. 

First, when the target or joint venture has EU turnover exceeding €500m, the investor now needs to obtain further clearance. This is in addition to merger control and the ever burgeoning filing requirements for foreign direct investment screening. Further, the broad disclosure requirements involved in an FSR filing mean businesses must begin preparing for this well before a deal is in contemplation. 

Substantial administrative burden 

The second point for investors is that when such clearance is required, they must provide the European Commission with details of the so-called ‘financial contributions’ that they’ve received. This is a broad concept that includes financial support in the form of subsidies, along with financial transactions made on normal market terms during the three years preceding the signing of the deal. 

Further complexity is due to the scope of counterparties covered. The FSR covers not only financial contributions received from non-EU governments and public authorities, but also certain public and private entities that may have been directed by a non-EU government.

Compliance will be a challenge as businesses generally do not have a system that identifies and captures this bespoke new concept. Companies will, therefore, need to establish a proportionate strategy to identify relevant transactions within their corporate group, to enable a timely preparation of the submission and respond swiftly to subsequent information requests to minimise deal delays. 

Deal strategy should factor in subsidies received 

Thirdly, once a notification is made, the Commission will zoom in on any financial contributions that risk distorting competition in the EU. While most are not expected to raise any such concerns, the Commission has broad powers to deploy should it identify problematic subsidies. This includes the ability to require the subsidy to be repaid, the divestment of the subsidised business, or block the deal.

To assess the risk of Commission intervention, companies will need to review subsidies received from non-EU countries and whether they could raise concerns. These could impact future M&A deals, including by affecting the business’s attractiveness as a bidder or co-investor. Alleged subsidies can also trigger complaints by competitors. 

Deals where a party or co-investor has close relationships with non-EU governments are more likely to end up in the spotlight. Similarly, deals funded by non-EU governments — including by banks with which they have close links — may draw attention. 

Op-eds you may have missed:

• Making sense of the EU's foreign subsidies regulation
• Is China still worth the risk after expanded anti-espionage law?
• Sustainability accounting standards: a game-changer for global investment

China warnings

While the FSR is jurisdictionally agnostic, the Commission has indicated that its impact may be more acute for investors with links to certain countries. To this end, EU competition commissioner Margrethe Vestager recently stated that “when China gives subsidies to companies active in our single market, that amounts to an unfair advantage. Our new FSR is designed to address this”. 

Meanwhile in January, commission president Ursula von der Leyen noted that “China heavily subsidises its industry and restricts access to its market for EU companies … We need to focus on de-risking, rather than decoupling. This means using all our tools to deal with unfair practices, including the new FSR”. 

Beware deal timelines  

The final point that investors must consider is that any FSR notification risks pushing back deal timetables, as closing will not be permitted until the transaction has received approval from the Commission. With the Commission’s scrutiny of deals getting ever more intensive, investors need to factor in — and be prepared for — the added regulatory hurdle presented by the FSR to ensure transactions proceed smoothly to clearance, closing and beyond. 

This article was written by Natura Gràcia and Neil Hoolihan, partners in Linklaters’s antitrust and foreign investment practice, and Ina Lunneryd who is a counsel in the same practice.