(3 min read)
From 12 October 2023, new mandatory ex ante filing and standstill obligations apply to EU-related M&A deals and public tenders meeting certain thresholds.
Much like the EU merger control regime, these obligations have the potential to disrupt (and, in certain cases, block) deals that raise foreign subsidies concerns. We explain below how these will affect your business governance and strategy going forward.
What the new FSR regime does
In December 2022 and July 2023, the European Commission published the final text of the EU Foreign Subsidies Regulation (FSR) and its accompanying Implementing Regulation respectively. From 12 October 2023, undertakings need to file notifications ahead of completing M&A deals and public tenders above certain foreign subsidies and turnover thresholds. The Commission can also open investigations on its own initiative.
The FSR targets EU and non-EU-based undertakings that are active in the EU and have received direct or indirect financial contributions from a non-EU government, including the UK. It empowers the European Commission to investigate and remedy subsidies received from non-EU Member States that distort competition in the EU internal market. For companies, the FSR adds a further layer of regulatory scrutiny on top of existing merger control and foreign direct investments rules.
The scope of financial contributions that qualify as “foreign subsidies” is broad and similar to the EU concept of State aid. The FSR covers financial benefits conferred to a business or businesses on a selective basis by non-EU countries. This includes central government, any other authority at other levels of government or public or private entities whose actions can be attributed to the central government of a non-EU country.
The European Commission has been granted far-reaching powers to enforce this regime – including in relation to requesting information and imposing fines up to 10% of total turnover for failure to notify.
What you need to do
The FSR introduces a significant change in compliance risk and administrative burden for undertakings which are regularly involved in M&A transactions and public tenders. We anticipate that this will particularly affect multinational businesses and investments funds.
In order to ensure compliance with the FSR, they now need to keep track of any foreign subsidies received from non-EU governments over the 3 years preceding any relevant transaction caught by the FSR regime.
Foreign subsidies are also now information that investors will often need to include in their due diligence lists.
It is also worth bearing in mind the possible timings impacts of an FSR procedure:
- merger notifications: between 25 and 115 working days (i.e. between 5 and 23 weeks);
- public tender notifications: between 20 and 130 working days if extended (i.e. between 4 and 26 weeks); and
- ex officio investigations: up to 18 months.
To minimise the risk of transaction delays and possible fines for non-compliance, we recommend that businesses build foreign subsidy record keeping into their existing governance processes, so that the necessary information is captured on an ongoing basis and easily available.