European investigations into companies receiving foreign subsidies

Last January, the Foreign Subsidies Regulation (FSR) on foreign subsidies that distort the internal market entered into force. This regulation, which applies to all companies that receive foreign subsidies and carry out economic activities within the European Union, aims to contribute to the proper functioning of the internal market by addressing distortions that may arise as a result of such subsidies.

As from 12 July 2023 the European Commission now has the authority to initiate ex officio investigations into mergers and procurement processes, which will allow it to identify and address potential problems that may be caused by foreign subsidies in the European internal market granted since 12 July 2018. In this regard, the wide-ranging powers granted to the Commission to gather the market information it deems necessary include information injunctions, inspections and market investigations in specific sectors and two notification-based instruments. However, it will not be until 12 October next that mergers and bids in public procurement processes will have to be notified.

In line with the above, the FSR establishes the mandatory notification of concentrations that cumulatively meet the following requirements:

• at least one of the merging companies, the acquired company or the joint venture must be established in the EU and generate a total turnover in the EU of at least €500 million, and
• the following undertakings must have obtained from third countries in the three financial years preceding the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest, being combined financial contributions exceeding €50M: (i) in case of an acquisition, from the acquirer(s) and the target; (ii) in case of merger, from the merging companies; and (iii) in case of joint venture, from those creating the joint venture and the joint venture itself.

But when does the EU consider that distortions of the internal market can be caused? Certainly, from a reading of the regulation it is clear that it is causing a distortion when subsidies are used to finance all or part of mergers involving changes in control of EU companies and when contracts are awarded in the EU to companies benefiting from such subsidies. Thus, in M&A transactions, together with the merger control and FDI analysis, an analysis of whether the transaction should be subject to the condition precedent of Commission clearance under the FSR will have to be carried out, which will affect the timing and costs of the transaction. On the other hand, companies wishing to participate in future public procurement procedures will also have to start analyzing whether they have received sub-grants affected by the new rule.

The regulation has a direct impact on mergers and acquisitions operations and public procurement processes. We therefore advise companies to timely carry out the relevant analyses to avoid unpleasant surprises!

If you want to know more, please feel free to contact us.