On Jan. 12, 2023, the new EU regulation on foreign subsidies distorting the internal market entered into force (Regulation (EU) 2022/2560 - Foreign Subsidies Regulation or FSR). The new regulation introduces a new review process and may have a significant impact on M&A practice.

Here are the key aspects:

Introduction
The European Commission (Commission) and Member States have observed for some time that foreign subsidies can significantly distort the internal market. While subsidies by Member States are subject to a control regime with European (and national) state aid law, there has been no control of subsidies by third countries so far. This is now changing with the introduction of the FSR.

The new regulation also introduces new control mechanisms applicable to M&A transactions, which may be subject to a new review procedure.

The new review procedure sits alongside European and national merger control and also foreign investment control rules. This means that parallel review procedures are possible both at the Commission and at the Member States and the Commission.

Parameters of the notification obligation
The Regulation introduces new notification requirements based on turnover and foreign financial contribution thresholds.

The notification requirement for M&A transactions targets the acquisition of sole or joint control or the establishment of a full-function joint venture if (i) the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and (ii) the foreign financial contribution involved is at least €50 million.

It should be noted that there is a significant difference in the relevant standard of the two thresholds. While the turnover value only refers to the companies mentioned (in the case of an acquisition of sole control, the turnover of the acquirer is therefore irrelevant), the “financial contributions”, however, refer to the “companies involved”. This means that financial contributions, e.g. to the acquirer, are also included in the analysis.

The term “financial contributions” in Art. 3 (2) of the Regulation is very broad. In particular, it also covers measures that may not constitute a classic subsidy:

• Financial contributions” include, for example, the transfer of funds or liabilities such as capital injections, grants, loans, loan guarantees, tax incentives, compensation for operating losses, compensation for financial burdens from the public sector, debt forgiveness, debt-to-equity swaps or debt restructuring measures. Similarly, foregoing of revenue due (such as tax exemptions) or the provision or purchase of goods or services may also be covered.

• Relevant grantors include not only third country government agencies, but also all public and even private entities whose actions can be attributed to the third country.

All “financial contributions” from all third countries granted in the three years preceding the notification must be aggregated. This applies regardless of whether they are directly or only indirectly related to the transaction. The relevant “financial contributions” do not only cover benefits that flow directly to the companies involved in the transaction. Rather, all financial contributions made to the group of companies must be taken into account.

Even if, according to its own examination, there is no obligation to notify, the Commission may require notification if it suspects that the companies involved may have received subsidies from third countries.

Review Procedure
The review procedure is modeled after the European merger control procedure. We can expect to see an informal preliminary procedure to coordinate the notification, followed by two review phases, which can reach a total of up to 130 working days from the filing of a complete notification until a decision is issued.

Implications for M&A practice.
The new rules must be observed in the context of M&A transactions and represent an additional potential regulatory hurdle. A possible notification obligation must be analyzed in due course before signing. If there is an obligation to notify, the notification period must be contractually covered by closing conditions similar to with merger control provisions. At the same time, the parties’ rights to information and duties to provide information should be contractually regulated, as the compilation of the relevant information can be considerable. Rules on risk sharing in the event of a transaction being prohibited can be considered, even though at present, without any Commission’s examination practice, decisions can hardly be predicted. Last but not least, the required review periods should be reflected in the timing of the transaction and any long-stop dates.

Applicability
The new procedure will become effective July 12, 2023 and will apply to all transactions where the contract is signed on or after October 12, 2023.

Feel free to contact us for further questions.