The first 100 days of the Foreign Subsidies Regulation and the First In-Depth Investigation -Which Resulted in a Withdrawn Tender
The Foreign Subsidies Regulation (the “FSR”), which is applicable in the EU since 12 July 2023, allows the European Commission (the “Commission”) to investigate and to take action against companies that receive financial support from non-EU governments deemed to distort competition within the EU single market. Notably, the FSR requires companies to notify the Commission of certain large M&A transactions and public procurement bids which involve parties that have received financial contributions from non-EU governments. See Delphi’s article on the FSR here. In this blogpost, we discuss the Commission’s first months of enforcement of the FSR.
More M&A notifications than expected
Since 12 October 2023, companies must notify M&A transactions to the Commission if (i) the target company is established in the EU and has an EU turnover of at least EUR 500 million, and (ii) the parties received foreign financial contributions of more than EUR 50 million in the three calendar years prior to notification. In February 2024 DG COMP, published a FSR brief containing statistics on M&A notifications under the FSR. Between October 2023 and January 2024, the Commission received 53 pre-notification requests. 14 cases have been formally notified and nine reviews have been completed. So far, no cases have been subject to an in-depth investigation. The number of pre-notification discussions is remarkably high given that the Commission in its impact assessment had estimated approximately 33 M&A notifications per year. The FSR brief also provides certain clarifications regarding the details required for notifications.
New Directorate at DG COMP
Due to the unexpectedly high number of notifications, the Commission has created a new FSR Directorate with more resources to deal with not only M&A notifications but also ex-officio investigations. The FSR empowers the Commission to investigate (ex-officio) any other market situations, such as M&A transactions not meeting the thresholds, if it suspects that a foreign subsidy could lead to a distortion in the EU internal market.
More notifications than expected also under the public procurement tool
Since 12 October 2023, companies engaging in public procurement procedures exceeding EUR 250 million are mandated to notify foreign financial contributions of at least EUR 4 million from a third country during the last three years. DG GROW is responsible for the enforcement of the public procurement tool. According to a news article published by DG GROW, over 100 pre-notifications have been made so far. The number of notifications is remarkably high given that the Commission in its impact assessment had estimated approximately 36 per year.
The first in-depth investigation led to the tender being withdrawn
On 16 February 2024, the Commission launched its first in-depth investigation under the FSR. The investigation relates to a bid in a public procurement procedure launched by Bulgaria’s Ministry of Transport for the provision of electric trains. The bid was submitted by the Chinese State-owned train manufacturer CRRC. In its summary notice on the opening of the in-depth investigation, the Commission considers that there are “sufficient indications” that CRRC received distortive foreign subsidies. The Commission suspects that CRRC received EUR 1.745 billion of foreign financial contributions, while observing that CRRC’s bid was “substantially lower” than the other bid in the public procurement procedure. The Commission also indicates that CRRC had not disclosed the EUR 1.745 billion contribution in the notification form. On 26 March 2024, the Commission announced that it will close its in-depth investigation following the withdrawal by CRRC from the public procurement tender. While the Commissioner Thierry Breton rightly announced that the investigation “yielded results”, companies and practitioners will have to wait for the next in-depth investigation for a first FSR decision which will be important for the understanding of the term “distortive foreign subsidy” given that many aspects of the substantive test of the FSR are unclear.
Important for companies to start collecting information on foreign financial contributions
In order to assess whether a transaction or a public bid is notifiable under the FSR, companies which have not already undertaken this task, must collect information on all financial contributions received during the last three years. This will often be a complicated and time-consuming exercise. Companies contemplating future M&A transactions or public bids in larger procurements are therefore recommended to begin already now to design and implement systems to identify and quantify any financial contributions received from third countries. It is also possible for companies to inform the Commission about potential breaches to the FSR by their competitors.