Antitrus Law News – July 2023

Adoption of the Implementing Regulation relating to the enforcement of the Foreign Subsidies Regulation

On the 10th of July, the European Commission (the “Commission”) published the final version of the implementing regulation (the “Implementing Regulation”) on detailed arrangements for the conduct of proceedings by the Commission pursuant to EU Regulation 2022/2560 on foreign subsidies distorting the internal market (the “FSR”).

Effective since the 12th of January 2023 (please see our previous newsletter), the FSR seeks to address distortions of competition resulting from subsidies granted by non-EU countries to undertakings operating on the internal market. It therefore introduced new tools enabling the Commission to closely monitor such subsidies:

• First, a prior notification mechanism applicable to certain mergers and public procurement contracts (which will both become applicable as of the 12th of October 2023);
• Second, a general ex-officio investigation tool designed to monitor all other market situations (applicable since the 12th of July).

The Implementing Regulation aims at specifying the practical arrangements for operating and enforcing these new tools, notably the above mentioned notification mechanisms.

I. Foreign Subsidies Regulation in Merger Operations

Applicable notification thresholds under the FSR

As a reminder, the FSR stipulates that all mergers must be notified if:

(i) the target, the merging undertakings or the joint venture is established in the EU and generates an aggregate EU turnover of at least EUR 500 million; and

(ii) the undertakings involved in the transaction (i.e., the target and its acquirer(s) or the parties to the merger or the joint venture and its parent undertakings) have been granted a combined foreign financial contribution (“FFC”) of at least EUR 50 million over the previous three years.

The Implementing Regulation does not modify these thresholds nor does it provide any additional elements regarding the way in which FFC amounts should be calculated. All financing emanating from a non-EU country, whatever its form (including purchases and sales carried out at market conditions), must therefore be taken into account to determine whether the second threshold mentioned above has been reached. When these thresholds are met, the relevant merger transaction must be notified to the Commission before the transaction is carried out. Such notification will have a suspensive effect.

This notification obligation will apply to all transactions (meeting the above-mentioned thresholds) which are either signed after 12th October 2023 or those which are signed after 12th July 2023 but which will have not yet been completed by 12th October 2023 (strongly impacting the timeline of such transactions, since no notification will be possible before 12th October 2023).

Information to be provided in case of mandatory notification

In case of transactions meeting the aforementioned thresholds, the notifying undertakings (i.e. the parties to a merger or the undertaking(s) acquiring control) will have to complete and file a notification form with the Commission. A sample form is annexed to the Implementation Regulation (« Form FS-CO»).

Although the final version of the Form FS-CO adopted by the Commission brings significant improvements compared with the draft submitted for public consultation, the amount of information requested is still significant.

In addition to general information regarding the transaction or the relevant undertakings, the Commission requests that notifying parties:

(i) Provide detailed information for all FFCs falling within one of foreign subsidies categories identified as most likely to distort the internal market (listed in article 5 of the FSR1) which were received by the notifying undertaking or the target undertaking during the three years preceding the merger, provided that their individual amount is equal to or greater than EUR 1 million.

For each FFC meeting these criteria, the notifying parties will have to:

• provide detailed information regarding the relevant type of FFC (loan, capital advance, etc.), the identity of the third country/authority granting the FFC, the amount and characteristics of the FFC (interest rate, duration of the loan, etc.), the purpose and justification for granting the FFC, or whether the FFC is likely to confer an advantage on the recipient undertaking and thus fall under the notion of “foreign subsidy” within the meaning of the FSR (sections 5.1 and 5.2 of Form FS-CO);
• specify whether and, if so, how the each relevant FFC is likely to improve the competitive position of the merging parties on the domestic market (section 6.4 of the FS-CO Form). In practice, the notifying undertakings will have to demonstrate, on the basis of various indicators (i.e., amount, type, use or economic rationale of the FFC), that no distortion of competition has been caused;
• provide a copy of all supporting documents as well as any documents relating to the purpose, use or economic rationale of the relevant FFCs which may have been drawn up by or for a member of one of the notifying parties’ management body.

(ii) Provide an overview of all FFCs not falling into the foreign subsidies categories listed
in article 5 paragraph 1, a) through d) of the FSR which were received by the notifying
undertakings (but not by the target undertaking) during the three years preceding the merger.

In practice, for this type of FFCs, the notifying undertakings will need to complete a table (see the template provided in the Form FS-CO), wherein they should list all relevant FFCs per
country and per type, it being specified that:

• only non-EU countries in which the cumulative amount of FFCs received over the last three years is equal to or greater than EUR 45 million will need to be included. To calculate this FFC amount, the Implementing Regulation specifies that the notifying parties should:
  • take into account the amount of FFCs possibly falling into the category of subsidies most likely to distort the domestic market;
  • not take into account the following FFCs: (i) tax exemptions of general application or which are intended to avoid double taxation; (ii) purchases or sales of products or services (excluding financial services) carried out under market conditions or provided following a transparent and non-discriminatory competitive bidding procedure and (iii) foreign financial contributions of an individual amount of less than EUR 1 million.
• Only FFCs whose individual amount is equal to or greater than EUR 1 million should be included in the above-mentioned table.

For FFCs meeting these criteria, the notifying parties should “only” provide a general description of the relevant FFC’s purpose and of the entity or entities granting the aid.

The Implementing Regulation also introduces simplified FFC calculation rules for transactions carried out by investment funds. Investment funds do not have to take into account FFCs granted to other investment funds (or to holding companies controlled by these other funds) which, although managed by the same investment company, have a majority of different investors measured according to their entitlement to profits, provided that:

• the fund controlling the acquiring party is subject to the European Directive 2011/61/EU on Alternative Investment Fund Managers (or equivalent third-country legislation); and
• the economic and commercial transactions (such as the sale of assets, including ownership in companies, loans, credit lines or guarantees) between the fund controlling the acquiring party and other investment funds managed by the same investment company are non-existent or limited.

Additionally, the notifying parties will have to provide a copy of the documents enabling to assess the merger’s rationale as well as all due diligence reports prepared by external advisors as a part of the transaction. Notifying parties will also be able to highlight, within the Form FS-CO, any possible positive effects on the development of the relevant subsidized economic activity on the internal market induced by the FFCs received by each party to the transaction (this would especially be required for any FFC falling within one of the categories listed in article 5 paragraph 1 of the FSR).

II. Foreign Subsidies Regulation in the context of public procurement contracts or concessions

Applicable notification and declaration thresholds

The FSR provides that a notification in the case of public procurement procedures if:

(i) the estimated value of the public procurement agreement or concession is equal to or  greater than EUR 250 million2; and

(ii) the bidder or bidders (or the group to which they belong, including if applicable, their main subcontractors and suppliers involved in the same tender3) have been granted aggregate FFCs in the last three years equal to or greater than EUR 4 million per third country. As in the case of mergers, all FFCs received by bidders have to be taken into account when determining whether this threshold has been reached.

The FSR also provides that if, in the context of procedures for public procurement contracts or concessions reaching the threshold of 250 million euros (first threshold referred to above), none of the notifying parties has been granted FFC totaling EUR 4 million per country over the last three years (second threshold referred to above), the relevant undertakings will have to submit a declaration instead of a notification (see below).

Where a notification or declaration is required, the relevant undertakings will be required to submit their FSR notification or declaration when submitting their tender, failing which their application will be rejected. The Implementing Regulation states that all economic operators, groups of economic operators, main subcontractors and main suppliers covered by the notification obligation must notify and be considered as “notifying parties” within the meaning of the Implementing Regulation. However, the Implementing Regulation specifies that it will be up to the “main contractor” (within the meaning of Directives 2014/24/EU and 2014/25/EU) to ensure that the notification (or declaration) is submitted on behalf of all notifying parties.

Once the notification or declaration is submitted, the contracting authority must transfer it to the Commission for examination without delay. In case of notification, the award procedure will not be suspended, but the public procurement contract may not be awarded until the Commission’s decision has been published.

Information to be provided in case of mandatory notification

The notification or declaration of FFCs in the context of public procurement contracts or concessions must be submitted to the contracting authority in a form, for which a sample is also annexed to the Implementing Regulation (“Form FS-PP“).

As in the case of mergers, the level of information to be provided in case of mandatory notification will vary according to the type of FFCs received. Thus, in addition to providing general information about the public procurement procedure at stake and the bidders, the Form FS-PP requires the notifying parties to:

(i) Provide detailed information for all FFCs falling into one of the foreign subsidies categories identified as most likely to distort the internal market (listed in Article 5, paragraph 1, a) to c) and e)4 of the FSR) which were received by the relevant undertakings, provided that their individual amount is equal to or greater than EUR 1 million. The type of information to be provided in this case is similar to the information required for mergers.

The notifying parties will also have to provide all official supporting documents regarding the relevant FFCs, or copies of documents which may have been drawn up by or for any member of their board of directors, management body or supervisory board, or received by them, relating to the purpose, use and economic rationale of these FFCs.

More specifically, in the case of FFCs falling into one of the foreign subsidies categories mentioned in article 5 paragraph 1, e) of the FSR (i.e., FFCs enabling an undertaking to submit an unduly advantageous tender, on the basis of which the undertaking could be awarded the relevant contract), bidders will be required to demonstrate in particular that the tender is not unduly advantageous, directly or indirectly, as a result of the FFC received. In this case, undertakings will also be required to provide supporting documentation for the period covering the three years prior to notification (e.g. business plans and market studies underlying the decision to take part in the public procurement procedure).

(ii) Provide an overview of all FFCs not falling into the foreign subsidies categories listed in Article 5 of the FSR and whose individual amount is equal to or greater than EUR 1 million.

For this type of FFCs, as for mergers, undertakings must complete a table (a model of which is also provided in the Form FS-PP), wherein FFCs should be listed per country and per type (grants, loans, etc.). However, only countries in which the cumulative amount of FFCs received over the last three years is equal to or greater than EUR 4 million have to be included (a much lower threshold than for mergers). The calculation rules for determining whether this threshold is met are identical to those for mergers.

For all FFCs meeting this criteria, the notifying parties will only need to provide a general description of the relevant FFCs’ purpose, its type as well as the entity or entities granting the aid.

Information to be provided in case of mandatory declaration

• In the case of declarations, the information required in the Form FS-PP is less extensive. As such:
  FFCs whose total value per third country is less than 200,000 euros over a period of three consecutive years preceding the declaration (de mininis threshold) do not need to be reported;
• FFCs not subject to the notification obligation whose value over the three years preceding the declaration, ranges between EUR 200,000 and EUR 1 million, must be listed as aggregate in a table, a model of which is also annexed to the Form FS-PP. Notifying parties should also provide a brief description of the types of FFCs received per third country, without indicating their value;
• FFCs not subject to the notification obligation whose value, in the three years preceding the declaration ranges between EUR 1 million and EUR 4 million, should all be listed individually (and not as aggregate).

In short, despite the improvements and simplifications brought by the Commission to the foreign subsidies notification system, this new European regulatory framework still imposes a considerable administrative burden on undertakings.

Undertakings will be required to collect, classify and monitor all FFCs received each year to determine whether these FFCs meet (i) the notification thresholds and (ii) where appropriate, the multiple thresholds introduced by the Implementing Regulation, to determine the amount and degree of information to be provided to the Commission. This collection and monitoring work will clearly be complex and costly for companies.

In addition, given that the notification obligation for mergers applies to all transactions (meeting the thresholds) signed since 12 July 2023 but closing after 12 October, it follows that, for these transactions, undertakings must take into account this new framework as of today, both as part of their usual due diligence to determine whether the notification thresholds are being met, and, if a notification is required, as part of the preparation of the transaction timetable and the relevant documentation.

On a more positive note, it should be recalled that, despite creating new obligations, the FSR also offers new tools to undertakings that consider to be suffering from unfair competition from competitors that benefited from foreign subsidies, by enabling such undertakings to bring to the Commission’s attention any alleged distortions of competition caused by the granting of such subsidies (the general investigation tool entrusted to the Commission is already applicable since July 12th).

The team remains available to answer any questions you may have regarding the practical implications of this new regulatory framework for your business.