The “new kid on the block”: the Foreign Subsidies Regulation

The new EU regulation on foreign subsidies distorting the internal market (“Foreign Subsidies Regulation”) has been in full force since the end of last year. It aims to ensure more equal opportunities and a level playing field in the EU internal market. In addition to EU law on State aid, merger control, public procurement and foreign trade, subsidies granted by non-EU countries to companies can now be thoroughly investigated for their possible effect on the EU internal market. The standard of substantive investigation, which is still unclear, is likely to be largely based on EU State aid law principles.

The new Regulation provides the European Commission with three tools for investigating foreign subsidies. The European Commission has announced that it will make increasing use of its new investigative powers in the coming months and intends to progressively create the necessary capacities.

M&A transaction tool

From now on, in addition to other possible regulatory notification obligations (such as merger control), companies involved in M&A transactions will be subject to a supplementary notification obligation if certain statutory thresholds are exceeded. This is paired with a standstill obligation subject to a fine until “clearance” by the European Commission.

Consequently, compliance with the supplementary notification obligation should already be taken into account when drafting contracts and in due diligence processes (“M&A readiness”). Ascertaining whether or not a company is subject to a notification obligation requires a substantial amount of information and careful preparation. For this reason, companies should establish an internal reporting system despite the significant expenditure of time and resources. Similar to clauses regarding merger control notification, the contracts must likewise reflect information gathering, notification and the standstill obligation. The importance of M&A readiness has become apparent by the appreciable number of notifications and pre-notifications to the European Commission in the first few weeks since the notification obligation entered into force. It seems that considerably more than the estimated 30 notifications per year are to be expected.

Public procurement tool

If the thresholds established in the Regulation are exceeded, the notification obligation also extends to public procurement procedures. In this case, the notification must be submitted together with the submission of a tender or the request to participate in procurement procedures.

Ex-officio investigation tool

Another important wide-ranging control over foreign subsidies results from ex-officio investigative powers. In this respect, the European Commission has very broad discretionary powers regarding when to initiate an investigation on its own initiative.

Companies may also use complaints to the European Commission to instrumentalise the ex-officio investigation tool against their competitors. However, the European Commission has responded with restraint to the first complaints, which were lodged by football clubs and associations last year. The European Commission stated that it would initially prioritise investigations under the M&A transaction and public procurement tool. Nevertheless, the European Commission recently announced its intention to make use of its new powers with regards to the wind energy sector. Companies have been explicitly requested to report potentially unfair, competition-distorting circumstances. Thus, it remains unclear to what extent companies will be able to use the ex-officio investigation tool as a “sharp” or merely “dull” sword against competitors.

 

This article is part of the Competition Outlook 2024. You can find all Competition Outlook articles here.