Shedding light on the application of the Foreign Subsidies Regulation

European Commission publishes staff working document with Q&As

On Friday, 26 July 2024, the European Commission ("Commission") published a staff working document with questions and answers ("Q&As") on the interpretation and application of Regulation (EU) 2022/2560 on the control of foreign (i.e. non-EU) subsidies, which has been in force since 12 July 2023 (Foreign Subsidies Regulation – "FSR"). Although the Q&As are not legally binding, they contain initial clarifications, especially on the different standards of review in M&A transactions and public procurement procedures and how the existence of unlimited guarantees is assessed. The Q&As therefore offer initial guidance to companies and their legal advisors in respect of the necessary risk assessment in M&A transactions and public procurement procedures, which will be further clarified by the Commission’s decision-making practice and case law.

Distortion in the internal market

The Commission first gives guidance on the two conditions to determine when a foreign subsidy distorts the internal market within the meaning of Article 4 FSR:

• Improvement of the competitive position: This condition embodies the need to establish a relationship between the foreign subsidy and the activities of the company in the internal market. For example, in the case of an interest-free loan provided by a non-EU country directly to a company active in the internal market, there is, prima facie, an apparent connection between the alleged subsidy and the activity in the internal market. On the contrary, if a foreign subsidy was granted to a subsidiary not active in the EU, where that subsidy was granted and effectively used in order to develop the local activity of the subsidiary in a non-EU country, the relationship with the internal market is not apparent. That being said, the Commission could assess, for example, whether a certain subsidy is used by the group to cross-subsidise activities in the internal market.
• Actual or potential negative effect on competition: A distortion in the internal market exists if, by improving the competitive position of a company in the internal market that foreign subsidy actually or potentially negatively affects competition in the internal market. In other words, the FSR not only addresses actual distortions but also addresses potential distortions that are liable to occur as a result of the foreign subsidies. The effects on competition could be assessed in relation to any of the activities in which the beneficiary is, or will likely be, active in the internal market, be it investments or the provision or purchase of any goods or services, as long as competition with regard to that activity in the internal market is, or may be, negatively affected by the foreign subsidy.

Unlike in European State aid law, in which a distortion in the internal market is presumed when a company operating in the EU is granted a financial advantage by an EU Member State, a distortion in the internal market under the FSR cannot be presumed solely on the basis of a foreign subsidy having been granted. A distortion in the internal market must instead be determined by the Commission. How detailed the Commission’s assessment needs to be depends on the category of the foreign subsidy; specifically, whether a foreign subsidy is most likely to distort the internal market (“Subsidies falling under Article 5”) or not (“Subsidies not falling under Article 5”).

• Subsidies not falling under Article 5: The Commission has to perform a detailed assessment of the individual case and, if appropriate, use the indicators as set out in Article 4(1) FSR (not an exhaustive list) to determine whether a foreign subsidy leads to such distortion in the internal market.
• Subsidies falling under Article 5: By contrast, a detailed assessment by the Commission using the indicators as set out in Article 4(1) FSR is not required for Subsidies falling under Article 5 as these are presumed to be most likely to be distortive. In any event, the company will always have the opportunity to show that the foreign subsidy in question, even if falling under one of the categories of Article 5, would not distort the internal market in the specific circumstances of the case. Companies also have the option of proving that the distortion in the internal market is offset by positive effects of the foreign subsidy, which the Commission will take into account in its balancing test (Article 6 FSR) based on the information received.

The Commission states in the Q&As that the notion of a "distortion in the internal market" will be developed taking into account the FSR’s aim of creating a level playing field for all companies operating in the internal market.

Different standards of review in M&A transactions and public procurement procedures

The Q&As also contain specific guidance on the Commission’s different substantive assessments (1) in the context of M&A transactions and (2) in public procurement procedures.

1. Specific guidance on M&A transactions

The Commission states that the scope of review in M&A transactions differs under the FSR and under the EU Merger Regulation, as both Regulations pursue different purposes. As a result, the two procedures can produce different results.

When assessing an M&A transaction under the EU Merger Regulation, the impact brought about by the concentration on competition in the relevant markets is decisive. An assessment under the FSR differs in that the Commission analyses whether there are distortions in the internal market (potentially) caused by the foreign subsidy in connection with the M&A transaction.

Foreign subsidies may distort the internal market differently in the context of M&A transactions. Firstly, the Commission focuses especially on foreign subsidies that directly influence the purchase process. In this case, there may be a distortion in the internal market if the potential buyer has directly received a foreign subsidy enabling it to outbid or dissuade other potential buyers. Secondly, foreign subsidies can also influence competition in the relevant markets the merged entity operates in.

When assessing M&A transactions, the Commission focuses on unlimited state guarantees which are presumed to distort the internal market under Article 5(1)(b) FSR. The Q&As clarify that unlimited state guarantees may be granted in various forms beyond traditional (explicit) state guarantees. An example of this would be specific indications that a company which, rather than being subject to standard national bankruptcy laws, would be bailed out by a non-EU country in the event of illiquidity.

This type of unlimited state guarantee is very likely especially in M&A transactions to distort the internal market as it may allow a potential buyer to obtain a loan on more favourable terms and thus offer a higher purchase price for the target company. An unlimited state guarantee is further viewed in a critical light if the buyer’s unlimited state guarantee is also extended to the EU-based target company after the transaction. This is liable to improve the competitive position of the EU-based target company in the internal market, leading to (potentially) negative effects on competition. An unlimited state guarantee also plays a crucial role in the Commission’s first in-depth investigation of an M&A transaction under the FSR (specifically in the planned partial acquisition of the European telecommunications provider PPF Telecom Group B.V. by the UAE-based company e&; see our article of 11 June 2024).

2. Specific guidance on public procurement procedures

In the context of public procurement, the Commission’s assessment is limited to the specific public procurement procedure. The Commission only assesses whether that public procurement procedure is (potentially) distorted by the foreign subsidies. The only relevant foreign subsidies are those that enable an economic operator to submit a tender that is unduly advantageous in relation to the services tendered for. The entire group of companies is therefore not considered in the substantive assessment:

• Unduly advantageous tender: To assess whether a tender is "advantageous", the Commission will need to compare the foreign-subsidised tender with the other tenders submitted in the public procurement procedure and compare the tender with the contracting authority’s own estimate. Whether the tender is of an "undue nature" depends on whether other factors can justify it. The economic operator can put forward circumstances justifying the tender, for example the particular cost-effectiveness of a production process, innovations or exceptionally favourable conditions from which it benefits in the supply of goods or services. The Commission may also initiate its own investigations.
• Link between the subsidy and the unduly advantageous tender: In a second step, the Commission must establish a link between the subsidy and the tender, i.e. it must be shown that the foreign subsidy enabled or likely enabled the economic operator to submit the unduly advantageous tender in the public procurement procedure in question. The Commission presumes such a link prima facie if, for example, foreign subsidies were granted expressly with the aim of favouring the production of goods in the EU to be supplied under the public contract or the provision of the relevant services.

A distortion of the public procurement procedure is presumed if, for example, there are foreign subsidies covering a substantial part of the estimated value of a contract to be awarded. For instance, the Commission based the opening of the in-depth investigations against two bidding consortia with Chinese participation in the public procurement procedure for the design, construction and operation of a photovoltaic park in Romania on the fact that the foreign subsidies granted already covered a substantial part of the estimated value of the contract volume to be awarded in the public procurement procedure (see our article of 11 April 2024).[1]

Balancing test

Regarding the Commission’s balancing test at the end of its review (Article 6 FSR), the Q&As contain no new insights for companies due to the Commission’s lack of substantial experience so far. The Commission refers to the EU’s general policy aims as further positive effects mentioned in recital 21 of the FSR, which should also be taken into account.

Conclusion

The Commission’s Q&As provide some helpful clarifications regarding the different standards of review under the FSR for M&A transactions and for public procurement procedures. The Commission also emphasises once again that it will continue to examine unlimited state guarantees with a particularly keen eye in the future.

In light of the information published to date on the Commission’s first in-depth investigations (see our article of 19 February 2024, our article of 11 April 2024 and our article of 11 June 2024), the Q&As contain few surprises.

It is therefore still crucial for companies to carry out an early risk analysis of the foreign subsidies received in the last three financial years before engaging in M&A transactions or participating in public procurement procedures. This approach ensures a thorough preparation of any required notifications under the FSR on that basis.

If you have further questions on the FSR, our Noerr competence team of experienced experts in the field of FSR, EU State aid law and merger control will be happy to assist you. You can also subscribe here to receive all our news alerts on the FSR.

 

 

 

[1] See the European Commission’s summary notices (C/2024/2830 and C/2024/2832) concerning the initiation of an in-depth investigation pursuant to Article 10(3)(d) of Regulation (EU) 2022/2560 in Cases FSP.100151 and FSP.100154, each published in the Official Journal of the European Union.