EU Adopts Reporting Requirements for Transactions and Public Bids Under the Foreign Subsidies Regulation
The Situation: On July 10, 2023, the European Commission ("EC") adopted the Implementing Regulation ("IR") and the corresponding notification forms (Form FS-CO and Form FS-PP), which specify the information and documents companies will need to disclose as part of notifications under the Foreign Subsidies Regulation ("FSR").
The Background: The FSR is a new regulatory regime requiring prenotification of certain large M&A transactions and public bids involving companies that receive subsidies from governments outside the European Union. Under the FSR, a company cannot close such a deal or receive a bid award until it receives clearance from the EC.
Looking Ahead: The business community will need to factor in the additional regulatory hurdle of the FSR in the evaluation of deal risks and consider whether a notification affects their closing or ability to participate in public tenders. Companies that engage in M&A activities, or have sales to government customers in the EU who source products and services through public tenders, will need to gather comprehensive data from their global operations about financial contributions from non-EU countries to identify filing and disclosure obligations and to comply with the information requirements of the notification forms in the IR.
The FSR is a new regulatory regime requiring prenotification of certain large M&A transactions and public tenders involving companies that receive subsidies directly or indirectly from governments outside the EU. The FSR empowers the EC to block or impose remedies in M&A transactions or public bids that involve a foreign subsidy that distorts competition in the EU internal market and that cannot be justified by overriding public policy benefits. The FSR also empowers the EC to conduct ad hoc investigations into any company or sector.
The FSR took effect in January 2023, and notifications will become mandatory as of October 12, 2023. Although the prenotification requirements in M&A and public tenders do not begin until October 12, 2023, the FSR empowers the EC to launch investigations as early as July 12, 2023.
Notifications are mandatory and suspensory if the M&A transaction or public tenders meet the notification thresholds and the parties received a relatively low amount of "financial contributions" from non-EU countries, which a significant number of companies are expected to exceed.
Table 1: FSR Notification Thresholds
|"Financial Contributions" Threshold|
|Acquisition of control over Target (or JV) "Established in EU"||Target or JV company Venture with sales > EUR 500m in EU||Aggregate financial contributions from non-EU countries > EUR 50m over last three years|
|Participation in Public Bid in EU||Public procurement value > EUR 250m||Aggregate financial contributions from at least one non-EU country > EUR 4m|
For further details on the thresholds and the overall FSR reportability assessment, please refer to our July 2022 Commentary.
Extensive Disclosure Obligations Requirements For Companies
The EC has now published the long-awaited IR, setting forth the administrative procedures before the EC, the specific notification forms, and the required content for filings (Form FS-CO for transactions and Form FS-PP for public procurement), similar to the EC's Form CO in merger control. Previous drafts of the IR received critical comments from governments, trade organizations, businesses, the legal profession, and the media for their extensive reporting requirements. The EC has worked intensely with these stakeholders to refine and simplify certain aspects of the reporting requirements.
Although the final IR is less onerous than prior drafts, it still imposes heavy administrative requirements on companies globally. Companies will have to collect information about all financial contributions received from non-EU countries and, through a self-assessment, determine the types of contributions that are subject to detailed reporting and to summary reporting under the IR.
Financial contributions from non-EU countries that the FSR deems to be "most likely distortive" are reportable in detail in all notifications. That requirement applies to assistance to failing firms that would otherwise exit the market, unlimited state guarantees, export financing, and the direct facilitation of M&A transactions or bids. A detailed reporting requirement exists for all "most likely distortive" financial contributions over the past three years in an amount exceeding €1 million.
Detailed reporting means that the notifying party must disclose, for each financial contribution, the nature and amount of the financial contribution, the granting country and entity, the economic rationale, any potential conditions attached to the contribution, and the main characteristics of the contribution (e.g., date, rates, duration, market terms). Importantly, the notifying party also will need to submit supporting evidence, including internal documents about the financial contribution such as annual reports, financial statements, board/management presentations, tax returns, business plans, and market reports.
The provision of incomplete, incorrect or misleading information can lead to the imposition of significant fines. But the IR also specifies that notifying parties are only responsible for data related to financial contributions granted to them (i.e., an acquirer cannot be held responsible for incorrect data provided by a target company).
As for other financial contributions, the notifying party must only provide an overview in the form of a summary table, together with information about the type of contributions received (e.g., government loans or guarantees). The notifying party does not need to list the value of each financial contribution individually but may use ranges for the aggregate value of each type of contribution per non-EU country. This information only has to be provided for countries where the total amount of all financial contributions received by each notifying party over the past three years exceeded €45 million (for M&A notifications) or €4 million (for public procurement notifications), respectively.
Certain financial contributions do not have to be included in the summary reporting and do not need to be taken into account for the calculation of the €45 million and €4 million reporting filters:
- Financial contributions with an individual value less than €1 million; and
- Financial contributions received in the ordinary course of business, including sales of goods and services to a public body at a market terms; tax exemptions, tax holidays and normal depreciation and loss-carry forward rules of general application; and tax relief for avoidance of double taxation in line with bilateral/multilateral agreements.
Although parties need not provide details about those financial contributions in the filing, they must still count those financial contributions for the purposes of the notification thresholds, which many companies are likely to exceed.
For M&A notifications, investment funds and their portfolio entities do not need to count financial contributions granted to other investment funds managed by the same investment company but have a majority of different investors measured according to their entitlement to profit, if their commercial transactions with those other funds (such as by a sale of assets or shares, loans, credit lines or guarantees) were "non-existent or limited."
Global Trend in Protectionism in M&A Reviews
The FSR, and the proliferation of foreign direct investment regulations, are part of a global trend of increased scrutiny of offshore M&A investments. The U.S. antitrust enforcers recently proposed changes to the Hart-Scott-Rodino ("HSR") merger filing form that implement a law passed in December 2022 to help the U.S. enforcers determine whether an acquisition involving a company that received a subsidy from a "foreign entity of concern," defined in 42 U.S.C. § 18741(a), including the governments of China, Iran, North Korea, and Russia, would violate the antitrust laws.
The draft regulation would require companies to report subsidies (or a commitment to provide a subsidy in the future) from a "foreign entity of concern," in addition to all pending or active procurement contracts with the U.S. Department of Defense or any member of the U.S. intelligence community valued at $10 million or more.
Three Key Takeaways
- The EC adopted a new Implementing Regulation on July 10, 2023, specifying the detailed information that companies will need to provide as part of mandatory suspensory notifications under the FSR and which apply as of October 12, 2023.
- The FSR is a new regulatory hurdle in certain large M&A transactions involving target companies with a presence in the EU and public procurement contracts. Companies will need to gather a substantial amount of data about financial contributions from non-EU countries that they do not collect today and have finalized initial preparations in advance of the October 12, 2023 deadline to ensure no disruption to M&A or the ability to bid in any public tenders.
- M&A advisors and bidders in public procurement opportunities will need to evaluate possible delays and uncertainties resulting from the new FSR regime. Early stage negotiations may require access to, and exchange of, (potentially) sensitive data, and a new category of deal risk needs to be added to deal evaluation.
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