EU Adopts Reporting Requirements for Transactions and Public Bids Under the Foreign Subsidies Regulation

Background

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

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. 

Detailed Reporting

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).

Summary Reporting

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.