In particular, such notification is required in the event at least one of the parties (namely, that target undertaking in case of acquisition of a controlling stake or either of the parties in case of a merger) has a EU-wide turnover of at least €500 million. Pending the clearance, a standstill obligation applies.
The new notification requirement is set forth under the new Foreign Subsidy Regulation (“FSR”), which addresses potential distortion of competition in the EU market caused by non-EU state aids.
The Foreign Subsidy Regulation was adopted in December 2022 and entered into force in January 2023, while relevant notification obligations are applicable as from October 12, 2023.
The scope of the Regulation
The FSR addresses potential distortion due to subsidies granted by non-EU countries to companies that operate in the internal market. Unlike the EU state aid control system, the FSR applies only to certain transactions that exceed established value or turnover thresholds—namely, M&A deals and tenders for public procurement—and applies to undertakings that are parties to such transactions. States that dispense the foreign subsidies are not subject to any reporting obligation under the FSR.
The FSR does not provide a definition of “foreign subsidies”. Instead, it provides an open, descriptive list of financial contributions that are relevant in determining whether a notification obligation exists. By way of example, the list includes:
- capital injections, grants, loans, loan guarantees, fiscal incentives, offsetting of operating losses, debt forgiveness, and debt to equity swaps;
- tax exemptions and the granting of special or exclusive rights without appropriate remuneration;
- the provision or purchase of goods or services.
The sorts of financial contributions that may trigger reporting obligations under the FSR therefore include a broad range of support measures and are not limited to monetary transfers. For instance, granting special or exclusive rights to an undertaking or trading goods without remuneration in line with normal market conditions may qualify.
This broad definition of foreign subsidies means that a certain amount of interpretation is involved. Thus, the European Commission will enjoy some discretion in determining whether a certain measure is relevant.
However, to be relevant under the FSR, the financial contributions must be traced to a non-EU third country and must provide a benefit to one or more undertakings that could not be obtained under normal market conditions (known as the “private investor test”). Any non-EU central government or public authority or entity shall be considered a third country, and in certain circumstances even private entities can be categorized as such if their actions can be attributed to a third country.
The scope of the regulation appears to encompass sovereign funds and General Partners with sovereign funds or public bodies among their Limited Partners, A clearer picture will be available once the interpretation by the Commission will unfold or guidelines will be published over the next year or so.
Notification obligations for M&A deals
Transactions subject to notification requirements are “concentrations” that fall under the scope of the EU Merger Control Regulation (“EUMR”), i.e., mergers, acquisitions of control over one or more undertakings, and full-function joint ventures.
However, the thresholds triggering the notification requirement are different from those set forth in the EUMR and refer to both turnover and the value of foreign subsidies received by the parties to the transactions:
- a turnover-based threshold: at least one of the merging undertakings (in case of mergers stricto sensu), or the acquired company (in case of acquisitions), or the joint venture must generate an EU-wide annual turnover of at least EUR 500 million (in the last completed financial year); and
- a subsidy value-based threshold: the merging undertakings, or the acquiring and acquired undertakings, or the undertakings creating the joint venture and the joint venture have been granted foreign subsidies exceeding, in the aggregate, EUR 50 million from third countries in the three years preceding the transaction.
The abovementioned thresholds must be met cumulatively to trigger the notification requirement. Also, the thresholds must be calculated including the group figures of all the controlling and controlled undertakings of the companies directly involved in the transactions (excluding those ceding control post-transaction).
Although no clear indication in this respect is contained in the FSR, in calculating these aggregate figures for private equity funds involved in a specific transaction, not only will foreign subsidies received by the portfolio companies of such funds be counted, but foreign subsidies that are received by limited partners investing in the private equity funds concerned would be relevant as well. For instance, a private equity fund making a transaction that may be relevant for the above turnover threshold will have to determine in advance if any of its investors have received foreign subsidies (in the broad sense described above) from non-EU countries and the possible amount of such subsidies. Therefore, it may be necessary to screen and calculate foreign subsidies for many private equity funds and M&A transactions to assess whether a notification obligation will be triggered under the FSR.
Additionally, even when the parties to an M&A transaction do not meet the above thresholds, the Commission may still require notification if it suspects that the companies received foreign subsidies during the three preceding years that may appreciably distort the functioning of the internal market.
Procedure and sanctions
From a procedural standpoint, the Commission’s review of concentrations under the FSR is very similar to review under the EUMR, in that it consists of two phases:
- phase I: the Commission has 25 working days from date of notification to conduct a preliminary review and determine whether the transaction is clearly unproblematic or needs an in-depth review; and
- phase II: if the Commission concludes that an in-depth review is required, the Commission then it has an additional 90 working days to complete its assessment.
As with the EUMR, the notification is suspensive of the transaction, meaning that the parties are not allowed to close the deal before receiving clearance from the Commission (a “standstill”).
After an in-depth investigation, the Commission may issue one of the following decisions:
- a decision with commitments, where the Commission finds that a foreign subsidy distorts the internal market and the undertaking(s) under investigation offer commitments that the Commission deems appropriate and sufficient to remedy the distortion fully and effectively, thus making those commitments binding on the undertaking(s);
- a decision to raise no objection, concluding that the foreign subsidies at issue do not have distortive effects in the internal market;
- a decision prohibiting the concentration, where the Commission finds that a foreign subsidy distorts the internal market and no suitable commitments have been offered or identified.
Finally, the Commission can fine companies up to 1% of their annual turnover for providing incorrect or misleading information or otherwise obstructing investigations, and it can fine them up to 10% for infringing notification and/or standstill obligations (known as “gun jumping”).
The FSR sets forth a new notification duty that should be taken into consideration well in advance when dealing with M&A transactions.
As a first step, companies and funds should assess the likelihood of being involved in M&A transactions that meet the turnover thresholds mentioned above.
Companies and funds that anticipate being involved in said transactions should identify all the foreign subsidies granted over the previous three years. This is by far the most burdensome and problematic compliance requirement indirectly imposed by the FSR. Indeed, given the broad range of financial measures and contributions that may be involved in calculating the value-based threshold, undertakings that may have directly or indirectly (including within the group to which they belong) received any sort of tax benefit or state-guaranteed or subsidized loan or even merely traded goods with public or private entities controlled by third countries would have to keep records of such contributions and report them. Performing such a deep search on the verge of conclusion of a deal may be detrimental to risk and cost assessment of the deal.
Finally, should the notification requirement under the FSR be met, the relevant transaction documents should provide appropriate condition precedents and “hell or high water” clauses addressing the possible outcome of the notification procedure, as well as the parties’ cooperation obligations. R&Ws may also be taken into account by a purchaser in case of material risk that the target is unable to provide accurate information on the foreign subsidies received in the preceding three years.
 Regulation (EU) no. 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market, in OJEU L 330 of December 23, 2022.
 Council Regulation (EC) no. 139/2004 of 20 January 2004 on the control of concentrations between undertakings, in OJEU L 24 of January 29, 2004.