The New Foreign Subsidies Regulation introduced by the European Commission

On January 12^th this year, the European Commission introduced its Foreign Subsidies Control Regulation.  It is designed to combat companies gaining an unfair advantage thanks to financial support from governments outside the EU Member States.  The Commission held a consultation on the draft implementation measures during February, ahead of the Commission being able to carry out investigations from July and requiring companies to submit notifications from October. 

But what is the new FSR and what impact will it have on companies?  To find out, I spoke to José Rivas of Bird & Bird, Annabelle Lepièce of CMS, Elisabetta Righini of Latham & Watkins and Nina Niejahr and Bram Hoorelbeke of Baker McKenzie 

The Commission has for a while been receiving complaints from Member States and large European companies that other companies (often in the Middle East) were benefitting from public support that in the EU would be considered State aid.  However, for the European Commission – normally the champions of multilateralism – to take such a unilateral approach to investigating possible subsidies from non-EU countries has come as a shock to some. 

Another surprise is the extent to which the new regulation will directly impact companies based in the EU, as well as those in non-member nations.  With hindsight of course it would have been virtually impossible for the Commission to introduce legislation targeting only companies outside the EU, even if many expected that this would be the focus when the regulation was first announced.  However, companies based in the EU will also be required to report any financial contributions that they or their subsidiaries receive – a concept which is very broad and may include a tax incentive in East Asia or an airline being granted a discount on landing charges in South America.  Ensuring that their clients are aware that this will directly impact them will be a key area of work for lawyers in the coming months. 

Another issue for companies may be the assumption – which I made myself initially – that this regulation is designed to catch subsidies from rich Middle Eastern countries.  However, a bigger concern for many companies may be that the United States has a less strict approach to State aid than the EU, which may cause some cultural adaptation issues at multinational companies.  Even companies in post-Brexit Britain looking to do business with companies in EU countries would fall under this regulation – though possibly there may still be greater existing awareness of the Commission’s attitude towards State aid in the UK compared to other jurisdictions. 

A major theme to emerge was the volume of work that the new regulation will cause.  The Commission’s team dedicated to Foreign Subsidy Regulation matters is much smaller than the team reviewing merger clearance notifications, yet may suddenly be about to be inundated with notifications under the FSR. 

The key concern for companies will be the breadth of the text used in the regulation.  All mergers or public procurement proceedings will have to include notifications or at least a declaration of all financial contributions received worldwide, even if it was given to a subsidiary or portfolio company, and any transactions involving public companies will need to be notified or declared under certain thresholds for public procurement.  These declarations will have to provide extensive information of the financial contributions received, including their legal assessment.  It is then up to the Commission to determine whether this financial contribution or the transaction counts as a subsidy and, if so, whether it has a distortive effect on the market. 

However, as the Football Association could doubtless tell the Commission following the huge scrutiny placed on it during the sale of Newcastle United to the Saudi Arabian-based Public Investment Fund, it isn’t always easy to know if a State is supporting a company or not.  Piercing through that façade will be another major issue for the Commission. 

Unlike the intra-EU State aid regulation, the burden will be on the companies to provide this evidence to the Commission, which is likely to lead to considerable issues around collecting the data.  Companies will have to supply information on every supply contract to show whether there are any financial contributions by or relations with a public company – might we see a major merger derailed under the FSR because one of the parties forgot to mention who supplied their pens? 

The other very interesting question that does not yet appear to have been answered is what – if a subsidy is discovered – the Commission is able to do to balance this, since in some cases any actual distortion caused in an EU Member State may be merely an unintended consequence.  If a subsidiary of an EU company, operating outside the EU, receives a tax break from the government of a non-EU country, does that distort competition within the EU?  Would the Commission prohibit the award of the public procurement contract to the parent company, since it is based in the EU but was not the direct beneficiary?  Could the Commission try to force the subsidiary, that is not based in the EU, to return the aid? 

The main advice seems to be start preparing as early as possible.  For private equity clients or major contractors who may not know exactly what the next transaction or procurement will be, but definitely know that there will be one, it may be possible to start gathering much of the information well in advance and trying to ensure that the Commission is familiar with the company structure before the first notification happens.  But for most companies, who do not have a steady stream of predictable acquisitions or public procurement contracts, this level of preparation may not be possible. 

Given the huge scope of the Foreign Subsidies Regulation it should come as no surprise that the State aid lawyers are expecting this work to keep them busy in the near future.  Any M&A or Public Procurement colleagues dealing with an upcoming transaction or tender process would be well advised to have one of their State aid colleagues on speed dial to help them navigate the implications of the new regulation for that specific matter.