Almost a year has passed since the EU Foreign Subsidies Regulation (FSR) became applicable on 12 July 2023. The notification obligations kicked in 3 months later. The FSR introduced:
- Extensive powers for the European Commission (EC) to launch ex officio investigations into potentially distortive foreign subsidies received by a company;
- A mandatory notification obligation for M&A transactions where the target (or JV, or one of the merging parties) has at least €500 million in EU turnover and the undertakings concerned have received at least €50 million in foreign financial contributions (FFCs) in the 3 years prior to the conclusion of the relevant agreement; and
- A mandatory notification obligation for public tenders meeting prescribed value thresholds and where the bidding party received at least €4 million in FFCs per third country in the three years prior to the notification.
Being interviewed by Rachael Johnson for her article in IBA Business Law was a welcome opportunity to take stock of recent developments. I pointed out that the FSR's objective is valid and arguably needed. Foreign subsidies can distort the competitive conditions in the EU because companies will find it challenging to compete effectively against heavily subsidised competitors.
Over time, it has become clear that the FSR has created significant additional work for the EC. The number of cases is much higher than initially predicted by the EC. While the responsibility for procurement investigations lies with DG Grow, DG Comp is dealing with transactions meeting the FSR thresholds and has recently installed a new Directorate K to deal with the flow of incoming notifications.
What next?
Looking to the future, I expect more investigations into companies originating from third countries with fewer or no-state aid controls. In these jurisdictions foreign companies might also be subject to trade restrictions that limit free competition which thereby protects local competitors from external threats.
When the EC launched its first in-depth FSR investigation into a rail sector tender in Bulgaria in February 2024, it became evident that, next to M&A transactions, the EC would also rigorously scrutinize public procurement procedures as well. The tenderer withdrew its bid in that case as a reaction to the launch of an investigation, but this was only the first of several high-profile investigations where the EC has used its powers under the FSR in public procurement matters. On the M&A side, DG Comp has not yet opened an in-depth investigation under the FSR. Interestingly, as explained in the EC's first FSR brief, transactions involving investment funds make up one third of FSR M&A notifications.
The EC also does not shy away from ex officio investigations, as seen in the wind energy sector, where it launched its first such probe in April 2024. Shortly thereafter, the EC conducted the first "dawn raids" under the FSR in the security equipment sector. EC representatives have suggested that the regulator is focusing its resources on those cases where the market impact caused by the potential distortion is the most significant and where there appears to be credible evidence creating solid grounds for suspicion.
To comply with the regulatory requirements the FSR imposes, companies need to collect a significant quantity of data relating to their foreign financial contributions, which is a challenging task. We at Norton Rose Fulbright have developed an FSR Solution – an online platform that helps our clients to lighten this additional burden.
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