In-Depth FSR Scrutiny Of M&A Transactions: DG Competition Enters The Arena

After an initial start-up phase for the EU Foreign Subsidies Regulation (FSR) in which we saw the European Commission (EC) targeting foreign bidders in public tender procedures, the EC's Directorate General for Competition (DG Comp) opened its first in-depth FSR investigation into an M&A transaction on 10 June 2024. This is the first time the EC is investigating an acquirer having potentially received foreign subsidies in relation to a corporate deal. While responsibility for public tender 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 larger than expected flow of incoming notifications.

The new investigation concerns the acquisition of a European telecommunications operator with activities in Bulgaria, Hungary, Slovakia and Serbia by a third country buyer. The target's Czech activities are excluded from the transaction. Apart from national merger control approvals, the acquirer still needs to obtain approval from the EC under the FSR as well. In its press release, the EC pointed out that the alleged subsidies take the form of an unlimited state guarantee and a loan from state-controlled banks directly facilitating the transaction.

The FSR requires a notification to be submitted 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 in the 3 years prior to the conclusion of the relevant agreement. Notifiable transactions must receive EC approval under the FSR before they can close, creating a standstill obligation. The parties in this case will have to wait for the EC's decision before they can implement the deal.

The EC can adopt (i) a no objection decision; (ii) a commitments/redressive measures decision; or (iii) a decision prohibiting the concentration. Redressive measures and commitments can be structural (e.g. unwind an acquisition, divest assets or reduce capacity or market presence), or behavioural (e.g. offer access to or licence infrastructure on FRAND conditions, publicise R&D results, repay foreign subsidies with interest or adapt the governance structure).

On a brighter note for companies, the EC may allow a transaction it would otherwise prohibit under the FSR based on a balancing of negative and positive effects (an option that is not available under the EU merger control rules). A positive effect could relate to an EU policy objective (e.g. environmental protection, digital transformation, jobs creation, promotion of R&D).

In my view, it is interesting that the previous FSR in-depth investigations in the public tenders field were resolved because the parties concerned withdrew their bids. Will the parties in this first FSR M&A case choose the same way out?

A withdrawal from a merger agreement might have more dramatic consequences for seller and acquirer than a withdrawal from a tender procedure. This will, of course, depend on the provisions foreseen in the SPA. This situation reiterates how important it is for companies contemplating M&A transactions to consider FSR compliance alongside merger control and foreign direct investment reviews. FSR needs to become part of due diligence and FSR clearances may need to be added to the list of regulatory conditions precedent, be considered in the context of deal timing and break fees and be built into representations & warranties as well as into disclosure schedules.

With this new investigation, the EC might be setting itself up for additional legal challenges regarding the FSR. We are already closely watching how a case recently lodged at the General Court plays out where the target of a dawn raid conducted under the FSR is challenging the EC's investigative powers. Another contentious issue is whether foreign governments will dispute the compatibility of the FSR with WTO law. Its supremacy over EC law is guaranteed by the Agreement establishing the WTO. The EC has so far maintained that the FSR closes a regulatory gap that, as EC Vice President Vestager stated here: "is only one of several legal instruments promoting fair international trade."

While these legal complexities continue to be debated, companies need to collect a significant quantity of data relating to their foreign financial contributions to be able to comply with the FSR. Our online platform FSR Solution facilitates clients to tackle this challenge.

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