Irish dealmakers involved in transactions where any of the parties are beneficiaries of foreign subsidies may be subject to an additional mandatory notification requirement under the new EU Foreign Subsidies Regulation ("FSR") where the thresholds are met. This new requirement to notify the European Commission ("EC") in such instances will go live on 12 October 2023. This additional burden will sit alongside existing merger control or foreign investment notification requirements and further impact completion timelines.
Scope of FSR
While support by Member States is assessed under existing EU state aid rules, the EC has long perceived a "regulatory gap" given the absence of a comparable regime to review financial contributions by non-EU countries that have distortive effects. The FSR has therefore been introduced to address the distortive effects that non-EU subsidies may have on the EU internal market.
The FSR introduces mandatory notification obligations for M&A transactions and public procurement processes above certain defined thresholds as of 12 October 2023; powers enabling the EC to open own initiative investigations into any potentially distortive non-EU subsidies as of 12 July 2023 (including 'below threshold' M&A transactions and public procurement processes); and a broad range of related enforcement powers to administer the regime (e.g., powers to request information, conduct on-site inspections, sanction companies for non-compliance, and impose redressive measures). We recently considered the impact of the FSR on public procurement processes here.
As regards M&A transactions, a notification obligation requiring 'pre-closing' clearance will arise where the following cumulative thresholds are met:
- Turnover threshold: one of the target company, one of the merging parties, or the joint venture has EU-wide turnover of at least €500 million in the last completed financial year; and
- Financial contribution threshold: the undertakings involved in the transaction (i.e., the acquiring company and the target, the merging entities, or the JV and its parent companies) have received combined aggregate financial contributions of more than €50 million within the three year period prior to the agreement.
The turnover threshold is therefore satisfied where just one of the target company, the merging parties, or the joint venture (but not the acquiring company) have EU-wide turnover of €500 million or more in the last completed financial year.
The financial contribution threshold is satisfied where one or more of the transaction parties have received financial contributions of €50 million or more over the last three years – meaning that one transaction party alone in receipt of contributions of €50 million or more in the last three years can satisfy the threshold and give rise to a notification requirement. The concept of 'financial contribution' is also broadly defined covering any direct or indirect financial contribution made by governments of, or any public or private entity attributable to, a non-EU country, and including: interest-free loans; unlimited guarantees; capital injections; preferential tax treatment; tax credits; fiscal incentives; grants; contracts given below market terms; debt to equity swaps; or the transfer of funds or liabilities.
Following notification, the EC will carry out a preliminary 'Phase I' review within a 25-working day timeline to determine if there are "sufficient indications" that the non-EU subsidy could have a distortive effect on the internal market, followed by an in-depth Phase II review within a further 90-working day timeline (extendable by 15 working days) if "sufficient indications" have been established.
As regards potential outcomes, where the EC determines that the non-EU subsidy distorts the internal market such that it confers a competitive advantage on one or more specific companies or industries active in the EU, it has extensive powers to impose remedies or even prohibit a transaction.
Impact for Irish dealmakers
Irish dealmakers should note the new 'pre-closing' notification requirements for deals involving parties that are beneficiaries of foreign subsidies above the thresholds. This new requirement is expected to be potentially onerous with companies required to provide details in relation to all non-EU financial contributions received within the last three years (other than those that below the de minimis threshold). This additional burden will sit alongside existing requirements to notify deals to merger control authorities (eg, the EC or the Competition and Consumer Protection Commission) or Government departments under foreign investment screening regimes (eg, the Department of Enterprise under the new Irish regime set to come into force) where relevant thresholds are met.
If you have any queries in relation to the FSR or its impact on your business, please contact Calum Warren, or your usual Matheson contact