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M&A transactions : far-reaching consequences of the EU Foreign Subsidies Regulation (FSR) for non-European and European companies

  • France
  • Mergers and acquisitions


The practical consequences of this new instrument, adopted by the European Union on December 14, 2022, on M&A transactions of a certain size will be considerable as of this year and may, above certain thresholds, concern all companies, European or non-European, benefiting from financial contributions from any country outside the European Union when the subject of the M&A transaction includes a business located in the European Union.

1.  Brief presentation of the FSR

Without going into detail about the content of this new European regulation, which would go far beyond the limited scope of this article, it will be briefly recalled that in order to avoid that foreign subsidies granted by a third country (i.e. non-EU) harm the equality of competition conditions, in particular during the acquisition, directly or indirectly (via a chain of control), of an undertaking established and generating turnover in the European Union or during the award of public contracts or concessions in the European Union, the European Commission will have the power :

  1. in the event of mandatory notification (above certain thresholds mentioned below) prior to a concentration operation or the award of public contracts or concessions, to prohibit the carrying out of such a transaction with the company concerned or to authorize it subject to undertakings or remedial measures, when the foreign subsidy distorts the internal market of the European Union,
  2. to require, below the mandatory notification thresholds, that a potentially subsidized operation be notified if it has not yet been implemented, or
  3. to carry out a spontaneous control (ex officio review by the European Commission independently of any notification obligation) of any situation in which the European Commission suspects the possible existence of a foreign subsidy distorting the internal market of the European Union, which may lead, as the case may be, to the application of remedial measures.

In essence, for the purposes of the FSR, a foreign subsidy is a "financial contribution" provided, directly or indirectly, by a third country that confers a benefit (outside normal market conditions) to one or more enterprises or sectors. The definition of "financial contribution" is very broad and can cover a wide range of situations, including grants, loans, loan guarantees, tax incentives or exemptions, debt forgiveness, or the provision or purchase of goods or services.

With respect to concentration operations, the proposed transaction will be subject to mandatory notification to the European Commission where:

  1. at least one of the undertakings involved in the merger (in the case of a merger), the undertaking acquired directly or indirectly (in the case of an acquisition), or the joint venture (in the case of a joint venture) is established in the European Union and generates a total turnover of at least EUR 500 million in the European Union, and
  2. the following undertakings have received from one or more third countries a combined total of "financial contributions" (not to be confused, as mentioned above, with foreign subsidies) of more than EUR 50 million during the three years preceding the proposed transaction: the acquirer(s) and the acquired undertaking (in the case of an acquisition), the undertakings involved in the merger (in the case of a merger) or the undertakings setting up a joint venture and the joint venture (in the case of a joint venture).

This new notification obligation will concern in particular undertakings (European or non-European) which respond to public calls for tenders from third countries since, on the one hand, the purchase of goods or services constitutes a "financial contribution" within the meaning of the FSR (whether or not this "financial contribution" meets normal market conditions) and, on the other hand, the threshold of 50 million euros cumulated over three years is particularly low.

The FSR will enter into force on July 12, 2023 and the M&A notification obligation will apply as of October 12, 2023, taking as a reference the "financial contributions" granted by third countries during the three years preceding July 12, 2023.

A large number of companies and operations will thus be likely to be affected by these new provisions. Indeed, as indicated above, in the presence of "financial contributions" from a third country, these provisions may apply not only to foreign (i.e. non-European) investors but also to any company established in the European Union.

Even transactions concluded solely between companies not established in the European Union and relating to the transfer of a company not registered in the European Union may be subject to the notification obligation provided for by the FSR, in the presence of "financial contributions" from third countries and a turnover generated, directly or indirectly (via one or more subsidiaries), in the European Union by the acquired company, if the aforementioned thresholds are met.

This new requirement is in addition to antitrust and foreign investment control procedures and will further complicate the completion of M&A transactions.

2.  Contributions of the draft regulation implementing the FSR in relation to M&A

In this context, on February 6, the European Commission launched a public consultation on an implementing regulation of the FSR, which concerns in particular M&A transactions.

This draft describes, in detail, all the information and documents to be provided to the European Commission in the context of a notification.

The extent of the information required on the nature of the financial contributions granted by any third country will require, for international groups, a significant amount of mapping work that may involve a large number of people from different departments (Finance, Tax, Legal, Commercial, etc.) and located in different countries. In the context of a M&A project, the timetable for the completion of the transaction may thus be considerably affected. It should be remembered in this respect that this gathering work may concern not only the acquirer but also, as the case may be, the acquired company.

But beyond this mapping work, it will also be necessary to provide the European Commission with information enabling it to assess whether these financial contributions have distorted competition in the context of a concentration operation, which will constitute another significant collection and analysis workstream.

In particular, information will be required on the sale process of a company, such as the number of candidate buyers contacted by the seller, the number of candidates who have expressed an interest in the transaction, the profile of each candidate buyer, the number of candidate buyers who have withdrawn from the project and at what stage of the process, the contact details of all companies that have expressed an interest, etc. This is obviously sensitive information that only the seller will have access to.

The draft implementing legislation also provides for the communication to the European Commission of information on the involvement of an investment bank, a financial intermediary or an advisory firm in the proposed project, as well as documents issued by any of them on the valuation of the target company and due diligence reports.

The notifying company will also have the opportunity to explain how any foreign subsidies received may have a positive impact on the development of the subsidized activity concerned within the European Union or, more generally, on the achievement of relevant strategic objectives, including those of the European Union.

Following the public consultation on this draft implementing regulation of the FSR, this draft will be finalized for publication before the effective date of the FSR.

Nevertheless, pending the final drafting of this implementing regulation, some practical consequences on the management of a M&A process can already be provisionally drawn from the reading of this draft regulation.

3. Practical consequences on M&A transactions

The management of a M&A process and the drafting of acquisition agreements will be significantly affected by the FSR, mainly due to its impact on the timing of the transaction and the additional uncertainty that the FSR will create regarding the completion of the contemplated transaction.

a)  Impact on the timetable of the transaction

With regard to the timetable, as we have seen, a significant amount of work may be necessary upstream of the process to collect and analyse the "financial contributions" from third countries. This work may be necessary for both the proposed acquirer and the target company since the latter is also concerned by the calculation of the 50-million-euro threshold of financial contributions from third countries.

Thus, when the threshold of at least 500 million euros of turnover generated in the European Union is reached, it may be useful for the due diligence carried out by the potential acquirers on the target company to also cover the review of "financial contributions" from third countries from which the target company may have benefited. In such a case, the seller should anticipate the availability of this information.

For its part, in addition to obtaining the seller's agreement for the transmission to the European Commission of information relating to the sale process, the purchasing entity will also have to anticipate obtaining the agreement of its advisors, in particular financial and legal advisors, so that information and documents relating to the valuation of the target company and due diligence reports can be communicated.

However, the impact on the timetable will also result from the time required to prepare the notification file and then to obtain the European Commission's authorization. The draft regulation implementing the FSR encourages companies to contact the European Commission, as part of a pre-notification exercise, before notifying the proposed transaction.

Given the large volume of information to be provided, this pre-notification exercise will undoubtedly prove invaluable in practice to determine whether the information provided is deemed sufficient or whether, as provided for in the draft implementing regulation, the European Commission may waive the requirement to obtain certain information. In the most complex cases, it can be anticipated that these discussions with the European Commission will be prolonged over an extended period of time and will delay the official notification of the proposed transaction and therefore its effective completion.

The acquisition contract will therefore have to anticipate this new timetable constraint and, in particular, provide for the deadline by which this new condition precedent must be fulfilled and the consequences of its non-fulfilment.

b)  Impact on the drafting of the acquisition contract

In this context, the parties to the acquisition agreement will necessarily discuss :

  1. the probability of the risk of not obtaining the European Commission's authorization,
  2. the efforts that the acquirer will have to make in order to obtain it,
  3. the commitments that the acquirer will have to make to the European Commission, should such commitments be necessary to obtain its authorization (the FSR mentions several examples of possible commitments),
  4. the consistency of these commitments with those that may also be required under merger control or foreign investment authorisation (FDI),
  5. the seller's obligation to assist the purchaser and to communicate information in its possession and, finally,
  6. the allocation between the parties of the risks (or benefits) that may arise while waiting for this authorization, especially if this wait is prolonged.

c)   Impact on the choice of the prospective purchaser

However, it is possible that subjecting a proposed acquirer to this new regulatory constraint leads, in certain cases, to its exclusion from the sale process if the seller does not want to take any risk in this regard (unless, for example, the acquirer concerned agrees to pay the seller a high break-up fee in the event of non-completion of the transaction) or if it wants to complete the transaction in a shorter timeframe.

The process of selecting the best candidate purchaser may therefore also be based on a risk analysis, which the seller may require of candidate purchasers. This risk analysis will be in addition to those which may be carried out with respect to merger control or the authorization of foreign investments in sensitive sectors.

Finally, this new regulatory constraint may, in certain cases, constitute a new angle of attack for unsuccessful rivals or for competing companies seeking to convince the European Commission that a transaction should have been notified or, if notified, that it should not be authorized.

As can be seen, the consequences of the FSR on M&A transactions will be significant and companies, regardless of their nationality, that plan to initiate transactions involving the sale of a business generating a turnover of at least €500 million in the European Union need to start preparing for it, whether they are buying or selling.