Background
To recap, the FSR creates a new regime regulating subsidies granted by non-EU countries to companies active in the EU. It introduces new suspensory notification requirements for companies participating in certain M&A transactions, joint ventures and public and utilities tenders. In addition, the EC will be able to investigate on its own initiative all market situations regarding potentially distortive foreign subsidies.
The FSR takes effect on 12 July 2023, with the notification obligations kicking in a couple of months later, from 12 October 2023. Q&A published recently by the EC clarify that transactions that close before 12 October 2023 will not have to be notified. However, transactions signed on or after 12 July 2023, but which have not closed on 12 October 2023, will need to be notified and cleared before they can close if the relevant thresholds are met.
Our previous alert provides more detail on how the overall regime will work.
The IR sets out the procedural rules relating to the FSR, including notification procedures, the calculation of time limits, the submission of commitments, access to file and confidentiality, the transmission of documents and the EC’s investigative powers. The annexes to the IR contain notification forms specifying the information that
companies must provide in the context of transactions (Annex 1, Form FS-CO) and public procurement (Annex 2, Form FS-PP).
In a very welcome move for parties who expect to need to make FSR notifications, the final version of the IR pares back many of the far-reaching, detailed information requirements of the original draft. This follows extensive feedback from many stakeholders (you can read our consultation response here) criticising the scope of the draft notification forms. We set out below how the notification requirements have changed.
However, crucially, although these changes limit some of the scope of required disclosure in the notification forms, much still remains. A business likely to be subject to FSR requirements will need to have some procedure to track financial contributions they receive from non-EU governments. This requirement is baked into the FSR itself and is necessary to determine whether the notification thresholds are met.
EC loosens extensive information requirements
Reduced (but still onerous) disclosure obligations for M&A and joint ventures
In a welcome step for transactions subject to a notification obligation, the EC has decided to limit significantly the disclosures required for foreign financial contributions. The initial proposal was that all financial contributions received from any third country in the last three years needed to be listed individually, subject only to some low minimum value thresholds. The final form now divides financial contributions into three categories.
- Detailed information on foreign financial contribution(s) (eg on the amounts granted, their form and rationale, the granting entity and the conditions attached and benefits conferred) will now only have to be disclosed where:
- such contributions fall into the listed categories considered “most likely to distort the internal market” (eg certain types of export financing or contributions directly facilitating a concentration); and
- the individual amount of the foreign financial contribution(s) received in the last three years before the conclusion of the agreement, the announcement of the public bid or the acquisition of control is at least EUR1 million (a five-fold increase from the EUR200,000 proposed in the draft IR).
- Less detailed description – to be provided in a summary table (covering the type of contribution, a brief description of the purpose of the financial contribution, the granting entity and the country of origin, and identifying a valuation band) – is required for foreign financial contributions which do not meet these conditions, and this is only where:
- the individual amount of the financial contribution is at least EUR1m; and
- the aggregate amount of the foreign financial contributions by a particular third country in the three years before the conclusion of the agreement, the announcement of the public bid or the acquisition of control is at least EUR45m.
The EC has clarified that the threshold of EUR1m set out in categories 1 and 2 above refers to an individual financial contribution(s) granted by a single third country to one of the notifying parties/target. Therefore, foreign financial contributions granted to different parties, or by different third countries to the same party, should not be aggregated.
- No disclosure required. Some categories of foreign financial contribution, while still relevant for deciding if a notification is required, do not then need to be identified at all in the form (with the exception of those falling into category 1 above). Notably, this includes market value transactions for the purchase or provision of goods or services with a non-EU government (other than financial services, which still need to be identified if over the value thresholds), double taxation arrangements, and financial contributions outside the thresholds described above.
Significantly, investment funds and private equity firms will benefit from an important carve-out when acquiring control or creating joint ventures. They will not need to list in the summary table any foreign financial contributions granted to other investment funds managed by the same investment company but with a majority of different investors measured according to their entitlement to profit (or granted to portfolio companies controlled by the other funds) if the following cumulative conditions are met:
- the fund which controls the acquiring entity must be subject to Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers or to equivalent third-country legislation in terms of prudential, organisational and conduct rules, including requirements aimed at protecting investors; and
- the notifying party must prove that the economic and commercial transactions (eg sale of assets/shares, loans, credit lines, guarantees) over the last three years between the fund that controls the acquiring entity and other investment funds (and the companies controlled by these funds) managed by the same investment company are non-existent or limited.
This exclusion, although welcome, is in fact limited. In addition to private equity/investment funds not meeting these very specific conditions, funds with a single-fund structure will still need to monitor, collect and disclose certain information about foreign financial contributions received by their portfolio (group) companies. Even for multi-fund structures, the initial jurisdiction test remains based on financial contributions received by all funds, and information on foreign financial contributions will need to be disclosed from all portfolio investments by that fund.
Another concession relates to auctions. The EC no longer requires certain information on the bidding process. The draft had asked for information on, for example, the number of other candidates that were contacted and expressed an interest, ie information that would not be readily available to an acquirer. Now, while the notifying party will have to provide detailed information on the bidding process, it is only required to submit a description of the profile of each of the other candidates that it is aware of.
Plenty of onerous and sensitive information obligations remain, however. For example, there is a requirement to submit certain highly detailed confidential information on the source of finances used to fund the transaction, the transaction value, and how the enterprise value has been calculated.
In addition, if external advisors have assisted parties in due diligence, the notifying party will have to provide summaries, conclusions or reports prepared by those advisors.
Less relief in public procurements
Parties in public and utilities procurement procedures subject to the notification requirements will have to disclose detailed information on foreign financial contributions “most likely to distort the internal market” when the value of the foreign financial contributions received in the last three years before the notification is at least EUR1m. This aligns the disclosure obligations with those for transactions, and will therefore eliminate confusion and simplify calculations, at least up to a point.
As for the transaction notification, if the contribution does not fall within these categories, it will only need to be described in a summary table. However, these are based on different thresholds from those in the M&A summary table. Companies will have to disclose foreign financial contributions in public procurement where:
- the individual amount of each financial contribution is at least EUR1m; and
- the estimated aggregate amount of all financial contributions per country granted in the three years prior to the notification is at least EUR4m.
Parties that have not received foreign financial contributions that are notifiable under the FSR (ie that do not meet the notification thresholds) will need to confirm this in their declaration. Nevertheless (and adding an extra layer of complexity), they will have to list certain non-notifiable foreign financial contributions received in the three years prior to the notification. The FS-PP form provides two safe harbours:
- Foreign financial contributions of which the total amount per non-EU country did not exceed EUR200,000 in the three-year period before the notification do not have to be disclosed.
- Foreign financial contributions (granted in the three years before the notification) which are valued at less than EUR1m may be listed in aggregated form (without indicating their values) according to type of contribution by providing a total amount per third country and a short description.
It is also worth noting that the exclusions set out in category 3 above apply to public procurements notifications.
Remember: waiver requests are possible
In addition to the disclosure thresholds and safe harbours now contained in the final version of the IR, notifying parties can also try to take advantage of the waiver mechanism, which remains unchanged from the draft.
The EC will consider notifying parties’ requests for waivers from information requirements in two scenarios: (1) if the information is not necessary for the examination of the case; or (2) when the information is not reasonably available to the notifying party (this will be accepted only in exceptional circumstances and, to the extent possible, parties will have to provide their best estimates for the missing data).
This is in line with the waiver mechanism under the EU merger control rules. Whether, and to what extent, the EC will be willing to routinely grant requests for waivers remains to be seen.
Pre-notification is encouraged
The IR sets out the FSR pre-notification process. The EC encourages companies to engage in pre-notification contacts in both transaction and public procurement notification procedures.
For transactions, pre-notification is similar to the process followed in EU merger control proceedings, starting with the submission of a case team allocation request. All of the necessary practical information for pre-notification contacts and notifications, such as address, means of delivery and formalities for the submission of notifications, as well as the necessary templates (including powers of attorney), can be accessed on the EC’s website.
The pre-notification process in public procurement procedures, however, remains unclear.
For both types of notification, pre-notification contacts with the EC will be available from September 2023 (in principle), in advance of the filing obligation taking effect on 12 October 2023. Given the infancy of the regime, companies should consider engaging with the EC as early as possible to discuss notification requirements and request waivers.
Further welcome clarifications in the Q&A
Although the IR provides some welcome clarifications and exclusions, it does not answer some key questions regarding various substantive and practical issues that are crucial to understanding and applying the FSR. For example, the section in the notification forms on “possible positive effects” remains vague as to what type of
positive effects the EC will take into consideration during the review process. It is also not certain how much and what type of evidence will be required to substantiate these arguments.
However, the EC has clarified some important points in its Q&A, including:
- The notification threshold will not be met in the case of so-called “greenfield” joint ventures, as these will have no turnover of their own. The situation will be different if the joint venture is created through a change from sole to joint control of a pre-existing business or subsidiary that has its own turnover (so long as the threshold is fulfilled).
- The relevant date to determine whether a foreign financial contribution is relevant for a notification is the date on which it is granted, not the date on which it is received. The financial contribution should be considered granted from the moment the beneficiary obtains a legal entitlement to receive it, regardless of when it is actually disbursed.
- All non-EU Member States including EEA EFTA countries (Norway, Lichtenstein, Iceland) and Switzerland are considered “third countries” that count for determining whether the notification threshold with respect to foreign financial contributions is met. However, the EC may grant waivers from the obligation to provide certain information.
Further guidance from the EC is expected in due course. The EC is obliged to publish guidelines by 12 January 2026, although it has committed to start clarifying the concepts of distortion and balancing test within one year after the FSR starts applying.
Preparing for the FSR regime
It remains to be seen what the enforcement of the FSR will look like. Although the EC has attempted to reduce the disclosure obligation, the overall notification burden under the FSR is still very high.
Since identifying, quantifying and collecting foreign financial contributions over a rolling three-year period will be time-consuming and challenging, companies should start implementing relevant tracking systems as soon as possible.
Compliance with the new rules is vital. Companies may face hefty fines, up to 10% of their global turnover for failing to notify, and up to 1% for the provision of incorrect, incomplete or misleading information or for failing to provide information within set time limits.
For M&A, companies should also now always consider and reflect the relevance of the FSR regime in transaction documents and deal timetables. Developing a filing strategy which encompasses FSR notification and review as well as merger control and other regulatory (eg foreign investment control) processes will be key. Similarly, parties should scope out possible commitments where the EC may have substantive concerns.
The U.S. also has foreign subsidies on its radar
Meanwhile, in the U.S., the Federal Trade Commission and the Department of Justice have announced proposed amendments to the merger control notification form under the Hart-Scott-Rodino Act (HSR), likely to take effect in Q4 this year. For the first time, the new form will require information on subsidies received from certain foreign governments or related foreign entities. The “foreign countries” in scope are currently limited to China, Russia, Iran and North Korea, but this may well change over time.
The scope of the data required under the new forms appears to be narrower than under the FSR, but if firms have interactions with any of these governments or foreign entities and expect to make HSR filings, it would be sensible to implement a system to collect FSR disclosure requirements that can also be used for HSR disclosures. You can read more about the proposed U.S. changes in our Global M&A Insights publication.
