The adopted FSR Implementing Regulation contains important changes compared to the draft published in February 2023. The focus of the FSR filings for M&A deals and public tenders in the EU will be on companies' foreign financial contributions ("FFCs") received from non-EU countries (or related entities) that are above €1 million and fall within the "likely distortive" category. While the narrower form is helpful, the notification obligations under the FSR remain onerous and companies will need to establish systems to collect the information relevant for the FSR.
Key takeaways
- The European Commission has aligned parts of the FSR filing requirements for M&As and public tenders in the EU related to the disclosure of their FFCs, but important differences remain;
- The FSR Implementing Regulation sets out a detailed disclosure obligation only for the FFCs above €1 million, and which fall under the "likely distortive" FFC category, i.e., FFCs that: (i) support a failing business; (ii) give unlimited guarantees; (iii) directly facilitate a concentration; (iv) are an export financing measure not in line with the OECD Arrangement on officially supported export credits; and (v) enable a company to submit an unduly advantageous tender;
- The Implementing Regulation requires only a high-level overview disclosure of the other FFCs, which are above €1 million individually and are more than €45 million (for M&A deals) or €4 million (for public tenders in the EU) in total per non-EU country over three years. Contracts concluded on market terms (except for financial services) and general tax measures do not require disclosure and do not count towards the €45 million/€4 million total. The two different thresholds will complicate the task for those companies that engage in both M&As and public tenders in the EU;
- While the above represents a significant and welcome change, all FFCs (even those that are exempted from disclosure) still count towards the €50 million over three years FFC threshold, which determines if an FSR filing is necessary; and
- Companies now need to collect the FSR-relevant data on an ongoing basis (and for the past three years) to determine their FSR exposure and to have the data readily available in case of a notifiable M&A deal or public tender in the EU. Using the right tools to collect this data is key.
Background
The Foreign Subsidies Regulation ("FSR") introduces a foreign (non-EU) subsidy control in the EU, which applies as of July 12, 2023. The Commission has been given powers to address distortions caused by foreign subsidies on the EU's internal market through three main tools:
- M&A deals: A mandatory FSR filing to the Commission for M&A deals, prior to their implementation, if the EU turnover of the target (in case of acquisition), one of the merging parties (in case of merger) or the joint venture itself has at least €500 million EU-wide turnover in the previous financial year and the combined FFCs of the parties involved in the deal is at least €50 million in the three years prior to the signing of the deal. The FSR filing obligation for M&A deals starts to apply as of October 12, 2023 for deals signed after July 12, 2023 and that have not closed before October 12, 2023. Pre-notifications can already take place after July 12, 2023. Deals signed prior to July 12, 2023 do not need to be filed;
- Public tenders in the EU: A mandatory FSR filing for public tenders in the EU, prior to their award, if the contract value is at least €250 million (or the value of the lots applied in such tender is at least €125 million) and the combined FFCs of the bidding party (on a group level) and its main subcontractors (or suppliers) is at least €4 million in the three years prior to the FSR filing. The FSR filing obligation for public tenders in the EU starts to apply as of October 12, 2023 for procedures initiated after July 12, 2023 and have not been awarded before October 12, 2023; and
- All-market-situations tool: The FSR grants general powers to the Commission to investigate on its own initiative all market situations that are suspected to benefit from distortive foreign subsidies (including, but not limited to, M&A deals and public tenders falling below the thresholds). The Commission can use this tool as of July 12, 2023.
On July 10, 2023, the Commission adopted the FSR Implementing Regulation and the accompanying FSR filing forms, which determine the procedural and the filing requirements for M&A deals and public tenders in the EU. Compared to the draft Implementing Regulation, published for consultation in February 2023, the Commission has made a number of adjustments to address the significant number of comments by interested parties, essentially making the notification process more efficient and focused.
We summarize below the main FSR procedural and filing requirements for M&A deals (now called Form FS-CO) and public tenders in the EU (Form FS-PP).
FSR filings for M&A deals and public tenders in the EU
a) What information needs to be provided in the filing forms?
For both M&A transactions and public tenders in the EU, much of the general information remains to the large extent the same as in the draft notification forms: the notifying parties need to provide an executive summary of the M&A deal/public tender, information about the parties, information on FFCs received in the past three years, and relevant supporting documentation for the likely distortive FFCs. See for more details here.
In the event that the M&A deal occurs in the context of a structured bidding process, the notifying parties still need to provide a detailed description of the bidding process, including a description of the profile of the other bidders that the notifying parties are aware of. Helpfully, the adopted FSR Implementing Regulation does not require companies to provide information on how many other candidates were contacted or expressed interest. The requirement to indicate how many letters of intent and non-binding offers were received and details on due diligence process were also dropped.
b) Which FFCs need to be disclosed and what details should be provided?
The reporting requirements for FFCs for M&A deals and public tenders are as follows:
Detailed description only of the “likely distortive” FFCs above €1 million
The adopted Form FS-CO and Form FS-PP require a detailed description of the FFCs received three years prior to the signing of the M&A agreement/notification of the tender, totaling above €1 million, and which fall under the likely distortive category, pursuant to Article 5 of the FSR, i.e., FFCs that: (i) support a failing business; (ii) give unlimited guarantees; (iii) directly facilitate a concentration; (iv) are an export financing measure that is not in line with the OECD Arrangement on officially supported export credits; and (v) enable a company to submit an unduly advantageous tender.1
While this focused notification requirement narrows the reporting burden for most companies, the detailed disclosure will still be extensive and will involve providing information on the relevant non-EU country/granting entity, FFC's type, amount, purpose, economic rationale, main characteristics, conditions attached to its grant and use, as well as an analysis if the FFCs constitute foreign subsidies. The Form FS-PP also requires an explanation if the FFC is granted only for operating costs exclusively linked with the public tender at stake.
A high-level overview of other non-distortive FFCs, which exceed €45 million (for M&A deals) or €4 million (for public tenders in the EU) in total per non-EU country over a three-year period
The adopted Form FS-CO and Form FS-PP request the notifying party(ies) to provide only an overview of their other FFCs, which do not fall within the "likely distortive" category of FFCs, if these are (i) individually above €1 million, and (ii) above €45 million or €4 million in total per non-EU country over a period of three years for M&A deals and public tenders, respectively. Additionally, the following FFCs do not need to be mentioned in the overview table and do not count towards the €45/€4 million total:
- Contracts for supply/purchase of goods/services (except financial services) concluded on market terms (e.g. the supply/purchase carried out following a competitive, transparent and non-discriminatory tender procedure);
- Deferrals of payment of taxes and/or social security contributions, tax holidays and tax amnesties, as well as normal depreciation and loss-carry forward rules that are of general application. However, if these measures are limited, for example, to certain sectors, regions or (types of) undertakings, they will need to be disclosed;
- Application of tax relief for the avoidance of double taxation in line with the provisions of bilateral or multilateral agreements for the avoidance of double taxation, excluding, however, unilateral tax reliefs applied under national tax legislation, which will need to be disclosed; and
- The Form FS-CO contains a special exemption for investment funds to provide an overview disclosure on a fund-by-fund basis. This should provide some relief for private equity firms engaging in large M&A deals as they will not have to report the FFCs that their various non-acquiring funds have been granted. To benefit from the exemption, the investment fund should fulfill two cumulative criteria:
- The fund controlling the acquiring entity is subject to Directive on Alternative Investment Fund Managers/an equivalent legislation; and
- The economic and commercial transactions (such as sale of assets, including ownership in companies, loans, credit lines or guarantees) between the fund controlling the acquiring entity and other investment funds (and the companies controlled by these funds) managed by the investment company are either not present or limited.
The overview disclosure, as requested in Table 1 of the adopted Form FS-CO and Form FS-PP, provides details on the relevant third country/granting entity, the type of FFC, a brief description of the FFC's purpose. While not part of Table 1, the companies will also need to collect the FFC's amount and the approximate date of grant, as otherwise it will be difficult to comply with the notification form requirement to quantify the notifiable FFCs for the past three years.
But beware! ALL FFCs count towards the FSR notification threshold
While the above represents a significant and welcome change, all FFCs (even those that are exempted from disclosure) still count towards the €50 million over three years FFC threshold, which determines if an FSR filing is necessary. This has been clarified in the FSR Q&A,2 as well as the final Forms FS-CO and FS-PP.3
Next steps and practical takeaways
- The FSR starts to apply as of July 12, 2023. The mandatory FSR filings for the notifiable M&A deals and public tenders in the EU kick in as of October 12, 2023;
- The FSR filing obligation will not apply to M&A deals that (i) were signed on or after July 12, 2023, but closed before October 12, 2023,4 and (ii) were signed before July 12, regardless of whether they were closed by October 12, 2023. The filing obligations will also not apply to public tender contracts awarded or initiated before July 12, 2023;
- Companies currently engaged in notifiable M&A deals or public tenders in the EU need to reflect the FSR filing requirements in their deal documentation and already have an option (but not the obligation) to start the pre-notification process;5
- In general, going forward, companies will need to collect the FSR-relevant data on an ongoing basis (and for the past three years) in order to determine their FSR exposure and to have the data readily available in case of a notifiable M&A deal or public tender in the EU. The use of the right tools to collect this data is key; and
- The Commission will update the FSR Q&A on the basis of stakeholders' questions. It is expected to publish very shortly a number of technical documents, such as on how to complete case allocation requests.
1 Article 5 (1) (a)-(e) of the FSR.
2 See FSR Q&A, Q4.
3 See Section 2(b), Introduction, Form FS-CO and Section 3(1), Introduction, Form FS-PP.
4 See FSR Q&A, Q1.
5 See FSR Q&A, Q10.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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