More Scrutiny to Come in the EU For Companies That Receive Foreign Subsidies

More Scrutiny to Come in the EU For Companies That Receive Foreign Subsidies

May 5, 2021, Covington Alert

Companies that benefit from non-EU state support or subsidies will soon face heightened scrutiny in the European Union (EU) as the European Commission unveiled on May 5 its proposed Regulation on foreign subsidies distorting the internal market. As its name suggests, the proposed Regulation will create a new tool to address what the European Commission sees as a “regulatory gap” in avoiding potential distortions caused by companies receiving non-EU subsidies and ensuring a “level playing field” in the EU. Perhaps emblematic of its perceived importance at a time where calls from Member States to tackle potential distortive foreign investment have multiplied, it took the European Commission less than a year from the publication of the White Paper on levelling the playing field with respect to foreign subsidies to analyze the results of its public consultation and to put this proposal to the EU legislator.

The proposed Foreign Subsidies Regulation is wide-ranging and will apply in addition to the existing merger control and Foreign Direct Investment screening mechanisms. Given the strong support it has received from most Member States and European industry bodies, it is widely anticipated that this new tool will be written into law without material change. 

Here is what foreign companies that receive any form of non-EU public support and are active or considering deals involving the EU need to know, and prepare for.

The Foreign Subsidies Regulation in a nutshell

The Foreign Subsidies Regulation targets non-EU companies that are present in the EU, plan to invest in the EU, or participate in EU public procurement or EU-sponsored programs. Depending on the scenario, the Regulation will require mandatory notification or will empower the European Commission to investigate ex officio whether such companies have received foreign financial support that may distort the EU internal market. If an investigation concludes that a foreign company has received distortive foreign financial support, the company may be subject to remedies (e.g., undo its acquisition of an EU target, repayment of the foreign subsidy to the foreign state, refrain from certain investments in the EU, license on FRAND terms assets developed with foreign subsidies).

The European Commission will have the power to conduct inspections at the EU premises of foreign companies under investigation to that end, and to impose fines on investigated companies that do not cooperate with the investigation or provide incomplete information.

The Foreign Subsidy Regulation – State aid for the world

The Foreign Subsidies Regulation will de facto extend the existing EU State aid regime, which controls subsidies given by Member States, to now also control subsidies granted by non-EU countries to companies. To date, there is no equivalent regime to control these and  the European Commission considers that this places EU companies that do not receive such support at a disadvantage vs. foreign companies.

Which companies may be affected?

Non-EU companies may be subject to scrutiny under the proposed regime if they benefit from a “foreign subsidy”, which is widely defined to capture any financial contribution that a foreign state provides, directly or indirectly, to support a company that does business in the EU. Whilst such financial contribution may take the form of direct foreign state participation in the company’s capital or foreign state funding to acquire an EU target, it can also (and perhaps less intuitively) encompass foreign state guarantees to (bank) loans, tax breaks, foreign government contracts, etc.

What EU activities of foreign state supported companies may be scrutinized?

Companies that receive foreign subsidies may fall under scrutiny if they are (i) already active in the EU; or (ii) looking to acquire (participations in) EU-based companies or participate in EU public procurement contracts or EU sponsored programs. 

What type of scrutiny may foreign state supported companies face in the EU?

The Foreign Subsidies Regime puts in place two prior notification systems as well as an ex-officio control mechanism.

Prior notification of transaction. Specifically, foreign companies that plan to acquire any EU target whose sales revenues exceed €500 million will have to notify the deal to the European Commission for clearance if they have received €50 million or more of foreign state support in the past 3 years. Similar to merger control, companies will have to “standstill” and hold off closing unless and until they receive clearance.

Prior notification in EU public tenders. The Regulation creates a similar prior notification system for foreign state supported companies that take part in EU public procurement contracts. For any EU public tender whose value exceeds €250 million, they will have to notify the contracting authority of any foreign support they received in the preceding 3 years. Through an alert system, the European Commission will be put on notice and may open an investigation, which will suspend the award until its conclusion. If the investigation concludes that the company received distortive support, it may be excluded from the tender.  

Ex-officio investigations. In all other market situations, including smaller acquisitions and smaller procurement procedures, the European Commission may launch an ex-officio investigation into non-EU state subsidies received by companies. Whilst the devil will be in the detail and it remains to be seen how the Commission will define investigation priorities, its ex-officio investigative powers are broad, not the least by allowing it to scrutinize support provided up to 10 years before the start of the investigation and imposing remedies to correct any subsidies it will have found distortive (including repaying the subsidy, unwinding the acquisition, reducing capacity or market presence). That said, the proposed Regulation provides a small comfort zone in that it makes it clear that foreign subsidies totaling less than €5 million in the previous 3 years will unlikely raise concerns. 

Next steps

The proposal will now undergo review by the European Parliament and the Member States with a view to adopting a final text that can be written into law. In light of the broad support received so far from within the EU, it is anticipated that the proposed Regulation will sail through without much material amendment.

If adopted, non-EU companies should expect active enforcement as the European Commission expects to initiate between 30-45 ex officio investigations per year, in addition to the 60-70 prior notifications it anticipates to receive annually of both planned acquisitions and subsidized bids in EU public tenders. The European Commission will allocate some 145 FTEs to enforcing the Regulation, as clear sign that it sees the control of foreign subsidies as a top priority.

Takeaways and Preparedness

The Foreign Subsidies Regulation, if adopted in its present form, will mimic the EU State aid regime to control foreign state subsidies and will add an additional regulatory layer (which admittedly already exists for EU-based companies) to the existing instruments in the EU, such as antitrust and merger control (at EU and national levels), and Foreign Direct Investment screening (at national levels).

Companies based outside the EU that receive foreign state support in any shape will need to carefully consider how the regime may impact their future EU-bound activities, review their current and past relationships with non-EU governments and assess their level of risk to potential investigation, in addition to building internal compliance mechanisms to assess whether any of their planned acquisitions or bids in the EU require upfront notification.

Companies may also want to consider preparing relevant documentation and justifications to support their position in the event of an investigation, which may go a long way in achieving successful outcome.

Why Covington

Our team has contributed to the feedbacks provided to the European Commission on the new EU Foreign Subsidies Regime and participated in industry discussions during the consultation period, including with respect to the complexities it may raise for non-EU companies, and has therefore given extensive consideration as to how the new regime will impact them and how they can position themselves to best tackle the upcoming change.   

If you have any questions concerning the material discussed in this client alert, please contact the members of our Antitrust/Competition and Public Policy practices:

EU Foreign Subsidies
Peter Camesasca
Laurie-Anne Grelier
Sophie Bertin                            

EU State aid
Johan Ysewyn                                    

Foreign Direct Investment Regulation
Horst Henschen
Kat Kingsbury                                  

EU Public Policy
Sebastian Vos