The FSR is coming: Are you ready? | Fieldfisher
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The FSR is coming: Are you ready?


United Kingdom

The EU's Foreign Subsidies Regulation (FSR) will start to apply from 12 July 2023 and has significant implications for EU-operating businesses that receive financial contributions from outside the bloc.

The Foreign Subsidies Regulation (FSR) entered into force on 12 January 2023 and will start to apply from 12 July 2023. 
The FSR will enable the European Commission to investigate subsidies granted by non-EU countries to companies operating in the EU. If it is found that subsidies are 'distortive' of the EU market, the Commission can apply redressive measures to prevent companies benefitting from the subsidies to use those funds, or from operating in the EU market.  
Importantly, the FSR catches all companies that are active in the EU and have received any form of 'financial contribution' from a non-EU country, so both EU and non-EU companies operating in the EU can be caught.
Below we look at the key features of the new FSR regime and its practical implications for companies operating in the EU.
What are the key features of the regime?
Key features of the FSR regime include:
  • A mandatory requirement for companies to notify the Commission of concentrations (mergers and acquisitions) involving a financial contribution by a non-EU government. This applies where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and the foreign financial contribution involved is at least €50 million in the three years prior to the notification.  
  • A mandatory requirement for companies to notify the Commission of participation in public procurement procedures, where the estimated contract value is at least €250 million and the foreign financial contribution involved is at least €4 million per non-EU country.
  • A general power for the Commission to investigate all other market situations (including mergers and acquisitions and public tenders falling below the financial thresholds above) where there may have been financial contributions from non-EU countries.
  • Powers for the Commission to impose fines of up to 10% of the parties' combined worldwide turnover for failing to notify a notifiable concentration or bid, or breaching the standstill obligation (i.e. completing a notifiable concentration or bid without clearance). 
What information will need to be provided?
The information requested in the notification form includes:
  • Details of the nature of the concentration, its status, the ownership and control structure before and after the concentration, and an explanation of how the concentration is being financed;
  • Details of all foreign financial contributions granted to the undertakings in the previous three years, as well as details of the nature of those financial contributions (form, who granted by, rationale, benefits etc.);
  • Information on the impact of the foreign financial contributions, including whether the acquisition is a result of a bidding process, involvement of consultants, any other bidders, the relevant business lines or activities, and whether the financial contributions are expected to improve, directly or indirectly, the competitive position in the internal market of the notifying parties or target;
  • Details, with substantiation, of any claimed possible positive effects on the development of the relevant subsidised economic activity on the internal market.
In addition, the Commission can gather information by issuing specific requests for information.
What are the potential consequences for market participants?
The FSR will affect any company operating in the EU that has received financial contributions from non-EU countries, governments or other public entities.
Identifying such contributions in companies is likely to be challenging, given that subsidies received in the last three years will need to be taken into account.
As such, companies are advised to start monitoring and collecting data now on any financial contributions that they receive. 
The concept of 'financial contribution' is defined broadly and includes grants, capital injections, loans, guarantees, tax incentives, grants of exclusive rights, and the supply or purchase of goods or services.
The Commission's catch-all power also allows it to ‘call in’ transactions and bids that fall below the notification thresholds and do not require up-front notification.
Companies will therefore need to bear in mind this residual enforcement risk.
What challenges may arise regarding the FSR's implementation for the M&A market?
The FSR introduces an additional filing obligation for companies engaging in mergers and acquisitions in the EU.  
It is possible that deals will have to be notified on three fronts: for merger control, foreign direct investment (FDI) and now also under the FSR. 
Deal documents will also have to be drafted and negotiated in the light of the FSR, and deal timetables may be affected. For example, when negotiating the terms and potential closing dates of an EU M&A deal, companies will have to factor in a longer lead time to assess which notifications will be required pre-closing and consider whether the FSR regime is triggered.
It is anticipated that around 30 mergers, acquisitions and joint ventures will be notified each year.
How will this sit alongside other EU merger filings?
The FSR timetable is modelled on the EU Merger Regulation process, with an initial 25 working day preliminary review period followed by an in-depth 90 working day review period (extendable by 15 working days where commitments are offered to remedy the distortion on the internal market) from the date of formal notification.
This means the EU merger control and the FSR notifications can run in parallel, though complete synchronisation may not always be possible (as one approval can always take longer or be more complex than the other).
What are the cross border concerns?
The FSR applies to EU-based companies and to foreign companies operating in the EU who are granted financial contributions from outside the EU (e.g. the UK).
As such, the notification obligations will be particularly burdensome for companies with a large geographic footprint as they will need to identify what financial contributions they may have received by non-EU countries in each territory in which they are active.
This article was written by competition and investigations partner Miguel Vaz and associate Afsand Gulzar.

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