The EU Anti-Subsidy Regulation: Implications for M&A

Introduction

The European Union (EU) is readying revolutionary new powers for the European Commission (the Commission) to combat distortions of competition resulting from subsidies from non-EU governments. The new regime, laid out in a proposed regulation (the Anti-Subsidy Regulation) published in May 2021, could be in effect as soon as mid-2023. The regulation includes new mandatory notification and approval requirements triggered by certain acquisitions, mergers and joint ventures that will apply alongside the existing EU and national merger control and foreign direct investment screening regimes.    

The Anti-Subsidy Regulation addresses concerns that non-EU State-owned enterprises (SOEs) could use foreign subsidies to tilt the competitive playing field. According to the impact assessment accompanying the Anti-Subsidy Regulation, subsidized companies may overpay for acquisitions of EU businesses, crowding out potentially more efficient bidders and risking serious long-term harm to the functioning of the EU market. Case studies cited in the impact assessment focus on acquisitions by Chinese buyers. But the new notification requirements will likely impact mainly European and other western multinationals, who are most likely to participate in transactions triggering the regulation’s thresholds.  

Multinationals doing business in the EU or considering joint ventures with EU businesses will need to create new compliance systems to identify and quantify all governmental “financial contributions” they receive outside the EU over rolling three-year periods. They will also need to revise their transaction processes and documentation to take account of the new notification and approval requirements. Many groups will need to start this process well in advance of the regulation’s effectiveness, depending on their activities. 

Background

The Anti-Subsidy Regulation follows a June 2020 white paper on levelling the playing field as regards foreign subsidies (the White Paper). The White Paper was in turn inspired by criticism that the Commission’s February 2019 prohibition of the proposed Siemens/Alstom merger failed to take account of competitive distortions caused by subsidies received by a Chinese competitor.  

The regulation will create a unique hybrid of trade and antitrust tools, filling a hole in the EU’s current toolkit. The Commission’s trade defense rules offer no protection when non-EU subsidies distort investment decisions, market operations or pricing policies in beneficiaries’ European operations, facilitate the acquisition of EU companies, or distort bidding in European public procurement. Similarly, the Commission’s powers to review and approve State aid do not apply to subsidies granted outside the EU.

The Anti-Subsidy Regulation will give the Commission new powers – modeled on the Commission’s traditional powers to investigate cartels and other antitrust offences – to investigate and redress distortions of competition by companies benefiting from “financial contributions” that arguably increase their profitability and thereby affect their competitive behavior in the EU. Presumably, these ex officio investigations will prioritize non-EU SOEs.  

The regulation will also impose a new requirement supplementing existing public procurement rules.  Lead bidders will have to notify “financial contributions” received by themselves and their main suppliers and sub-contractors over the prior three years for all tenders valued at over €250 million (regardless of the amount of financial contributions received). The Commission’s review may delay awards for up to 200 days.  

Finally, the regulation will impose new ex ante notification obligations – modeled on the EU Merger Regulation (EUMR) – in relation to certain M&A transactions. The notification thresholds are based on a combination of revenue (or “turnover”) and “financial contributions” received by members of the relevant groups from non-EU governments and entities “attributable” to non-EU governments.   This blog focuses on this new ex ante mandatory notification regime for M&A transactions. 

The Anti-Subsidy Regulation joins a crowded EU legislative docket, including the Data Governance Act, Digital Services Act, Digital Market Act, AI Regulation and (soon) Data Act. But the Anti-Subsidy Regulation has so far proved less controversial among EU stakeholders than some of these other measures and is expected to be approved by the end of 2022, in which case it would apply as from mid-2023.

Contributions, subsidies and distortions

The Anti-Subsidy Regulation distinguishes between three related concepts: “financial contributions,” “foreign subsidies” and “distortions on the internal market.” The Commission can only impose redressive measures or require commitments as a condition of approval where it finds that a “financial contribution” qualifies as a “foreign subsidy” that is likely to distort the EU internal market.  

In the case of concentrations, multinationals’ notification requirements are based on the financial contributions received by them and other transaction parties. “Financial contributions” are defined very broadly as “(i) the transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling; (ii) the foregoing of revenue that is otherwise due; or (iii) the provision of goods or services or the purchase of goods and services,” whether provided by government authorities or public or private entities whose actions can be attributed to a non-EU country.

The Commission must assess “financial contributions” to determine whether they involve a “foreign subsidy.” Similar to the EU State aid concept of “selectivity,” a foreign subsidy is deemed to exist where a financial contribution confers a benefit limited to an individual corporate group or industry or to several groups or industries. Once a financial contribution is determined to constitute a subsidy, the Commission must determine whether the subsidy risks distorting the EU internal market. The regulation includes a non-exhaustive list of subsidies most likely to be considered distortive: those granted to a group otherwise likely go out of business (unless there is a satisfactory restructuring plan), an unlimited guarantee of debts or liabilities, subsidies directly facilitating a concentration, and subsidies enabling an undertaking to submit an unduly advantageous tender.
Notably, the definition of “financial contributions” includes many forms of government interaction that involve no subsidy, such as government contracts awarded pursuant to competitive tenders. Financial contributions also include support that may involve a subsidy that would be authorized under EU State aid rules, such as incentives for R&D or support of under-developed regions, and therefore unlikely to be distortive.  

Based on this definition, many if not most multinationals receive financial contributions, especially considering the support granted to businesses worldwide during the COVID-19 pandemic. But identifying and quantifying these contributions is likely to be a complex exercise, especially for groups operating in many jurisdictions and/or sectors.

Notification thresholds

The Anti-Subsidy Regulation’s mandatory notification obligations, similar to the EUMR, apply to one group’s, or “undertaking’s,” acquisition of sole control of another, the merger of two or more previously independent undertakings or parts of undertakings or the creation of a “full function” joint venture (generally defined as a joint venture with its own personnel, assets and market presence, as opposed to a joint venture formed to provide goods or services to its parents). 

In the case of an acquisition or merger, concentrations will be notifiable if the target (in the case of an acquisition) or at least one of the merging parties (in the case of a merger) is established in the EU and generates EU turnover of at least €500 million and the parties concerned received aggregate financial contributions in the three prior years of over €50 million. The €500 million EU revenue threshold is double the comparable EUMR threshold, but the €50 million financial contribution threshold seems very low, especially considering the broad definition, the rolling three-year period and the fact that the threshold is calculated on an aggregate group-wide basis.  

The idea seems to be to catch potentially subsidized acquisitions of (or mergers with) large European businesses. Since the financial contribution threshold applies to all transaction parties together, however, the target could satisfy the turnover and financial contribution thresholds by itself. Thus, the thresholds for acquisitions could catch transactions even if the acquirer receives no non-EU financial contributions at all. Moreover, the €500 million threshold has been criticized as too high, and the final figure seems likely to be significantly lower.  

The Commission will also have the right to require notification of any transaction not meeting the thresholds if it suspects that the acquirers may have benefitted from foreign subsidies in the three years prior to the concentration, so long as it does so before the transaction’s implementation. This flexibility may be inspired by the Commission’s controversial decision to accept (and even encourage) Member State referrals of transactions below the EUMR thresholds, regardless of whether the transaction in question meets Member State review thresholds. 

Full-function joint ventures will be notifiable if the joint venture itself or one of its parent groups is established in the EU and generates aggregate EU turnover of at least €500 million and the joint venture and its parent groups received aggregate financial contributions in the three prior years over €50 million. As with acquisitions and mergers, since the financial contribution threshold applies to the joint venture and its parent groups together, a single party could satisfy the turnover and financial contribution thresholds.  
Like the EUMR, the Anti-Subsidy Regulation will catch many joint ventures with little or no connection to the EU. Unless the joint venture thresholds are modified in the legislative process, virtually any full-function joint venture, regardless of its geographic scope, could trigger notification if one parent is a multinational group with significant European revenues. Similarly, many joint acquisitions – a common practice of private equity groups and other financial investors, such as pension funds – will also trigger notification even where targets are not active in the EU. 

Procedure

The Anti-Subsidy Regulation’s notification process and timetable closely resemble the EUMR process, with an initial 25 working day review period followed by an in-depth 90 working day review period starting from the date of formal notification. Notified transactions cannot be closed while the review is pending. 

Should the Commission find that the non-EU financial contributions received by the parties constitute “foreign subsidies” and that such subsidies distort the Single Market, it could either accept commitments by the notifying party that effectively remedy the distortion or prohibit the acquisition after its in-depth review (contrary to the EUMR, remedy offers in the preliminary review period are not allowed).  

Commitments can include providing fair and non-discriminatory access to infrastructure; reducing capacity or market presence; refraining from making certain investments; licensing intellectual property rights on fair, reasonable and non-discriminatory terms; publishing R&D results; divesting assets; dissolving  concentrations; and/or repaying the subsidies (with interest).  Some of these measures could apparently reduce output and/or increase prices and thus run counter to generally accepted principles in merger remedies. On the other hand, the Commission could allow a transaction that would otherwise be prohibited based on a balancing of negative and positive effects (an option that is not available under the EUMR).  

In contrast to the well-established criteria for evaluating the antitrust effects of concentrations in traditional merger review, the Commission will be ploughing new ground as it assesses the distortive effects of foreign subsidies in the M&A context. The Commission will no doubt draw on its experience assessing EU State aid, but analyzing potential distortions in the EU from dozens, or hundreds, of financial contributions in multiple sectors all over the world will present very different challenges compared to analyzing the effect of a single aid or aid scheme in the EU. Although the Anti-Subsidy Regulation includes some general guidance on foreign subsidies most likely to be considered distortive, much more detailed guidance will be needed.   

Similarly, the Commission is presumably working on implementing measures elaborating on the notification process and information required. Based on experience under the EUMR, it is likely that notifying parties will be expected to submit one or more draft notifications and answer questions from the case team before making the formal filing. These pre-notification discussions can and often do take as long or longer than the official review process.  

The notification forms will presumably require notifying parties to provide detailed information on the financial contributions received by all parties concerned to enable the Commission to assess whether or not they constitute a “foreign subsidy,” as well as their potential distortive effects in the EU. Again based on experience under the EUMR, a “simplified procedure” involving a streamlined notification form may be available for transactions meeting certain criteria. For example, a shorter form may be available where the financial contributions received by the parties are below certain value thresholds or are do not include the types of contribution considered most likely to distort competition. EUMR experience shows, however, that even simplified procedures can be time consuming and costly.   

Action items

The Anti-Subsidy Regulation will require significant efforts by multinationals, in particular to identify and quantify their financial contributions and to update their transaction processes and documentation. As mentioned, many if not most large multinationals are likely to receive financial contributions meeting the notification thresholds, especially in view of the significant support granted by governments all over the world during the pandemic.  

Multinationals will need to design and implement new compliance programs to identify interactions with governments and government-related entities in all jurisdictions in which they do business, determine which of these qualify as financial contributions and quantify them. Unlike revenues, company accounting systems do not track financial contributions, so new reporting systems will need to be designed and implemented from scratch. Once potentially relevant interactions are identified, determining which qualify as financial contributions will involve a legal analysis drawing on experience with EU State aid law. Multinationals’ new compliance programs will thus be complex and potentially time consuming. The time required will vary depending on the complexity of multinationals’ operations and the number of jurisdictions in which they do business, but designing and implementing a system to identify and quantify three years’ worth of financial contributions could easily take a year or more.

Large private equity firms and other financial investors will face special challenges, for several reasons. Their portfolio companies may operate in a wider variety of sectors than most multinationals, so identifying government interactions that may qualify as financial constitutions may require a broader range of expertise. Financial investors often have relatively thin and decentralized management and reporting structures compared to other multinationals, so updating these structures to comply with the regulation will require more significant changes. The members of financial investors’ groups change frequently owing to their practice of buying and selling companies.  Private equity funds and other financial investors also likely receive financial contributions at multiple levels. In addition to receiving financial contributions at the portfolio company level, for example, limited partners commonly include governments, sovereign wealth funds, funds managing the pensions of public-sector employees and government-controlled financial institutions.  

Multinationals will also need to review their transaction procedures and documentation. Current due diligence procedures will need to be revised to include the extent to which transaction counterparties receive financial contributions, which may involve significant delays if those counterparties have not implemented procedures to identify and quantify their financial contributions.  

Standard transaction documents, which contain detailed obligations relating to filing merger and foreign investment notifications and obtaining approvals, will need to be revised to contemplate potential Anti-Subsidy Regulation filings as well. Standard merger agreements allocate regulatory approval risk and may require parties to accept certain obligations to obtain approvals, often through divestitures. These will need to be adapted to contemplate the types of commitments potentially required under the Anti-Subsidy Regulation. Related changes will be required to other provisions, including conditions precedent, representations and warranties and termination provisions.

The most onerous aspects of the Anti-Subsidy Regulation for M&A transaction parties derive from the definition of “financial contribution” and the notification thresholds. These aspects have so far not been a main focus of debate in the legislative process. Multinationals, in particular European-based multinationals who are most likely to trigger the notification thresholds, may consider advocating for changes. Some common sense changes – e.g. introducing a de minimis threshold and safe harbours for financial contributions that can be excluded and amendments to the thresholds to ensure that only transactions with a reasonable likelihood of raising concerns are notifiable – would help reduce the burden of the new system for business, as well as for the Commission. Assuming the final regulation contains a notification requirement, however, these changes will not eliminate the need to prioritize the development of new compliance procedures.  

Key takeaways

Of the Anti-Subsidy Regulation’s three main elements – ex officio investigative powers, mandatory notification and approval of certain concentrations, and notification of information on financial contributions in connection with certain public tenders – the new merger control regime will likely have the greatest impact for the largest number of multinational groups. Many if not most large multinational groups receive non-EU financial contributions well in excess of €50 million over three years, especially considering the massive assistance provided by governments worldwide to support companies during the COVID-19 pandemic.   

While no notifications will be required until 2023 at the earliest, the regulation’s impact will be felt long before. Whether or not a future transaction triggers a notification requirement, multinationals will need to develop and implement new programs to collect three years’ worth of “financial contribution” data on their worldwide operations. The Commission’s impact assessment significantly underestimates the resulting burden on business, as it focuses on the cost of collecting information for notifiable acquisitions, disregarding the compliance burden of identifying and quantifying financial contributions where no notification is required (as well as the notifications of potentially large numbers of non-EU joint ventures).  

Multinationals, especially groups active in a large number of jurisdictions and/or sectors, would be well advised to take stock of their activities in light of the regulation and to consider advocating for improvements before the text is set in stone. A few common-sense changes would go a long way towards reducing the regulation’s burdens, though not eliminate the need for new compliance systems and other changes. The best time to intervene to support common-sense changes in the legislative process is now.