Global | Publication | January 2022
The European Union’s (EU’s) proposed new competition law regime, the Anti-Subsidy Regulation, seems on track to be finalised by mid-2022 and to apply from early 2023. The Anti-Subsidy Regulation was formally proposed in May 2021 but closely tracks a 2020 white paper. It will create mandatory new M&A notification and approval requirements based on a broad new group-wide, global financial metric, “financial contributions,” starting with multinationals’ 2020 financial years.
This article considers the proposal and its impact on the technology sector.
The Anti-Subsidy Regulation creates a unique hybrid of competition and trade law tools to empower the EU Commission (the Commission) to combat distortions of competition caused by subsidies granted by non-EU Member States to companies doing business in the EU. The regulation is driven largely by concerns about non-EU State-owned enterprises (SOEs) using foreign subsidies to compete unfairly in the EU. But the main impact for most multinationals will stem from new requirements to notify M&A transactions involving a significant EU target business or joint venture (JV) partner or significant public tender in the EU, where the parties involved received “financial contributions” from non-EU governments or government-affiliated entities in the preceding three years.
The new regulation will have a significant impact on technology companies and investors, virtually all of which receive “financial contributions” caught by the regulation (if they are active outside the EU).
The notification thresholds are broad and counter-intuitive. For example, a private equity fund or tech company with significant EU revenues would need EU approval to acquire a software company in Singapore or the US with another controlling partner, regardless of the target’s or partner’s EU activities.
The notification will need to include details of all interactions with governments or government-affiliated entities (contracts, tax incentives, loans, etc.) for the past three years, anywhere in the world, covering the target, all JV parents and their group members.
Whether or not a notification is in fact triggered, technology companies and investors need to design and implement new systems to identify and quantify all such financial contributions worldwide, beginning with 2020.
Commission officials argue that new compliance systems should already be in progress and are unsympathetic to requests for formal guidance, carve-outs or transition periods, even though “financial contributions” is not a concept recognised in international accounting standards. In many cases, designing and implementing the new compliance systems will be a multi-month project that should start as soon as possible.
The Anti-Subsidy Regulation distinguishes between three related concepts: “financial contributions,” “foreign subsidies” and “distortions on the internal market.” Importantly, the new mandatory reporting regimes for acquisitions, JVs and public tenders are triggered by the broadest term, “financial contributions”; reporting may be required whether or not a multinational receives a subsidy.
More specifically:
Whether there is a distortion on the internal market depends on factors such as the amount and nature of the subsidy, the situation of the beneficiary and the markets concerned, the beneficiary’s level of economic activity in the EU, and the purpose and conditions attached to the subsidy, all subject to a de minimis threshold of €5 million.
The foreign subsidies considered most likely to cause a distortion include subsidies:
The definition of “financial contribution” is deliberately very broad to allow the Commission to review a large number of transactions whether or not there is any realistic possibility that they will distort competition in the EU internal market.
For example, the inclusion of all public-sector contracts, whether or not awarded by competitive tender, will catch many technology companies and investors, as will tax and other incentives.
The Anti-Subsidy Regulation creates a new, mandatory ex-ante notification system for acquisitions and joint ventures that is analogous to the EU Merger Regulation (EUMR).
The notification requirement would apply to acquisitions only where the target’s EU turnover is at least €500 million, double the €250 million basic threshold under the EUMR. If that target turnover threshold is met, an acquirer would be required to notify the Commission if the buyer and the target together received an aggregate “financial contribution” from non-EU countries of at least €50 million in the prior three years.
Similar to the EUMR, so-called “full-function” JVs, including many joint acquisitions, will be notifiable under the Anti-Subsidy Regulation if certain thresholds are met, regardless of whether the JV will be active in the EU. The JV thresholds will be met if any party has EU turnover of at least €500 million and all parties together received financial contributions of at least €50 million in the prior three years.
While the acquisition threshold will only be met by transactions with a clear EU nexus (because the target must have at least €500 million in EU turnover), the JV thresholds will be met whenever one parent entity has at least €500 million in EU turnover, regardless of the JV’s activities, if all parties together received at least €50 million in financial contributions in the prior three years.
Considering the broad definition of “financial contribution,” if a JV party is large enough to meet the EU turnover threshold, the financial contribution threshold is also highly likely to be met. If a transaction is notifiable, all parties (not only the party with a significant EU business) will have to report all financial contributions received by them worldwide for three financial years.
In addition to the mandatory notification thresholds, the Commission would have the right to require notification of any transaction not meeting the thresholds if the Commission 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 is implemented.
The notification process and timetable closely resembles 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 acquisition is facilitated by the foreign subsidy and distorts the Single Market, it could either accept commitments by the notifying party that effectively remedy the distortion, or prohibit the acquisition.
The Commission would also have specific remedial powers where it finds that a notifiable transaction has already been implemented and distorts the EU internal market.
The Anti-Subsidy Regulation will also supplement existing EU public procurement rules for contracts over €250 million by requiring participating companies to notify the contracting authority of any financial contribution they have received in the preceding three years. The notification obligation will cover not only the actual bidder, but also its main suppliers and subcontractors.
Again, considering the broad definition of “financial contribution,” technology companies participating in significant EU public tenders will likely be caught by this additional notification requirement. Unlike the JV notification requirement, however, the public procurement provisions of the Anti-Subsidy Regulation will not apply to significant public tenders outside the EU.
Upon receipt of a notification, the contracting authority must transfer the file to the Commission without delay. The Commission can also require notification where it suspects that a participant in a public procurement process has benefitted from foreign subsidies in the previous three years. Again, the Anti-Subsidy Regulation gives the Commission exclusive authority to review the distortive effect of financial contributions in public procurement procedures.
The Anti-Subsidy Regulation creates a new power for the Commission to conduct ex officio reviews of alleged distortive foreign subsidies.
The Commission’s reviews will be divided into two phases: a preliminary review to assess whether a “financial contribution” constitutes a foreign subsidy that appears to distort the EU internal market; followed by an in-depth review when needed. For this purpose, the Commission will have powers, familiar from its antitrust toolkit, to impose interim measures, issue requests for information, conduct inspections both inside and (with the relevant company’s and government’s consent) outside the EU, take action against non-cooperation and impose fines and periodic penalty payments.
Where the Commission finds that a foreign subsidy distorts the internal market, the Commission may impose redress measures or, if the company concerned offers satisfactory commitments, adopt a decision making those commitments binding.
The Commission may adopt a no-objection decision even if it concludes that a foreign subsidy distorts the internal market if it finds that the distortion is outweighed by positive effects on the “development of the relevant economic activity.”
Possible positive impacts could include creating jobs, achieving climate neutrality and protecting the environment, digital transformation, security, public order and public safety and resilience.
The Anti-Subsidy Regulation will confer important new powers on the Commission to determine whether foreign financial contributions amount to subsidies and distort the internal market. The Commission will likely target especially non-EU SOEs with significant EU activities.
Similarly, the Commission is likely to intervene in M&A and public procurement transactions relatively rarely, and only where the parties receive significant non-EU subsidies deemed likely to distort competition in the EU.
However, the Anti-Subsidy Regulation will have a direct and immediate impact on technology companies and investors regardless of whether the Commission eventually intervenes in their activities. Technology companies and investors will need to assess the notifiability of every acquisition of a significant EU business or joint acquisition or other JV involving such a business anywhere in the world, based on financial contributions received by all parties starting in 2020.
Since financial contributions are defined very broadly, and do not correspond to any existing accounting requirements, multinationals will need to design and implement new compliance procedures from scratch. Senior Commission officials argue that businesses have been on notice since at least 2020 that such information would be required, and should already have begun to design and implement compliance procedures.
The burden of the new monitoring and compliance procedures will vary depending on each multinational’s activities, but such procedures will in any case need to be carefully designed in cooperation with EU and local counsel familiar with the different arrangements prevalent in global markets and how these arrangements will be viewed from an EU law perspective. In many cases, designing and implementing new procedures will take many months. As the Commission would be the first to say, there is no time to waste.
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