Foreign Subsidies Regulation: What to expect from the second year of the EU’s newest trade defence tool

The first full year of Foreign Subsidies Regulation (FSR) enforcement was very lively, with the number of notifications far exceeding initial expectations, several in-depth investigations, two ex officio investigations hinting at the European Commission’s enforcement priorities and a court case following the first FSR dawn raid.

Initial uneasiness about the operation of the new rules, particularly the scope of data required by the notification forms, gradually began to give way to an increasingly streamlined co-operation between notifying parties and the Commission and more confidence on the side of investors, notably private equity (PE) funds, many of which have been through the FSR notification process at least once.  

This year, is expected to be as active as 2024, providing further clarity on both the obligations of notifying parties and the Commission's review methodology. 

Background

Since October 2023, mergers and acquisitions (M&A) transactions where the target or one of the merging entities generated at least €500 million of revenues in the EU in the financial year preceding the transaction and all undertakings concerned received “foreign financial contributions” (FFCs) of at least €50 million combined in the three years preceding the transaction, have been subject to the FSR notification and approval regime.¹ The FSR allows the Commission to review information about the undertakings’ FFCs to determine whether any of these could distort competition in the EU internal market. To mitigate a negative impact on the EU market, the Commission may impose behavioral or structural remedies, such as offering access to subsidised infrastructure, FRAND licensing or divestment of subsidised assets or even prohibit M&A transactions which are financed with foreign subsidies. 

In addition to transaction-specific information, FSR forms require information on FFCs, which include a wide range of interactions with non-EU governments and other private or public entities attributable to non-EU governments, including transfers of assets and liabilities, tax benefits, contracts or investments (including in joint ventures) etc. Group-wide FFC reporting requires the collection of diverse data types on a consistent basis across many businesses and geographies and usually takes several months to complete.  

The FSR review procedure is closely modelled on the EU Merger Regulation (EUMR) and, in most cases, the FSR notification process runs in parallel with other regulatory processes like EUMR and foreign direct investment (FDI) review, provided that the parties have taken steps to collect the three years of groupwide FFC information in advance of the signing and none of the reported FFCs is considered by the Commission as likely to distort the competition in the EU.

Looking back

Last year was an eventful year with around 120 FSR M&A (pre-)notifications involving targets from a wide range of sectors and geographies, and well over a third of all notified transactions concerning investments by PE funds, a trend likely to continue in 2025. The Commission also concluded its first in-depth M&A investigation into the acquisition of Czech telecoms assets by e& of the UAE, issuing a first conditional FSR decision requiring, among others, the withdrawal of an unlimited state guarantee in the form of an exemption from bankruptcy law granted to the buyer.

The number of notified transactions, which is well above the 30 notifications per year expected when the FSR was adopted, shows that the additional regulatory burden has not necessarily had a chilling effect on M&A activity, despite the concerns expressed by the business community.  

Outlook for 2025 

As the number of FSR filings is driven by overall market conditions and the amount of M&A activity, it is expected that the level of FSR filings in 2024 will continue, with a similar mix of investors and sectors involved. It is expected that a significant proportion of transactions will continue to involve PE funds and that there will be a gradual increase in the number of filings by sovereign wealth funds as they become more familiar with the requirements and get prepared to notify. 

As the FSR is neutral regarding the sector and nationality of the target and buyer, filings are expected to continue to cover a range of sectors.

However, while the FSR is neutral, it allows the Commission to pursue its enforcement priorities in the M&A context using call-in powers to investigate transactions below the notification thresholds. As announced by the previous Competition Commissioner, the Commission is expected to use the FSR as part of a broader systemic approach to protecting the single market, focusing on renewable technologies, electric vehicles and essential chips².

Guidance in a mission letter to the current Commissioner Teresa Ribera Rodriguez, asking her to address the risks of killer acquisitions of small European companies by foreign competitors, may suggest that the FSR's call-in powers will also be used in other strategic and IPR-intensive sectors, notably pharmaceuticals and IT/digital markets.

Some indications about the Commission’s enforcement priorities can be also drawn from its first ex officio investigations (outside of the M&A review process) into Chinese suppliers of solar panels and wind turbines confirming the role of the FSR enforcement in the renewable energy sector and the first FSR dawn raid conducted at Polish and Dutch premises of a Chinese producer of safety scanners.  

On the practical side, by 2025, many global investors, particularly PE funds, will have been through the FSR notification and approval process at least once and will have put in place the mechanisms necessary to collect and report the relevant data efficiently. A better understanding of the rules - also thanks to the Commission's active engagement with companies in and outside the notification process - is helping to streamline and shorten the review. As the number of global companies unaware of the FSR requirements decreases, the number of transactions delayed due to lack of FSR preparation will also decrease.

More guidance to come

Further clarification is expected from the Commission in the form of a non-confidential version of the first conditional decision but also, through a brief summarising key takeaways from the first 12 months of FSR enforcement. Commission officials also announced that the Commission will publish statistics covering the same period at the beginning of 2025. 

During the second half of 2025, the Commission is also expected to launch consultations for draft guidance on several elements key for the FSR review, including the criteria for determining the existence of a distortion, the balancing test or the application of its call-in powers. 

Based on their involvement in the consultations on the draft FSR and the implementing regulation, it can be anticipated that, this time too, business will actively participate in the consultations, seeking to ensure greater predictability of the FSR proceedings. 

It is also anticipated that lobbying efforts, in particular, by investment funds and the banking sector will intensify, to influence the announced revision of the notification procedure and the introduction of a simplified notification for certain types of transactions.