1. Overview of the Policy Brief

The European Commission has published a Policy Brief following the 100 day mark since the entry into force of the obligation to notify qualifying concentrations under the new Foreign Subsidies Regulation (“FSR”). The brief details the most relevant aspects of the FSR’s initial implementation period.

The Policy Brief provides an overview of the following:

• Statistics on the numbers and types of cases with which the Commission has engaged in this period,
• Further clarification regarding the details required for notification, 
• Categorisation of the different types of foreign financial contributions (“FFCs”) and their respective reporting requirements, and 
• An explanation of the exceptions to reporting obligations for investments funds. 

The Policy Brief is accessible here.

In this article we describe the main topics covered in the Policy Brief and provide an overview of our own practical experiences gathered in the first 100 days of the FSR. We will also discuss the Commission’s first in-depth investigation under the FSR.

2. Greater than expected FSR notifications in the initial period

The new regime may require more time than the Commission initially expected. Indeed, when the legislation was initially proposed, the Commission predicted an average of 33 cases per year. However, during the first 100 days alone, the Commission has already engaged in pre-notification discussions in 53 cases concerning concentrations. Of these, 14 have been notified, 9 have been cleared after an initial investigation and one notification has been withdrawn. 

The majority of these 53 pre-notified cases (42) have also been subject to a parallel assessment under the EU Merger Regulation. A significant portion of these pre-notified cases are also subject to national FDI obligations.

Moreover, over 100 notifications were submitted under the public procurement tool, nearly three times the EC’s estimate of 36 cases annually.

3. Most common types of FFCs assessed by the Commission so far

So far, the most common types of FFCs assessed relate to the sources of financing of the notified transactions. These include capital injections, equity contributions and loans from financial institutions which could possibly be linked to a third country. Other types of FFCs assessed include state guarantees, direct grants for specific projects and tax benefits. About a third of the cases involved an investment fund as the notifying party.

4. What types of FFCs to notify?

Several pre-notifications have raised questions to the Commission about which FFCs should be considered for the notification threshold and which should be considered for the reporting threshold per country in the notification form. The Policy Brief clarifies that all FFCs received from third countries within the three years prior to the transaction’s conclusion, including FFCs excluded from reporting obligations, must be considered when determining whether the notification threshold has been met. However, to determine whether the reporting threshold of €45 million per third country is met, the FFCs excluded from the reporting obligation do not need to be considered. 

Importantly, if the notifying party has concluded that the notification threshold is met but none of the FFCs received need to be reported, the notification must include a further description of the reason for the notification. 

In our experience, if this information is not included in the draft notification, the case team will immediately request an RFI during the pre-notification period.

Practical experience from M&A procedures

In general, the Commission understands that the regime is still new and that there is a learning curve for both notifying parties and case teams.

From our experiences, it is important to note that:

• The pre-notification phase may be quite long for complex cases, with even non-complex cases being subject to a four-week pre-notification with multiple RFIs from the Commission.
• Regardless of the complexity of the case, certain questions are frequently asked, particularly those concerning the financing of the transaction and the nature of reportable FFCs.
• Once the formal notification is submitted, the EC typically does not request additional information, having dealt with most or all issues during pre-notification phase. 
• The FSR does not contemplate the adoption of a decision. The standstill period of 25 working days post formal notification must expire before companies can implement the concentration. Therefore, the formal notification phase will always have a duration of 25 working days (unless an in-depth investigation is opened). 
• Despite this, the Commission does send a short letter to the notifying parties regarding the closure of the preliminary review:

“Dear Sir,

We refer to your notification filed on [date] regarding the case referenced above.

In accordance with Article 10(4) of Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market1 (the ‘Foreign Subsidies Regulation’), we hereby inform you that the European Commission considers, on the basis of the information available to it, that there are insufficient indications to initiate an in-depth investigation in the present case and has, therefore, closed its preliminary review.

Please note that, for the purposes of Article 24(1) of the Foreign Subsidies Regulation, the period of 25 working days during which the concentration shall not be implemented expires today.”

Due to the significant time it takes to obtain clearance, we recommend that all companies contemplating transactions that may be subject to a mandatory FSR notification:

• Conduct internal screening in all relevant subsidiaries for FFCs already at an early stage given that this may be very burdensome;
• Set up a system for ongoing monitoring of FFCs; and
• In particular, consider the impact of any received FFCs that are “most likely to distort competition”.

5. The Commission has initiated its first in-depth investigation under the FSR

On 16 February 2024, the Commission opened its first in-depth investigation under the FSR. The notification under investigation concerns a Chinese state-owned train manufacturer, CRRC Qingdao Sifang Locomotive (“CRRC”). CRRC submitted a bid for the provision of electric trains and related services in a public tender issued by the Bulgarian Ministry of Transport and Communications. 

In a press release, the Commission stated that there are sufficient indications that CRRC has been granted a foreign subsidy that distorts the internal market. 

In the in-depth investigation, the Commission will determine whether CRRC has indeed been granted foreign subsidies, and whether these subsidies may have enabled CRRC to submit an unduly advantageous offer in the Bulgarian tender. Interestingly, the available summary notice concerning the initiation of the in-depth investigation reveals that CRRC’s bid was half the estimated value of the contract, while the foreign subsidies CRRC received in the form of grants or public procurement contracts were five times larger than the value of its bid in the tender. CRRC was unable to prove during the initial investigation that these contracts were awarded based on “competitive market conditions”.

The Commission has until July 2 to finalise its in-depth investigation. Given that most aspects of the substantive test are unclear, this decision will be significant for the understanding of the substantive test in the FSR.

If you need more information or further guidance in this area, please contact Morten Nissen  or Alexander Brøchner. 

See our Guide on the EU Foreign Subsidies Regulation and try our free FSR online self-assessment tool to help you understand if your company must notify foreign subsidies to the EC.

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