Following a trend towards protectionism that seems quite fashionable in many jurisdictions globally those days, the European Commission proposed, on 5 May 2021, a regulation on foreign subsidies distorting the internal market (hereafter “FSR”) intended to ensure a level playing field between companies subject to EU State aid rules and companies which are not.
On 30 June 2022, the co-legislators (EU Parliament and Member States) reached a political agreement on the text, meaning that the regulation could be formally adopted in the coming months and become effective as soon as 2023.
For people unfamiliar with EU State aid rules, the EU has a rather unique regime in place which aims at tackling government support, whatever its form, in favor of economic operators, which is likely to distort or distorts competition and trade within the EU. But, today, there is no equivalent set of rules that can be enforced in relation to subsidies received by economic operators from third countries. The traditional Section on subsidies contained in trade instruments or the Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union which are limited in their scope may indeed hardly qualify as an equivalent. This asymmetry was highly criticized over the past few years, as it was schematically deemed to put European companies at a disadvantage compared to foreign companies heavily subsidized by their home country (Chinese companies were particulary in the spotlight).
With the FSR, this asymmetry or enforcement gap shall now be history.
The FSR will provide the European Commission with new tools and powers to investigate foreign subsidies granted to companies that are engaged or will engage in economic activities in Europe and to remedy their distortive effects on competition.
Prior notification obligations for concentrations and public procurement bids meeting certain thresholds
In case of a merger, acquisition or creation of a full-function joint venture, the transaction will have to be notified to the European Commission prior to its implementation if the following cumulative thresholds are met:
(a) an annual turnover generated in the EU of at least EUR 500 million by the target of the acquisition, by any of the merging undertakings, or in the case of a joint venture, by the joint venture itself if it is established in the EU or by one of the parent companies if it is established in the EU; and
(b) subsidies amounting to at least EUR 50 million.
This review will run in parallel with the traditional EU merger control review (if also applicable).
In case of a public procurement procedure, a bid will have to be notified to the European Commission and the award of the contract put on hold if the following cumulative thresholds are met:
(a) the estimated contract value is at least EUR 250 million; and
(b) the bid involves a foreign subsidy of at least EUR 4 million by a single third country.
To ensure efficient control, the Commission will be vested with investigatory powers in that context (power to send information requests to companies, power to conduct fact-finding missions and inspections, etc...).
Following the notification, the Commission will be able to (i) prohibit the concentration or the award of the contract to the concerned bidder, (ii) impose behavioral and structural remedies or accept commitments, or (iii) issue full clearance. A breach of the notification obligation will potentially be fined up to 10% of the aggregated turnover of the undertakings concerned.
Ex-officio investigations
The Commission will also have the power to launch investigations on its own initiative into any other market situation where there is a suspicion of distortion of competition due to foreign subsidies. This includes but is not limited to concentrations and public procurement procedures where the thresholds above are not met. Again, the Commission will have investigatory powers as well as the power to impose fines on non-cooperative undertakings.
Challenges ahead
This is an innovative and very ambitious tool, which was finally drawn up in a relatively short period of time (less than 14 months) and for which a certain number of points will have to be clarified quickly for the sake of legal certainty.
It remains to be seen whether it will succeed in achieving its objectives and not produce (too many) undesirable effects. For example, there may be unintended consequences as this new regulation will not only affect state-controlled companies outside the EU, but all companies (including EU companies) that benefit from foreign subsidies while carrying out or preparing to carry out economic activities in Europe.
While waiting to see the first effects of the FSR, the efficiency of the European institutions in producing laws (be they hard or soft) and moving fast on competition/regulatory topics is to be commended, as it must be remembered that the FSR will be only one of many areas to be monitored in relation to competition enforcement in the EU, at a time when additional regulation (Digital Markets Act) is being put in place and current procedures and policies are being updated.