Soon to come: Additional clearance requirement for M&A transactions in the EU due to the Foreign Subsidies Regulation


M&A advisors, in-house and external alike, be aware: from next summer, transactions may depend on an (additional) approval by the European Commission. While the procedure under the new Foreign Subsidies Regulation (“FSR”) is similar to that of the EU Merger Control Regulation (“EUMR”) - the parties have to notify their plans to the Commission and are subject to a stand-still obligation - the substantive test is different: it focusses on potential distortive effects of subsidies granted by states outside the EU on the EU’s internal market. The Commission is given an additional instrument to examine and, if necessary, prohibit M&A transactions – this instrument will exist in parallel and independent of the EUMR.

The FSR requires an acquisition of control (“concentration”) to be notified to the Commission if the target company has a turnover in the EU of more than EUR 500 million and the companies involved have received foreign subsidies of more than EUR 50 million within three years before the merger. The same applies mutatis mutandis to mergers and the creation of joint ventures. Even below the thresholds, the Commission may intervene ex officio against a concentration before and after its implementation, and it may order, for example, the repayment of subsidies or the unbundling of companies. These new rules obviously have an impact on the timeline of transactions, the scope of due diligence, and the drafting of purchase agreements. The FSR aims at public procurement, too – in this article we focus on M&A only and do not cover procurement procedures.

Foreign subsidy

The FSR defines a foreign subsidy as (1) any financial contribution provided directly or indirectly by a country that is not a member state of the EU (2) which confers a benefit to an undertaking engaging in an economic activity in the EU internal market and (3) which is legally or factually limited to one or more undertakings or industries. The FSR contains examples of what type of financial contributions are considered to be foreign subsidy: capital injections, interest-free loans, unlimited guarantees, compensation payments, tax advantages and any other economic advantage that is given without adequate remuneration. That concept is very wide and well-known from EU state aid law, that is the specific provisions prohibiting EU member states from granting similar benefits to undertakings.


The FSR defines the term "concentration" identically to the same term in the EUMR. a concentration is brought about by a lasting change in control such that (1) two or more previously independent undertakings or parts of undertakings merge or (2) one or more persons already controlling at least one undertaking or one or more undertakings acquire, whether by purchase of shares or assets, by contract or by any other means, direct or indirect control of the whole or parts of one or more other undertakings. Control, too, is defined in the same way as in the EUMR. This means, for example, that the acquisition of a minority shareholding which grants the acquirer a veto right over strategic decisions in the target company is a concentration. The creation of a joint venture, i.e., an undertaking over which several other undertakings have control, is a concentration if the joint venture performs on a lasting basis all the functions of an autonomous economic entity. As does the EUMR, the FSR contains exceptions for a temporary interim acquisition by financial institutions, the acquisition of control by insolvency administrators, and by specific holding companies.

Compulsory notification

A concentration is notifiable if:

  • At least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and has an aggregate EU-wide turnover of at least EUR 500 million, and
  • All undertakings involvedinthe concentration received from third countries (i.e. countries not members of the EU) combined aggregate financial contributions of more than EUR 50 million in the three financial years prior to the notification.

Turnover is determined in the same way as under the EUMR, and basically means group turnover (i.e. not only of those companies directly involved in the concentration). The whole group, too, is relevant when determining the amount of the foreign subsidy. If the thresholds are not met, the parties are not obliged to notify. Nevertheless, the Commission may order the undertakings to notify the concentration before it is implemented; in such an event, the undertakings are obliged to notify and to comply with the standstill obligation. If, from the point of view of the undertakings, it is not sufficiently certain whether, on the basis of the facts at hand, the thresholds for a notification have been reached, they can ask the Commission for guidance.

Standstill obligation

Until clearance by the Commission or until the expiry of deadlines, the concentration may not be implemented. Transactions implemented in violation of the prohibition are invalid. The Commission can impose a fine of up to 10 % of group turnover on any company participating in a violation.

Substantive test

While under the EUMR the Commission prohibits a concentration that threatens to significantly impede effective competition in the internal market, under the FSR a prohibition can be based on the grounds of "distortion on the internal market by a foreign subsidy". The assessment must take into account, for example, the amount of the subsidy, its nature, the economic and financial situation of the undertaking, the market conditions, the extent of the economic activity of the beneficiary on the internal market, and the purpose and conditions attached to the foreign subsidy. If the total amount of a foreign subsidy does not exceed EUR 4 million over three financial years, it is presumed that a distortion on the internal market is unlikely. Moreover, subsidies that do not reach the threshold of de minimis aid (currently EUR 200.000) do not distort competition on the internal market. Finally, only those foreign subsidies granted within a period of three business years preceding the conclusion of the contract, the publication of a takeover bid or the acquisition of a controlling interest are to be taken into account.

According to the FSR, for certain categories of subsidies, a distortion on the internal market can most likely be assumed. This is the case if a state grants a subsidy to a company that is in economic difficulties and would exit the market at least in the medium term in the absence of any subsidy, if a subsidy is granted in the form of an unlimited guarantee for liabilities, or as a non-OECD-compliant export financing measure, or if the subsidy is directly facilitating a concentration. If, for example, a foreign subsidy covers a significant part of the purchase price, it will have to be assumed that such a subsidy has distortive effects on competition.

If the Commission finds that a foreign subsidy has negative effects on competition in the internal market, it balances the negative effects of the distortion of competition with possible positive effects. Companies and consumers in the EU might benefit from such a subsidy, for example, in the form of lower prices for intermediate products or consumer goods.

Procedure after notification

The procedure is – again identical to the EUMR – structured in two stages. It begins with the notification. After the receipt of the complete notification, the Commission has 25 working days for a preliminary review. In merger control, this is frequently referred to as Phase I. If this preliminary review does not reveal concerns, the Commission ends its examination and informs the companies involved accordingly. The undertakings may implement the concentration.

In the event of concerns, the Commission may initiate an in-depth investigation, in merger control called Phase II, that ends at the latest after 90 working days with one of the following decisions (these are also modelled on the EUMR):

  • If there are no longer doubts as to the compatibility of a foreign subsidy with the internal market because the doubts raised in the preliminary procedure have not been confirmed or the positive effects of a foreign subsidy outweigh the negative ones, the Commission issues a no objection decision and the undertakings may implement the concentration.
  • If the Commission concludes that a foreign subsidy is incompatible with the internal market, a company may offer commitments to address the concerns, which the Commission may accept and make binding.
  • If the Commission finds that a foreign subsidy distorts competition on the internal market and commitments are neither offered nor accepted, the Commission prohibits the concentration. If the undertakings nevertheless implement the concentration, they violate the standstill obligation and risk a fine of up to 10 % of their group turnover.

The Commission, for a specified period of time, may order undertakings to bring to its attention all concentrations in which they participate; a breach is subject to a heavy fine.

The Commission’s investigative powers

In order to carry out investigations, the SFR provides the Commission with extensive powers. Such powers are rarely used in merger control proceedings because the notifying companies themselves usually have an interest in obtaining clearance by providing sufficient information; the use of such investigative powers, however, is the rule in cartel proceedings. For example, the Commission can require a company to provide it with all necessary information. The Commission also has the power to carry out inspections at the premises of an undertaking within the territories of the EU Member States and, for this purpose, to enter the premises, land and means of transport of an undertaking, to examine and take copies of the books and other business records, to ask representatives and employees of an undertaking for explanations on facts or documents relating to the subject-matter of the inspection and to record such explanations and to seal business premises or business records, as necessary, for the duration of the inspection. The Commission may also address a request for information to a country outside the EU and request an inspection on the territory of that country. However, those countries are not obliged to comply with the Commission's request.

If an undertaking does not cooperate, the Commission may take a decision on the basis of the facts known to it. In addition, the Commission may impose a fine of up to 1% of the total turnover achieved by the undertaking concerned in the preceding business year if the undertaking has intentionally or negligently provided incorrect or misleading information. The Commission may impose a fine of up to 5 % of the undertaking's average daily turnover for each working day of delay in answering formal requests for information.

Right to be heard, limitation periods, judicial protection

Before the Commission adopts a decision prohibiting a concentration or imposing conditions, commitments and remedies, it must give the undertakings the opportunity to submit their observations and, for this purpose, (limited) access to the file; the same applies before imposing a fine or periodic penalty payment. The Commission may base its decision only on reasons on which an undertaking has been heard.

All decision-making powers that the Commission has after the conclusion of a Phase II-review are subject to a ten-year limitation period, which begins on the day the subsidy is granted. Fines and periodic penalty payments may be imposed for up to three years from the termination of the infringement. The power to enforce a fine or periodic penalty payment decision lapses after five years from the date on which the fine or periodic penalty payment was set.

Legal protection against Commission decisions – prohibition, binding declaration of commitments, fines, periodic penalty payments, inspections – is available by bringing an action for annulment before the EU’s General Court (with the possibility of an appeal to the European Court of Justice).

Ex officio investigations

The Commission may on its own initiative (ex officio) examine all situations in which it suspects a foreign subsidy. Consequently, the Commission may examine concentrations even if the target company has a turnover of less than EUR 500 million in the EU or if the acquirer has received less than EUR 50 million in foreign subsidies in the past three years. In such ex officio proceedings, the powers of the Commission are basically the same as in the notification procedure. However, a fine due to a violation of the standstill obligation cannot be imposed, because the implementation of the concentration was not prohibited as the thresholds were not met. However, the Commission may require the parties to the concentration to take action in order to remedy a distortion of competition, such as repayment of the subsidies, divestiture of assets, granting of access to an infrastructure, refraining from certain market behavior or reduction of capacity or market presence on the internal market; this goes as far as ordering unbundling measures. Violations are subject to heavy fines

Date of application of the SFR

In order to enter into force, the FSR must be published in the EU’s Official Journal. That can be expected by the end of 2022 or the beginning of 2023. Most of its rules will apply six months later. The notification obligation will apply only nine months after the FSR’s entry into force.

Impact on M&A transactions

M&A transactions must take the FSR into account like any other regulatory provision that makes the transfer of companies or parts of companies subject to prior approval by an authority. In addition, the possibility that the Commission may initiate investigations on its own initiative must be taken into account. Therefore:

When planning the acquisition of an undertaking or a controlling influence over an undertaking, it must be examined whether the FSR thresholds are exceeded and consequently whether prior approval by the Commission is required.

25 working days must be allowed for the formal procedure. However, as known from merger control procedures, pre-notification contacts with the Commission are highly recommended and will take their time. Establishing the facts, collecting information from the companies etc. will certainly require some time and resources, as the information required may not be readily available – so far, no jurisdiction in the world has a similar tool to the FSR, and companies are neither prepared for nor familiar with it.

Even if the thresholds are not met, the parties must be aware that the Commission has the right to initiate an investigation on its own initiative. Therefore, they should make at least a rough assessment of whether and to what extent a foreign subsidy granted (and thus the merger) could pose a threat to competition on the internal market and decide accordingly whether to contact the Commission on a voluntary basis.

In the course of a due diligence investigation of the target it might be asked if the target has been held by the seller for at least three years, and, if not, clarify whether the seller acquired the target in conformity with the FSR. Otherwise, the target might not be owned by the seller.

If the SFR thresholds are exceeded, a condition precedent must be included in the M&A agreement that the transaction will not be completed until the Commission's approval has been obtained. Likewise, the parties have to make contractual arrangements as to what is to apply in the event of an in-depth investigation or with regard to commitments.

The seller might ask for contractual safeguards, for example, in the event that a notification to the Commission is not made because the buyer declares that it has received less than EUR 50 million in foreign subsidies in the past three years. Obligations to cooperate could be imposed on the buyer in the case of a later procedure. Guarantees will also be considered.

Text of the provisional consolidated SFR
Dr Helmut Janssen, LL.M. (King's College London)

Dr Helmut Janssen, LL.M. (King's College London)
Brussels, Dusseldorf
+32 2 627 7763 / +49 211 5660 18763 / +49 1520 16 18763

Martin Lawall, LL.M. (University of Glasgow)

Martin Lawall, LL.M. (University of Glasgow)
Senior Associate
+32 2 627 7767