Antitrust

The new mandatory M&A hurdle under the EU Foreign Subsidies Regulation began to apply on October 12, 2023. From this date, transactions meeting certain financial thresholds must be notified to the European Commission for review prior to closing. This new tool sits alongside the EC’s merger control regime and is part of a wider regime aimed at reviewing financial contributions granted to companies active in the EU by non-EU countries (called foreign financial contributions, “FFCs”).

Based on our experience of live filings, we give our thoughts on the important takeaways for dealmakers, and how the FSR fits into the wider regulatory landscape for global M&A deals.

In a Nutshell: The FSR’s M&A notification thresholds

As we discuss in more detail here, the FSR requires merging parties to notify their transaction to the EC for review prior to closing when (i) the target, merging parties or JV have EU revenue of €500 m or more in the previous financial year, and (ii) when they have combined FFCs of €50 m or more over the last three years.

The notion of FFC is extremely broad and captures a wide range of measures, including payments under contracts for goods/services, transfers of funds/liabilities, capital injections, grants, loans, guarantees, fiscal/tax incentives, and debt forgiveness. As such, in practice deals which meet the €500 m EU revenue threshold are generally likely to be notifiable.

FSR Scorecard for 2023

• At least 34 reviewable deals so far. This is already more than the number of reviewable deals that the EC had expected annually.
• Most deals subject to parallel EU merger control review. This is unsurprising given the FSR revenue threshold is higher than the EU merger control thresholds. It remains to be seen how aligned the processes will stay and merging parties will need to factor in the resulting impact on overall deal timetables.
• Requests for FFC data are more detailed than the EC first indicated. The final notification form was designed to minimise the burden of data collection on merging parties, including by requiring them to report only on FFCs above €1m (individually) and €45m (together per third country). However, the EC reserves the right to ask for more information at any stage. We have already seen requests for data on all FFCs below these thresholds, regardless of the perceived likely presence of distortive foreign subsidies. Notifying parties will need to engage constructively with the EC on the scope of information requests throughout the process, even for technical filings.
• No EC publication of notified deals – limiting transparency around the regime. This differs from the EU merger control process, under which the EC is obliged to publish all notifications, and is closer to the EU State aid process and many foreign direct investment (“FDI”) control processes. If the EC also decides not to publish details of its decisions not to refer deals for in-depth review, or to publish them with heavy redactions, this will mean dealmakers won’t have public precedents to help assess their deals. On the flipside, it may mean that the EC can afford to be more flexible, for example about giving waivers, since it won’t be bound by previous (public) decisions.
• More clarity on FSR FAQs. The EC has updated its Q&A document to give more detail in answer to what the EC says are the most commonly asked questions on the FSR. The update introduces a significant expansion of which FFCs are caught: parties now need to assess the €45m FFC threshold as combined between all of them per country (as opposed to individually), which materially impacts the information collection process. It also covers more basic jurisdictional and procedural issues and for example confirms that:
  1. While certain FFCs do not require disclosure, all FFCs are relevant for the purposes of determining whether the jurisdictional thresholds are met.
  2. FFCs provided by a private entity may be attributed to a third country when, for example, the private entity is directed or entrusted by the third country to undertake a certain action.
  3. As with the EU merger control regime, merging parties must self-assess the notifiability of their transaction rather than consult with the EC.

Global regulatory context

The FSR emerges at a time of increased global regulatory scrutiny of M&A activity, with new or expanded FDI control regimes, and enhanced powers to assess the competitive impact of deals using merger control powers, including deals otherwise falling below review thresholds. The FSR adds a new mandatory regulatory hurdle which will bite for global deals with significant EU activities, with implications for deal timetables and – in some more limited cases where distortive foreign subsidies are potentially at play – deal certainty.

Although we have not yet seen other jurisdictions adopt rules similar to the FSR, this could follow, for example via broadening FDI legislation to include a similar toolbox. Meanwhile, proposed changes to the US pre-merger notification process will require merging parties to disclose information about subsidies received from “countries or entities that threaten U.S. strategic or economic interests” and also report any contracts with defense or intelligence agencies valued at $10 m or more.

The main takeaway: Planning is everything…

While most filings are likely to be largely technical, assessment of filing obligations and preparation of any required filings will require a considerable amount of internal data collation on FFCs, which is unlikely to be available “off the shelf” as part of existing financial reporting systems. 

The earlier an efficient and robust collection process is started (ideally before the contemplation of specific deals), the greater the chance of aligning the timing for any FSR process with other regulatory approvals, avoiding unnecessary delays to closing, and ensuring ongoing legal compliance. 

…especially for PE investors

While the FSR does not specifically target PE, it introduces unique hurdles for PE investors, given the sheer number of companies across a PE firm’s fund portfolio and the nature of their investor base, which may include e.g. state affiliated pension funds and sovereign wealth funds whose investments could constitute FFCs.

Acknowledging the extra administrative burden on PE funds, the final notification form limits disclosure of FFCs to the investment fund(s) directly acquiring the target (as opposed to all funds), as long as the other funds have a majority of different investors measured according to their entitlement to profit and it can be shown that: (1) the fund which controls the acquiring entity is subject to “EU or equivalent legislation” governing prudential, organisational and conduct rules; and (2) the economic and commercial transactions (e.g. sale of assets, loans, credit lines, or guarantees) between the funds (and their controlled portfolio companies) are “at most limited”.

PE funds should assess the availability of this exemption ahead of contemplating specific transactions, as this will have a significant impact on the volume of information required about FFCs (and therefore the time needed to collect it). It will also likely determine the appropriate strategy for rolling data collection, for example whether to only collect information from funds which are likely to enter into reportable transactions in the foreseeable future.