Antitrust

In recent weeks the European Commission (“EC”) has launched two significant consultations that will shape the future of the EU Foreign Subsidies Regulation (“FSR”), publishing new draft guidelines on the EC’s approach to key elements of the regime (“FSR Guidelines”) and opening a broader review of the regime’s impact.  With the consultations marking two years since the FSR came into force, in this post we look at key takeaways from the past 24 months, the new FSR Guidelines and what to expect from the EC’s review. 

Background

The purpose of the FSR, which came into force on 12 July 2023, is to enable the EC to investigate financial contributions granted by non-EU governments (so-called “foreign financial contributions” or “FFCs”) to parties with activities in the EU (even if such parties are headquartered or principally active outside of the EU).  If the EC finds that any FFCs constitute distortive subsidies (i.e. because they confer an unfair advantage on their recipients in the context of an M&A or public procurement process), it can impose measures to redress their distortive effects.  The FSR regime includes a mandatory and suspensory notification regime for M&A deals and EU public procurement processes meeting certain financial thresholds.  The EC also has extensive powers to “call-in” below threshold concentrations and tenders, and to launch ex officio investigations into allegedly distortive foreign subsidies. 

Key takeaways from the first two years of the FSR regime

Significantly more filings than expected, with burdensome data collection requirements

When the FSR was introduced the EC estimated it would receive around 30 M&A and tender notifications per year.  These estimates have been dwarfed in practice: by early August 2025 the EC had received over 170 M&A notifications cases, and over 2,000 filings concerning public tenders. 

While most FSR filings are likely to be largely technical, assessment of filing obligations and preparation of any required filings requires a considerable amount of internal data collation on FFCs over a rolling three-year period, which is unlikely to be available “off the shelf”.  The notion of FFCs 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.  This includes circumstances where FFCs are granted in relation to a specific project in a non-EU state (for example tax incentives linked to renewables projects outside of the EU).

This is particularly burdensome for private equity (“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.  As expected, PE investors have as a result accounted for a significant proportion of M&A notifications (around a third to date). 

Given these onerous data collection requirements, 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.

Effective handling of filings and case teams is key to an efficient process

Having advised on multiple FSR filings, we have to date seen significant variation in the approach of different EC case teams in terms of the amount and type of information required.  Proactive and constructive engagement with case teams on the scope of information requests is therefore important throughout the process, even for technical filings.  Through careful management, these information requests can often be narrowed down through exemptions and waivers.  With little public transparency on the EC’s approach in individual cases, experience is key in understanding where the EC is likely to show greater flexibility. 

Main enforcement focus has been on Chinese and Gulf state subsidies and key strategic sectors

The EC’s enforcement practice has focused on sectors seen as strategically important for the EU, including infrastructure (transportation and telecoms), industrials, renewable energy and security equipment.  To date the EC has only initiated two in-depth reviews into mergers, both concerning acquisitions of EU targets by operators with links to the UAE government:

• e&’s acquisition of PPF’s telecoms operations in several EU Member States was ultimately cleared subject to behavioural remedies, including a prohibition of any financing to the target group in the EU. 
• State-owned Abu Dhabi National Oil Company’s (ADNOC) acquisition of German chemical producer Covestro was referred for an in-depth investigation on 28 July, with an initial deadline for the EC’s decision of 2 December. 

The EC has also opened in-depth reviews relating to bids by Chinese operators in public procurement processes and ex-officio investigations targeting Chinese suppliers operating in European markets. 

With the vast majority of notifications relating to acquirers based in the EU and US, this indicates that most cases are unlikely to raise substantive concerns.  Moreover, it should not be assumed that any transactions involving Chinese or Gulf state entities will necessarily raise concerns: the EC has granted unconditional clearance for two Chinese acquisitions without in-depth investigations (Haier’s purchase of Carrier’s Commercial Refrigeration business for $775 million and Luxshare’s acquisition of Leoni for €320 million).  

FSR Guidelines clarify EC’s approach to reviewing M&A

The FSR Guidelines, published for consultation on 18 July, reflect the EC’s experience and practice in applying the FSR to date, aiming to provide greater clarity on how the EC: (i) assesses whether there is a distortion of competition caused by a foreign subsidy, and (ii) applies the ‘balancing test’ to determine whether there are positive effects which offset any distortion.

In the context of M&A notifications, the FSR Guidelines confirm that the EC’s assessment will typically focus on two key issues (as seen in the e&/PPF and ADNOC/Covestro cases referenced above):

• Whether foreign subsidies distorted the outcome of the acquisition process.  If foreign subsidies allowed the buyer to outbid, or deter, other bidders for the target (e.g. through a reduced financing cost), the EC will consider if this could reduce the growth opportunities of rivals and limit potential efficiency gains or innovation.  This analysis will focus on identifying any other actual or potential investors interested in the acquisition, and then determining if the foreign subsidy crowded out their investment.  
• Whether the target could benefit from foreign subsidies post-acquisition.  The EC will consider whether foreign subsidies could distort competition in the market(s) in which the target operates post-transaction in a number of ways.  This includes: (i) relaxing financial constraints on the target, allowing it to adopt a more aggressive commercial policy (e.g. by reducing prices or offering other advantageous sales terms) at the expense of rivals; (ii) lowering the target’s output and/or investment costs and thereby altering its risk-taking incentives; or (iii) negatively affecting firms active at different levels of the value chain (e.g. if foreign subsidies led to the relocation of a given business or technology outside the EU).

The FSR Guidelines set a relatively low bar for the EC to find a distortive effect.  While the EC must show a ‘reasonable link’ between the foreign subsidy, the improved competitive position of the target company and the negative impact on competition, it is sufficient that the subsidy ‘contributes’ to that negative impact: it need not be the only or even the main factor. 

Where distortive effects are found, the EC must conduct a balancing test against any positive effects of the foreign subsidy.  Such positive effects could occur where the foreign subsidy enables the development of an economic activity in the EU, e.g. by enabling increased innovation or investment.  Similar to state aid proceedings, the EC may also take into account other positive effects relevant to key EU policy objectives, including the promotion of environmental protection, economic development in disadvantaged areas of the EU, or contribution to the EU economy’s competitiveness and resilience.

The balancing test does not involve a numerical computation, meaning that neither the negative nor positive effects have to be precisely quantified.  Ultimately, if the EC determines that the positive effects are greater than any distortive effects, it may clear a deal unconditionally.  However, even if that is not the case establishing positive effects may help to mitigate the scope of potential remedies.

The EC’s call-in powers

The FSR Guidelines also explain how the EC will consider applying its powers to call-in and review below threshold transactions.  Given that the number of FSR notifications has significantly exceeded the EC’s expectations, it is perhaps unsurprising that the EC has not yet formally made use of these powers.  However, we are aware of instances of the EC sending information requests to transaction parties in order to evaluate whether to issue a call-in and this is likely to become a greater focus as the regime becomes embedded. 

With no quantitative thresholds for triggering a review, the FSR Guidelines state that in assessing whether to call-in a merger the EC will consider several factors, including:

• Whether the target’s turnover understates its actual or future economic significance.
• The strategic importance of the relevant sector, especially if the target owns strategic assets such as critical infrastructure or innovative technologies.
• Evidence of roll-up acquisition strategies by the acquirer to build up influence or economic presence in a particular sector (or sectors).

With clear parallels to the EC’s approach to below threshold transactions in a merger control context, where the EC continues to encourage referrals from Member States under Article 22 EUMR despite the Illumina/Grail judgment, this emphasises that all major transactions should be evaluated for potential FSR implications, even if technically below the FSR thresholds.

The FSR review

Just under a month after consulting on the FSR Guidelines, on 12 August 2025 the Commission opened its first review of the FSR, inviting feedback on how the regime is being implemented and enforced: essentially an evaluation of how the new rules have functioned in practice since their introduction in 2023.  The Commission is required to conduct such a review every three years and report to the European Parliament and Council. 

There is considerable overlap between the two consultations, including in relation to the assessment of distortive effects and the balancing test.  However, the Commission’s broader review will also focus on the appropriateness of the FSR notification thresholds, and the complexity and cost of the FSR regime for businesses.  Importantly, in its report the Commission may propose legislative changes to the regime – including new notification thresholds or different review periods – aimed at ensuring the regime effectively addresses distortions caused by foreign subsidies, while minimising the regulatory burden. 

Given that the number of notifications has far exceeded expectations, the review can be expected to consider whether notifications are sufficiently focused on cases where there are genuinely potential distortive effects or are placing an undue burden on benign transactions. 

Next steps

The public consultation on the FSR Guidelines will be open until 12 September 2025, with the final guidelines required to be published by 12 January 2026.  Once finalised, the guidelines will serve as an important reference for companies and advisors.  Separately, the EC is due to publish its report reviewing the implementation of the FSR by July 2026, with comments sought by 18 November.  In the meantime, the EC’s second in-depth investigation in ADNOC/Covestro deal will be closely watched for further clarity of the EC’s approach to assessing the impact of foreign subsidies on mergers in practice.