Access2Europe: The Hunt for Foreign Subsidies.

On 5 May 2021, the European Commission published its long-awaited draft proposal for a Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market, as announced in the White Paper of June 2020 on the same subject. The White Paper stirred up much debate among stakeholders and in public media, as it gave rise to concern that additional layers of bureaucracy might complicate the day-to-day market conduct, transactional business and public procurement bids of companies having received third country subsidies. The draft Regulation confirms this concern. While it largely follows the structure outlined in the White Paper, some details come as a surprise.

Conceptually, foreign subsidies are largely the same as State aid under the EU Treaty. If such a subsidiary is granted, its likelihood of internal market distortion must be assessed against a non-exhaustive list of criteria. These include the size, nature and intended use of the subsidy, but also the level of EU activity of the recipient and the overall market conditions (Article 3). The substantive de minimis threshold is low with 5 million euros over the last three years. Article 4 lists a series of subsidies that are most likely to distort the internal market: Subsidies for ailing companies outside a restructuring process, unlimited guarantees, but also subsidies enabling “an unduly advantageous tender” or “directly facilitating a concentration” (a very vague concept). Even where the criteria of Articles 3 and 4 result in a negative assessment, a “balancing” between negative and positive effects will take place (Article 5). Depending on the outcome, the Commission can impose a wide range of redressive and prohibitive measures. It should be noted that the Commission is given a broad discretionary margin in assessing whether foreign subsidies distort the internal market. These general principles inform the three layers of subsidy review.

Public tenders: While the concept of an “unduly advantageous tender” is linked to a theory of harm (i.e., that the beneficiary may outbid more efficient competitors), it is surprising that there is no subsidy threshold triggering the notification. Rather it is the contract value that triggers a notification requirement (250 million Euro, Article 27 para. 2). In addition, even below the contract value the Commission can at its own initiative require an ex-ante notification (Article 28 para. 6). The notification occurs at local level, as any subsidies received within the last three years must be reported in the tender documents. Without any limitation, any such notification signalling the presence of subsidies must be notified to the Commission without delay, provided the contract value exceeds the threshold, even if the subsidy is rather small (Article 28 para. 4). The Commission then has 60 days for a preliminary review and 200 days for an in-depth review, suspending the award. That is a long period of uncertainty for all involved. It goes without saying that the Commission can prohibit the award if there is a concern that the negative impact is not remedied by commitments. 

M&A: In the case of a concentration, a turnover threshold is relevant for the notification requirement (buyer or target is EU-based and generates EU turnover in excess of 500 million Euro). This threshold is not aligned on the Merger Regulation, which can lead to a variety of filing scenarios (only merger filing, two parallel filings, only subsidy filing). The second leg of the triggering threshold is the subsidy amount of +50 million (in the last three years). An ambiguity from a drafting point of view is the provision that a filing is triggered where the “undertakings concerned” (note the plural) receive the “aggregate” subsidy of +50 million. If “undertakings concerned” has the same meaning as in merger control (buyer/target), this would mean that a notification is triggered even where the buyer received no subsidies but the target received more than 50 million Euro in subsidies. It is not clear to me how the acquisition of a subsidized target by a non-subsidized buyer can “directly facilitate an acquisition” or otherwise distort competition in the internal market. As in the case of public tenders, the Commission can request a notification for ex-ante review of non-notifiable concentrations if it suspects the presence of subsidies (Article 19 para. 5). While the timeline of assessment is aligned on the Merger Regulation, the standard for intervention is that of the general provisions, i.e. very broad and vague.     

While the assessment of subsidies in the context of tenders and concentrations is limited to the impact of the subsidy on the tender or concentration at stake, the Commission remains free to assess at a later stage the impact of the same subsidies on other activities (Article 34). Similarly, under the first pillar of the Draft Regulation, the Commission can at its own initiative fully investigate subsidies regardless of any triggering threshold, and without any limitations in time, disposing of the same broad discretion as to its substantive finding.  

If these rules enter into force, potential beneficiaries of foreign subsidies will have to factor in additional feasibility assessments and procedural uncertainties as well as potentially prolonged waiting requirements in transactions and tenders. They may need additional protection in transaction documents against the risks associated with these procedures. As to the unlimited possibility of the Commission to review the impact of subsidies on day-to-day operations without any deadlines, this sword of Damocles is all the more bothering as the substantive standard of intervention defined in Articles 3 to 5 is quite vague and opaque.

It remains to be hoped that the “geopolitical awakening” of the EU will not unduly impact the flow of direct investment into the EU at the expense of innovation, employment and competitiveness.