The EU Foreign Subsidies Regulation (FSR) adopted in December 2022 creates a new instrument to prevent foreign subsidies from distorting the European Union (EU) internal market. It aims to fill a perceived regulatory gap left by EU State aid rules applying to subsidies granted by EU countries but not by foreign states. It started to apply on 12 July 2023 and its notification obligations kick in on 12 October 2023. Procedural details are laid down in the Implementing Regulation (IR) which entered into force on 13 July 2023.

Key things you need to know about the FSR and the IR:

  • The FSR creates an additional layer of deal conditionality for sizeable transactions besides potential foreign direct investment (FDI) and merger control clearance.
  • From 12 October 2023, when acquiring (including jointly) control of a company in the EU or participating in a public tender in the EU, companies – including EU ones – will have to notify the European Commission (Commission) of foreign financial contributions (FFCs) received from non-EU states if the relevant thresholds are met or if the Commission so requests. Notification is compulsory and suspensory. Failure to notify or to suspend closing pending clearance may lead to severe sanctions. Information requirements are far-reaching as they comprise FFCs irrespective of whether they have a link with the notified transaction or public procurement procedure.
  • Beyond notified transactions and public procurement procedures, the Commission may launch ex officio investigations where it suspects that a foreign subsidy may distort the internal market. The FSR can relate to any type of activity unless already governed by other legislation.
  • Where following an investigation (initiated either in relation to a notification or on an ex officio basis) the Commission determines that a foreign subsidy risks distorting the EU internal market, remedies could apply, and the Commission could even prohibit the transaction or the award of a public contract.

We have put together a brief overview for your reference. We would be happy to facilitate a discussion with our team to review what this regulation could mean for your company.

Based on the 11th Amendment to the German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen, “GWB”) that was passed by the German parliament (Bundestag) on 6 July 2023, the GWB will undergo significant reform (the “Reform”). Among other Reform amendments, attention has focused on the Federal Cartel Office’s (Bundeskartellamt, “FCO”) new powers in the context of sector inquiries (Sektoruntersuchungen). According to the Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz, “BMWK”), the amendments intend to strengthen business opportunities for competitors, start-ups and small / medium sized entities.

For the first time under German competition law, the FCO will obtain powers to take remedial measures following sector inquiries, even where the addressee has not been found to have engaged in anti-competitive conduct. Under the Reform, the FCO will be able to take measures where it identifies a significant and continuing ‘disruption of competition’ (Störung des Wettbewerbs) in the relevant market. Such measures will include – as ultima ratio – divestment orders (new Section 32f of the GWB).

In this blog-post we: explain the concept of sector inquiries under the GWB in general; and analyse the key amendments to the FCO’s sector inquiry powers, the most significant changes under the Reform.

Continue Reading Sector Inquiries and the German new (and complicated) Competition Toolbox

On July 19, 2023, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice (collectively, “the Agencies”) issued a new set of merger guidelines in draft form for public comment (the “Draft Guidelines”).  The Draft Guidelines, if adopted, will replace the Horizontal Merger Guidelines issued in 2010 and the Vertical Merger Guidelines issued in 2020 (the latter of which the FTC withdrew in September 2021).  The updates make significant changes to the guidelines, such as:

  • Lowering the thresholds for when the Agencies are likely to presume that horizontal mergers are illegal;
  • Including—for the first time—a presumption of illegality for certain vertical mergers;
  • Adding guidelines focused on serial acquisitions and acquisitions of potential competitors;
  • Introducing concepts related specifically to multi-sided “platforms”; and
  • Explicitly addressing the effects of transactions on labor markets for the first time.
Continue Reading U.S. Antitrust Agencies Propose Major Changes to Merger Guidelines

The Foreign Subsidies Regulation (“FSR”) enters into force today, 12 July 2023. It creates a new instrument designed to prevent foreign subsidies from distorting the EU internal market (see our blog). The objective is to level the playing field within EU markets between companies subject to scrutiny under the EU State aid rules and companies receiving subsidies from non-EU Member States. Two days ago, on 10 July 2023, the European Commission (the “Commission”) adopted the Implementing Regulation (“IR”), which sets out the procedure and enacts the notifications forms. 

Continue Reading The EU Foreign Subsidies Regulation starts to apply – what you need to know about the notification obligations

On June 27, 2023, the U.S. Federal Trade Commission (“FTC”), with the concurrence of the Antitrust Division of the Department of Justice (“DOJ”) (together, “the Agencies”), issued a Notice of Proposed Rulemaking (the “Notice”) that proposes extensive changes to the Hart-Scott-Rodino (“HSR”) Act premerger notification form and associated instructions, as well as to the rules implementing the Act. The proposed changes represent the most significant revisions to the requirements that HSR filing persons must satisfy in the nearly 50 years since the inception of the HSR notification process. 

Continue Reading FTC and DOJ Propose Sweeping Changes to the HSR Form

Belgium introduced an FDI screening mechanism anticipated to enter into force on July 1, 2023, adding yet another jurisdiction in the EU which has adopted national measures to implement the EU’s FDI Regulation (EU) 2019/452. The new Belgian regime may place additional compliance obligations on companies, and, for some investments, it will entail modifications to initially planned transactions. For companies considering transactions – directly or indirectly – in Belgium, the new regime creates an additional layer of deal conditionality, besides merger control and the EU Foreign Subsidies Regulation (also due to be implemented this year – see our previous blogpost here).

Key Takeaways:

  • The FDI screening mechanism will cover key sectors for the Belgian economy; for example, critical infrastructures, essential technologies or raw materials, defense, and energy;
  • Notification is mandatory and the investors cannot close the transaction before the foreign investment has been cleared, or they risk incurring hefty fines;
  • The preliminary assessment phase can take up to 30 calendar days and where a more in-depth review is required, this can take up to an additional month, but extensions and suspensions are possible.
  • The Interfederal Screening Commission (“Screening Commission”) will review the notifications. The competent minister will clear the investment, impose remedies, or prohibit the investment where no remedies can overcome the concerns over Belgian national security, public order or strategic interests.
Continue Reading Belgium takes action to screen foreign direct investment (FDI) on its territory

A glance at headlines regarding competition law could easily give the impression that U.S. antitrust agencies have embarked on a record number of merger challenges in recent years. But the numbers tell a different story: in the first two years of the current Administration, the rate of merger-related federal enforcement actions has actually decreased. While the agencies are attempting to deter transactions, they are doing so through strident rhetoric and procedural changes that increase both the cost of deal making and the uncertainty of agency decision making, rather than through increased adjudicative enforcement activity.

Observers of the U.S. antitrust landscape could be forgiven for missing this phenomenon if they simply read the media coverage in recent months. Commentators and advocates continue to characterize the current status of merger enforcement actions as substantial; one attorney with the American Economic Liberties Project argued the agencies “have successfully blocked a record number of deals in the last two years,” while another antitrust commentator stated “[t]he Antitrust Division is filing a record number of cases” in recent years. In the same vein, Bloomberg claimed “US enforcers have roughly doubled their efforts to block mergers under the Biden administration.”

This view of the agencies’ conduct comes amid tougher rhetoric from the current Administration on competition law, including a July 2021 executive order urging federal agencies to plan for “the revitalization of merger oversight.” Moreover, in recent months, the Department of Justice’s Antitrust Division (“DOJ”) and the Federal Trade Commission (“FTC”) have drawn widespread attention with a few high-profile merger challenges, including DOJ’s March 2023 challenge to the proposed JetBlue/Spirit merger; the FTC’s recent challenge to Amgen’s proposed acquisition of Horizon Therapeutics under a novel and untested theory of harm filed in May 2023; and, of course, the FTC’s lawsuit seeking to block Microsoft’s proposed acquisition of Activision in December 2022.

But zooming out from the handful of headline-grabbing court challenges to look at the aggregate level of enforcement activity by the federal antitrust agencies, the picture becomes more complicated. In terms of both absolute numbers and as a percentage of the total number of transactions filed with the agencies, the number of mergers that the agencies challenged during the first two-plus years of the current Administration decreased compared to similar time periods in prior administrations.

Comparing the first two calendar years of the two most recent administrations shows the change in the number of enforcement actions,[1] as well as the enforcement rate,[2] as shown in the following two graphs:

As these figures show, the absolute number of enforcement actions was slightly lower in the first two years of the Biden Administration (50) than it was in the first two years of the Trump Administration (53). The decrease in enforcement activity becomes clearer when you look at the enforcement rate (i.e., the number of enforcement actions divided by the number of transactions reported to the agencies). As the figure on the right shows, the enforcement rate during the first two years of the Biden Administration (0.76%) was nearly 40 percent lower than the enforcement rate during the first two years of the Trump administration (1.24%).

The drop-off is even more stark when comparing the first two years of the Biden Administration to the last year of the Trump Administration, as shown in the two charts immediately below.

In 2020, the FTC and DOJ challenged 36 transactions, representing 1.9 percent of reported transactions. But in 2021, the agencies challenged just 28 transactions, accounting for 0.7 percent of reported transactions—less than half the rate of 2020. The enforcement rate has crept up since 2021, but as of the first quarter of 2023, it was still less than half of the agencies’ enforcement rate in 2020.

These numbers contradict the narrative presented in recent commentary from legal news observers: the rate of merger enforcement has actually decreased under the new leadership at the FTC and DOJ. However, concluding from the 2021 and 2022 metrics that the antitrust agencies are pro-merger would be ill-advised.

Despite initiating fewer formal enforcement actions, the antitrust agencies have sought to make deal making more difficult using other mechanisms that are not reviewable by courts. Former FTC Commissioner Noah Phillips described this counterintuitive reality in April 2022, commenting that “[a]ntitrust enforcement over the last fifteen months has been anything but vigorous—indeed, it has been sclerotic.” And yet, as Phillips observed, the FTC has engaged in “gratuitously taxing M&A” through various tactics, including:

  • Suspending the early termination of the initial Hart-Scott-Rodino Act waiting period for all transactions;
  • Increasing the number of Second Requests issued and expanding the scope and burden of those full-phase investigations;
  • Adopting a general aversion to consent agreements;
  • For those consent agreements that the FTC enters,[3] imposing a new requirement that the merged entity must obtain the agency’s prior approval to engage in future transactions in certain specified industries;[4]
  • Sending a large volume of pre-consummation warning letters.

It appears that the agencies are pursuing a goal of general deterrence of transactions through broad application of these tactics rather than by increasing the number of merger enforcement actions.

*           *           *

Companies considering deal making activity should be aware that full-phase investigations can take longer than under previous administrations, but that ultimately the agencies are not challenging as many transactions as they have in the past. This atmosphere of uncertainty requires a significant amount of planning and careful strategic thinking well in advance of entering into a merger agreement. Covington has the experience and knowledge to provide effective guidance in this challenging environment.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Antitrust Litigation practice.

[1] For the purposes of this alert, “enforcement actions” include (1) complaints filed to block a merger, (2) consent agreements following merger investigations, and (3) mergers abandoned in the face of antitrust concerns raised by the FTC or DOJ with an accompanying press release or other public acknowledgement of the abandonment. This is largely consistent with how the FTC and DOJ count enforcement actions. See, e.g., Fed. Trade Comm’n & Dep’t of Justice Antitrust Division, Hart-Scott-Rodino Annual Report Fiscal Year 2021, at 9-15 (counting “challenged” merger transactions as those in which a complaint was filed (both to block mergers and for consent purposes) and when parties abandoned or restructured the transaction after the relevant agency raised antitrust concerns).

[2] We calculate the enforcement rate as the number of enforcement actions divided by the number of transactions reported to the agencies, as published officially by the FTC and DOJ in Appendix B of their Hart-Scott-Rodino Annual Reports (for data through September 2021) and preliminarily on the FTC’s Premerger Notification website (for data from October 2021 onward). While there may be slight variability in the datasets depending on how particular actions are counted, the trends described in this alert remain clear.

[3] Until May 2023, DOJ had not entered a consent agreement since the Senate confirmed AAG Kanter. The first and only consent DOJ has entered since November 2021 came mid-trial in the Antitrust Division’s litigation seeking to block ASSA ABLOY’s proposed acquisition of Spectrum Brands’ hardware and home improvement division, and even in agreeing to that settlement, DOJ publicly stated that a complete injunction would have been preferable. See Competitive Impact Statement, U.S. v. ASSA ABLOY AB, 1:22-cv-02791, Dkt. 129, at 7 (D.D.C. May 5, 2023) (“The United States respectfully submits that only a complete injunction preventing the original proposed merger would have eliminated those risks. Alternatively, complete divestitures of all relevant standalone business units necessary to fully compete may have diminished those risks significantly. Based on the totality of circumstances and risks associated with this litigation, however, the United States has agreed to the proposed Final Judgment, which includes additional provisions and protections to address some of the concerns identified above.”).

[4] Divestiture buyers are facing similar restrictions if they want to sell the divested assets within 10 years of acquiring them.

Various national competition authorities (“NCAs”) are continuing to consider sustainability arguments in competition cases. However, NCAs are increasingly diverging in their approach as to whether, and to what extent, they are willing to allow sustainability considerations in the competition law framework. This blogpost highlights a few recent developments in jurisdictions on both sides of the Atlantic.

Continue Reading Sustainability Agreements: Potential Divergence between Authorities

On April 27, 2023, the Commission presented its draft regulation on SEPs (“Draft SEPs Framework Regulation”, retrievable here).

Under the aegis of DG GROW, but in close consultation with DG COMP, the Commission seeks to address what some have perceived as lack of transparency and predictability in the licensing of SEPs.  The Commission had previously expressed its concern in its Intellectual Property (IP) Action Plan of 2020 and 2017 Communication and suggested that this situation could lead to a cumbersome and costly licensing process for both owners and implementers of SEPs.  The Commission sought feedback via a public consultation between February and April 2023.

The draft SEPs Framework Regulation would:

  • Establish a Competence Centre to register SEPs at the European Union Intellectual Property Office (“EUIPO”) and providing an electronic register and database with extensive information about SEPs;
  • Oblige the owners of SEPs to register any claimed SEP in the database;
  • Create additional essentiality checks through the Competence Centre;
  • Establish an out-of-court procedure to determine fair, reasonable, and nondiscriminatory (”FRAND”) conditions and aggregate royalties for use of a given standard.
Continue Reading Draft Regulation – The EU Commission Proposes a new Framework for the Licensing of Standard Essential Patents (“SEPs”)

The European Competition Commissioner, Margrethe Vestager, announced on 20 March 2023 that new State aid investigations into “aggressive tax planning” practices of multinationals can be expected. This follows an in-depth inquiry into tax ruling practices in European Union (“EU”) Member States for the period 2014-2018.

While the European Courts have annulled several European Commission (“Commission”) decisions that ordered companies to repay to the State advantages gained from tax rulings, they have decided that State aid law also applies to tax measures, even if direct taxation is a prerogative of Member States. However, as this article sets out, the European Courts have limited the Commission’s review.

In particular, by its judgment of 8 November 2022 in the Fiat Chrysler case (C-885/19 P), the Court of Justice of the European Union annulled a Commission decision ordering Fiat Chrysler to refund EUR 30 million of tax advantages to Luxembourg. It clarifies when a tax ruling can be considered State aid.

These are the key takeaways of this judgment:

  • Although not harmonized at the EU level, direct taxation must comply with State aid rules. Therefore, the Commission may review tax rulings under State aid law and verify, for instance, that the tax system is applied consistently with the objectives pursued.
  • As long as direct taxation is not harmonized at the EU level, it is up to Member States to determine the tax regime applicable to companies. Therefore, the Commission should consider that the normal tax system, against which discriminations favoring certain companies may be State aid, is determined by national law.
  • When examining whether a tax measure favors certain companies over others, the Commission cannot substitute the normal national applicable law with its own standard of normality.

This judgement will likely impact pending investigations into the tax rulings issued to other companies and in ongoing proceedings. It will also set the approach the Commission may take in potential new investigations.

In short, this judgment says that if a tax ruling is issued in compliance with the national legal framework and not manifestly inconsistent with the objectives pursued by the national tax regime, it is unlikely to be State aid.

Continue Reading Will the EU Commission start new State aid investigations into multinationals’ tax rulings after of the Court of Justice’s judgment in the <em>Fiat Chrysler</em> case?