The EU Foreign Subsidies Regulation (“FSR”), which creates a new clearance mechanism for non-EU subsidies granted to companies engaging in certain activities in the EU, took effect on 12 July 2023, with notification obligations starting on 12 October 2023. On 22 February 2024 the European Commission’s (“Commission”) Directorate General for Competition (“DG COMP”) published a Policy Brief discussing the 100 days since the start of the notification obligation for concentrations.

This post provides an update to our previous blog post on FSR enforcement expectations for 2024, taking account of the Policy Brief, the reported enforcement activity of the Commission’s Directorate General for Internal Market, Industry, Entrepreneurship and SMEs (“DG GROW”) for public procurement procedures, and the launch of the first in-depth investigation by DG GROW into a public procurement procedure in Bulgaria.

Key Takeaways

• The Commission does not publish the decisions it adopts after a preliminary review and will not issue guidelines on key concepts underpinning the FSR before 2026. In the meantime it has sought to provide some additional guidance to companies through informal documents such as Q&A pages, news articles, and Policy Briefs. However, it has yet to provide guidance on how it assesses the distortive potential of foreign subsidies. Companies will therefore have to anticipate how such foreign subsidies will be assessed under the FSR, with a view to developing their own narratives to persuade the Commission that any foreign subsidies they may have received are unproblematic.

• As of 20 January 2024, DG COMP had received 53 (pre-)notifications, higher than the 30 notifications it expected annually in its 2021 FSR proposal. To review these files and launch investigations on its own, DG COMP has been restructured with the creation of a new directorate (Directorate K) from 1 March.
• As on 19 January, DG GROW, which is in charge of reviewing public procurement procedures, had received over 100 notifications / declarations. DG GROW also opened its first in-depth investigation into foreign subsidies received by CRRC, a Chinese rolling stock manufacturer.

Limited guidance on procedural issues only

In the absence of guidelines on certain key concepts underpinning the FSR, which are not expected to be published before 2026, and without any decisions published yet, notifying parties will have to make do with limited guidance from informal Commission documents, such as Q&As posted on its website, news articles, and Policy Briefs. However, these documents only address procedural and jurisdictional matters and do not deal with substantive considerations. Further, DG COMP has not offered any clarifications on key FSR issues, like the criteria for determining the existence of a distortion caused by a foreign subsidy on the internal market, or the evaluation framework for any positive effects resulting from FFCs.

In its Policy Brief, DG COMP restates the importance of correctly identifying a transaction as (i) a merger, (ii) an acquisition of control, or (iii) a creation of a joint venture, categories which are in line with those developed under the EUMR. Such categorisation directly impacts on the relevant thresholds for FSR notification and the scope of reporting of foreign financial contributions (“FFCs”). The Policy Brief also reiterates the difference between FFCs for jurisdictional purposes and for reporting purposes. Regarding the former, all FFCs must be counted, whereas regarding the latter, only certain FFCs must be reported, due to existing exceptions to the reporting obligation. DG COMP is of the view that the exceptions are exhaustive and should be interpreted narrowly. Note that when an investor is relying on the exception to report FFCs to investment funds other than the one directly involved in an acquisition of control or a joint venture in the EU, the relevance of the exception must be demonstrated to DG COMP and cannot just be assumed.

Detailed information must be provided on FFCs where they may fall in one of the categories of foreign subsidies most likely to be distortive. In this respect, DG COMP considers that the categorisation of FFCs is generally straightforward. It stresses that the most likely to be distortive category of FFC that directly facilitates a concentration does not depend on the intention of the granting authority; even FFCs granted generally for acquisitions (and not specifically the one notified) can belong to that category. As a result, investments made by non-EU countries as limited partners belong to that category because the countries typically provide resources used by the funds to make the acquisitions.

In the absence of further guidance, companies need to anticipate and to develop their assessment and line of arguments to persuade the Commission that foreign subsidies they may have received are unproblematic. Drawing from EU State aid law may be useful in this respect, given the similarity of the concepts.

New directorate at DG COMP to treat FSR filings and ex officio investigations

In our previous blog post of January 2024, we reported that, the number of FSR concentration filings which have been received so far significantly exceeded the Commission’s original expectations. The Policy Brief confirms this and shows that, in the period spanning from 12 October 2023 to 20 January 2024, DG COMP received 53 files, of which 14 have formally been notified (with one transaction being withdrawn). Of the 14 notified cases nine have been fully assessed. None of these nine cases raised apparent concerns as they did not lead to any in-depth investigation. The 53 cases cover a wide array of sectors, ranging from basic industries to fashion retail and high technologies. One-third of the cases involved an investment fund as notifying party.

42 of the 53 pre-notified cases were also notified to the Commission for merger control purposes, and a further five cases were subject to national merger procedures. 26 of the 53 cases also involved a foreign direct investment filing in one or several EU Member States, showing that the FSR creates an additional layer of deal conditionality for sizeable transactions besides merger control and foreign investment screening.

There were concerns that the very limited number of Commission staff dedicated to the FSR enforcement would be insufficient to absorb such workload (see previous blog post). From 1 March 2024, a new DG COMP structured directorate (Directorate K) with three units and 40 officials replaces the FSR Task Force previously in place. However, it remains to be seen if and when the number of Commission staff in Directorate K will reach the 100 employees the Commission initially estimated it would require to enforce the FSR M&A tool and use its ex officio powers.

First DG GROW in-depth investigation

DG GROW, the directorate-general responsible for overseeing the FSR public procurement procedures, did not issue any Policy Brief or equivalent document after the first 100 days of application of the FSR (contrary to DG COMP). However, DG Grow did announce in a short press release that it has received over 100 submissions. This widely exceeded the Commission’s 2021 expectation of about 36 public procurement notifications per year.

Most notably, DG GROW launched the first FSR in-depth investigation. The investigation relates to a notification submitted by a Chinese State-owned train manufacturer, CRRC Qingdao Sifang Locomotive Co., Ltd. (a subsidiary of CRRC Corporation) for a public contract on the provision of electric trains in Bulgaria, as well as related maintenance and staff training services.

In launching this investigation, the Commission considered that the value of the bid was five times lower than the total amount of FFCs received by the company and substantially lower than the contract value estimated by the contracting authority or the offer of its competitor.

Under the FSR, a decision opening an in-depth investigation only have to be published via a summary notice inviting market participants to submit their views within a period of time determined by the Commission. The summary notice of the investigation has been published on 29 February 2024 in the Official Journal and the Commission set a 10 working days period for submitting comments.

[Updated 27 March 2024: In week commencing 25 March 2024 CRRC withdrew its bid. As a result, the Commission stated that it will close its investigation.]

Covington will continue to monitor these important developments. In the meantime, if you have any questions concerning the material discussed in this blog, please contact the members of our FSR and State aid practice.