2. 11. 2023

Obligation to notify a receipt of foreign subsidies in certain mergers and acquisitions and public procurement procedures

Last week, a part of Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (Foreign Subsidies Regulation) began to be applied, which establishes the obligation to notify the receipt of foreign subsidies in the case of intended concentrations and public procurement procedures.

The established system for monitoring state aid in EU Member States prevents them from granting state aid that unduly distorts competition within the internal market. However, this system did not include cases where companies received any form of aid from third countries. The Foreign Subsidies Regulation has addressed this deficiency, the purpose of which is to establish rules and procedures for investigating foreign subsidies that actually distort or have the potential to distort the internal market, and to redress these distortions.

The Foreign Subsidies Regulation applies to all companies operating in the EU market that have received any form of direct or indirect financial contribution from a country outside the EU (“foreign financial contributions”). It is important to note that foreign financial contributions are not limited to traditional forms of state aid (such as capital injections, grants, loans, tax incentives, debt forgiveness, etc.). They also encompass the purchase of goods or services. Therefore, all revenues that companies obtain from third countries, including public or private entities whose actions can be attributed to a third country, are considered in this context. 

Contrary to the rules on foreign direct investments, which remain within the jurisdiction of EU Member States, the Commission will be the sole supervisory authority for the specific foreign subsidy regulations.

Like conventional merger notification procedures, companies are required to submit a prior notification to the Commission and stand still pending a positive decision. The thresholds for notification are determined as follows:

    • turnover threshold: at least one of the companies involved in the merger (in the case of a merger), the acquiring company (in the case of an acquisition), or the joint venture is based in the EU and generated a combined turnover in the EU of at least 500 million EUR in the previous financial year; and
    • foreign financial contributions: the parties to the transaction have collectively received foreign financial contributions from third countries exceeding EUR 50 million in the three years preceding the conclusion of the contract, the publication of the public tender, or the acquisition of a controlling interest.

The Regulation on foreign subsidies also mandates prior notification for companies participating in public procurement in the EU, with the thresholds established as follows:

    • estimated value of the public procurement: the estimated value equals or exceeds EUR 250 million; in cases where the public procurement is divided into lots, the total value of the lots applied for equals or exceeds EUR 125 million; and
    • foreign financial contributions: the supplier (including affiliated companies) and its main subcontractors have received foreign financial contributions totalling EUR 4 million or more in the three years prior to the application. Despite this, the bidders not meeting the EUR 4 million threshold must still submit a statement confirming that they do not meet the notification threshold.

Under the Foreign Subsidies Regulation, the Commission may require parties involved in merger and acquisition transactions or public procurement procedures that do not meet the above-mentioned notification thresholds to notify the Commission about their intended transactions before their execution if the Commission believes that these transactions are aided by foreign subsidies that distort competition.

When the Commission initiates an investigation, it will first assess the amount of financial contributions and their impact on the competition with the internal market. If, during an in-depth investigation, the Commission determines that the parties have received foreign subsidies that distort the internal market and are not offset by positive effects within the offsetting test, it will have two options. The Commission could either accept commitments to effectively remedy the distortion (offsetting measures) or prohibit the transaction.

Due to the high reporting thresholds, the immediate implications of the Foreign Subsidies Regulation will primarily impact companies engaged in larger merger and acquisition transactions and those participating in significant public procurement processes, as they will need to obtain Commission approval. Nevertheless, Slovenian companies must also assess whether they have met the aforementioned foreign financial contribution threshold in their dealings with third countries or entities whose actions can be attributed to these countries. Based on this assessment, they must determine whether a special notification is required for Commission clearance of a concentration or whether they must inform the contracting authority about the foreign financial contributions received.

Author:        Matevž Klobučar, Attorney at Law
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