“FSR” (Foreign Subsidies Regulation) Requires New Reporting Obligations for M&A Transactions – EU Commission Can Block Mergers
As a measure to curb so-called factors distorting the internal market, the European Commission, through EU Regulation 2022/2560 in conjunction with Implementing Regulation (EU) 2023/ 1441 of July 10, 2023, a new reporting requirement for companies planning a merger and intending to implement it with the help of subsidies from third-country governments or other public authorities. The notification must be submitted prior to the merger (i.e., ex ante). This is followed by an assessment by the European Commission to determine whether a subsidy received distorts competition and whether the proposed transaction can be approved. Violations of the notification requirement may result in fines of up to 10% of a corporate group’s total annual revenue.
This reporting requirement applies within the following scope:
- Effective Date: October 12, 2023, and later
- Which companies are affected? Mergers (i.e., mergers, acquisitions of sole or joint control, and the formation of joint ventures) involving companies that receive certain subsidies from third countries; both the acquiring company and, where applicable, the target company are required to file a report (in the case of so-called “subsidies most likely to distort competition”)
- Threshold values for the company:
- Companies based in the EU have a net revenue of 500 million euros in the EU internal market
- One of the companies involved has received subsidies of more than 50 million EUR
- Bids in the context of procurement procedures (> 250 million EUR and > 4 million EUR in grants per non-EU country)
- If there is reason to believe that the participating companies may have received subsidies within the 3 years prior to the merger
- Consequences of failure to file a notification: No transaction is possible without approval from the European Commission. If a transaction is carried out without approval from the European Commission, the company may face heavy fines of up to 10% of a corporate group’s total annual revenue.
- What must be reported? The “FS-CO” form requires a comprehensive description of the transaction, beginning with a statement of the economic reasons for the merger, the value of the transaction, and the sources of financing (debt, equity, cash, etc.). In addition, documents such as reports from any due diligence reviews must be submitted.
- Exceptions: Among other things, the following financial contributions from third countries do not need to be entered in the table: deferrals of taxes or social security contributions, general depreciation and loss carryforward provisions (unless limited to specific economic sectors); tax reductions under double taxation agreements, the provision or acquisition of goods or services under normal market conditions or through a transparent procurement process, and financial contributions from third countries of less than 1 million EUR
When determining whether a subsidy distorts competition (the so-called “balancing test”), the European Commission relies on risk categories that serve as an indicator of a high likelihood of competition distortion (“most likely to distort the internal market”).
Indicators that a subsidy is highly likely to distort competition are present primarily in the following circumstances: for distressed companies without a restructuring plan
- that directly facilitate the merger
- allow for the submission of an unreasonably low bid
- Export financing that is not in accordance with the OECD Agreement on Export Credits
- or unlimited guarantees (amount and term)
Conclusion
Before a merger is carried out, it must be determined whether the company has received subsidies from public authorities, provided that the company exceeds the thresholds for mandatory notification and a corresponding notification has been filed.
Sources:
https://eur-lex.europa.eu/legal-content/DE/TXT/?uri=CELEX:32023R1441
