EU flexes its muscles on foreign-subsidised acquisitions and market distortions

15 min read

On 17 June 2020, the European Commission published a White Paper seeking views on three powerful new tools to control the acquisitions and activities of foreign subsidised companies in the EU:1 (i) a general ex post control mechanism to review competitive distortions, (ii) a mandatory ex ante notification mechanism that would allow the Commission to review foreign subsidised acquisitions, including certain minority investments, and (iii) the possibility to exclude bidders that have received distortive foreign subsidies from public contracts tendered by the EU and Member State authorities. The three new tools, if they were to result in legislative measures, would have significant implications for companies operating in the EU that receive some form of foreign subsidy, or acquisitions of EU companies financed by foreign subsidies.


The gaps in the EU’s current toolbox

The European Commission (“Commission”) already has a range of powers to tackle subsidies, both home-grown and international: it can apply EU competition law and the WTO trade rules. In addition, it recently acquired powers to ensure the protection of certain strategic EU assets from foreign investors from a national security or public order perspective. However, according to the Commission, these instruments leave an enforcement gap, both when it comes to the review of acquisitions of EU companies by subsidised non-EU companies, and for the distortive effects of certain foreign subsidies on the internal market.

First, as the White Paper notes, neither EU antitrust rules nor EU merger control regulations “specifically take into account whether an economic operator may have benefited from foreign subsidies (even if in principle it could form part of the assessment) and they do not allow the Commission (or Member States) to intervene and decide solely or even mainly on this basis”.

Second, the White Paper notes that financial support granted by third countries (either to undertakings active in the EU or to their parent companies outside the EU) is not covered by EU State aid rules.

Third, under national FDI screening mechanisms and the EU FDI Screening Regulation,2 authorities may assess and block FDI based on security and public order grounds, but this does not explicitly include considerations of foreign state subsidies.

Finally, EU anti-dumping and anti-subsidy rules, themselves based on WTO Agreements, apply to the import into the EU of goods only, and – importantly – do not cover trade in services, acquisitions of EU companies or other financial flows in relation to the activities of undertakings in the EU. It is also difficult to apply anti-subsidy duties to subsidies granted by Country A which benefit a company that is exporting to the EU from a factory located in Country B – although the EU has recently adopted measures on this basis in rather specific circumstances.3

It is this enforcement gap relating to the distortive impact of foreign subsidies on the EU’s internal market, which lies between the boundaries of traditional competition and trade rules, that the White Paper is proposing to close.


The specific concerns about foreign subsidies

The Commission largely distinguishes three categories of subsidies that can cause distortions on the EU’s internal market:

  1. subsidies to promote existing activities in the EU;
  2. subsidies to attract new activities or investments in a third country; and
  3. subsidies to facilitate the acquisition of EU companies.

Given the limited reach of the EU’s State aid and WTO rules, the ideas set out in the White Paper intend to extend the EU’s anti-subsidy rules to companies outside the EU. According to the White Paper, “EU State aid rules help to preserve a level playing field in the internal market among undertakings with regard to subsidies provided by EU Member States. However, there are no such rules for subsidies that non-EU authorities grant to undertakings operating in the internal market. This situation may include circumstances where the benefitting undertakings are owned or ultimately controlled by a non-EU company or a foreign government.” [emphasis added]


Three proposed “Modules” to bolster the EU’s competition and trade rules

In order to address potential distortions on the EU market, the Commission proposes three approaches, which can be applied in parallel:

Module 1: Addressing distortions caused by foreign subsidies given to an economic operator active in the EU market

With this first tool, the Commission envisages making an ex post review of the impact on the EU internal market of foreign subsidies granted to any company active in the EU, irrespective of its place of establishment. Such review would generally be initiated ex officio by the Commission or a national authority: they “may act upon any elements [they consider] relevant indicating the granting of a foreign subsidy to a beneficiary active in the EU”. While the Commission would conduct this review, competence would be extended to Member States’ authorities where the foreign subsidy impacts one Member State only.

In a two-step review process to determine the impact of specific subsidies on the internal market, the authorities may consider indicators such as: the size of the subsidy, the situation, market conduct and level of activity of the beneficiary on the internal market and the general situation of the market concerned.

The White Paper envisages that certain categories of subsidies (e.g., subsidies in the form of export financing) are likely to create distortions in the internal market because of their nature and form. Even if a distortion is established, it could be balanced by a positive impact: for example, the subsidy may support the EU’s own public policy objectives (e.g., creating jobs, environmental considerations, digital transformation, or public safety). Interestingly, these public policy justifications are often not available in EU anti-subsidy investigations in the trade field, so their inclusion here does show that this is a hybrid form of instrument between trade and competition. As a result, economic operators need to be prepared to present a convincing strategy in light of the Commission’s concerns.

If the Commission remains unconvinced, it has the possibility to impose “redressive measures”, ranging from structural remedies (e.g., divestments) or behavioural measures (e.g., prohibition of certain investments, acquisitions or market conduct; third-party access; FRAND licensing) to redressive payments to the EU or Member States. In addition, the EU authorities may impose severe sanctions for not supplying information or supplying incomplete, incorrect or misleading information, while also undertaking fact-finding visits at the EU premises of the alleged beneficiary of a foreign subsidy. It will thus be important for economic operators to assess the legal risks of investing in the EU internal market in advance.

Module 2: Tackling the distortive effect of foreign subsidies facilitating the acquisition of EU targets

Under a second – alternative or cumulative – tool, the Commission proposes an ex ante review, based on a mandatory notification, of acquisitions of EU undertakings that have been facilitated by foreign subsidies, not only directly by being linked to the acquisition, but even indirectly by de facto increasing the financial strength of the acquirer, which would then be used for an acquisition and may give rise to a distortion of the internal market. As a result, the potentially extremely broad scope of this tool risks leaving non-EU economic operators in the dark as to what exactly is covered (although some guidance would no doubt be published if these proposals were to be adopted).

The new measures would cover not only acquisitions of control of an undertaking, but also acquisitions above a certain percentage of the shares or voting rights (threshold yet to be determined) or any “material influence” over an undertaking (precise concept yet to be determined). Therefore, the Commission could also target certain acquisitions of non-controlling minority shareholdings. Needless to say, as the rules pass through the legislative process we would expect guidance to be adopted as to what “material influence” would cover, particularly as the regime will be mandatory and not voluntary. On the one hand, the “material influence” test may be similar to the one used by the UK Competition and Markets Authority to capture acquisitions in which, even though de facto or de jure control is not reached, the acquirer is deemed to have material influence over the target by other means, such as relevant industry expertise that may influence decisions at the shareholder or board level. On the other hand, it could well also resemble the German “competitively significant influence” test.

The Commission recommends that only potentially subsidised acquisitions of EU targets, i.e., where the notifying parties have received a financial contribution by any third-country authority in the past three years, or expect such contribution in the coming year, would trigger a notification requirement requiring the transaction to be put on hold. It proposes to define an EU target as “any undertaking established in the EU and meeting a certain turnover threshold in the EU, but other criteria could also be considered” and then indicates that the turnover threshold “could be set at for example EUR 100 million, but other values, thresholds or alternative approaches could also be envisaged”.

Moreover, the notification requirement would be triggered where the financial contribution received by the acquiring undertaking in the three calendar years prior to the notification is in excess of a certain amount or of a given percentage of the acquisition price. Being a triggering event, these criteria need to be clearly defined. As anyone who is familiar with anti-subsidy or State aid investigations would tell you, establishing the amount of the financial contribution with precision is not an easy task. This may be why the proposed threshold for financial contribution may potentially be low – which would allow authorities and companies to proceed on the basis that the threshold is met without having to first undertake a detailed analysis of the exact value of the potential financial contribution (which is a task that typically takes many months in trade cases). This being said, the fact that the approach to determining notifiable acquisitions relies on self-assessment, including as to past subsidy received, does clearly increase legal uncertainty.

Similar to Module 1, the effects of the subsidy may be balanced against the overall positive impact of the transaction. If, however, the Commission finds a distortion, it may adopt a conditional clearance decision based on proposed commitments, or prohibit the proposed transaction. Again, the Commission envisages a sanction mechanism for violations of procedural rules, such as on the submission of incorrect or misleading information.As a result, a significant number of transactions would become notifiable yet covered by a layer of legal uncertainty, potentially leading to a substantial burden on foreign investors, but also on EU economic operators relying on external support. In turn, this may risk hampering investment incentives in the EU in general. The regime may also potentially be open to mis-use by third parties seeking to interfere with competitors’ acquisition plans.

As a result, a significant number of transactions would become notifiable yet covered by a layer of legal uncertainty, potentially leading to a substantial burden on foreign investors, but also on EU economic operators relying on external support. In turn, this may risk hampering investment incentives in the EU in general. The regime may also potentially be open to mis-use by third parties seeking to interfere with competitors’ acquisition plans.

Module 3: Tackling distortive foreign subsidies in public procurement rules

Finally, the Commission proposes adjustments to EU public procurement rules, which would require bidders to notify contracting authorities whether they have received any foreign subsidy in the previous three years, or would receive such a contribution in the course of the contract. Such information would then be passed to the competent supervisory authority, which may start an investigation. If it is held that the bidder has received a distortive foreign subsidy, then the operator may be excluded from the specific tender process or even from all future public procurement procedures up to 3 years.


Interplay with other EU and international instruments

One crucial question in practice is how the proposed new tools fit into the existing EU legal and regulatory landscape.

According to the Commission, the objective of the new tools is different from that of existing tools – focusing on the effects of foreign subsidies as such. The Commission thus finds that the new measures are complementary to EU merger control and EU antitrust rules. In a situation where a transaction would have to be notified under both Module 2 and the EU Merger Regulation (or national merger control regulations), there would be parallel proceedings (albeit the review period for the Module 2 procedure has not yet been determined). The Commission notes that “while subsidies may be taken into account when assessing for instance the financial strength of the merged entity relative to its rivals, the focus of the analysis of the significant impediment to effective competition is on the structure of competition in a given market, not on the existence or effects of foreign subsidies as such. A new instrument would therefore with its different objective complement the Merger Regulation. If a given acquisition has to be notified under both such a new instrument and the Merger Regulation, the notification and possible assessment would be dealt with in parallel, but separately from each other under the respective instruments.” [emphasis added]

Similarly, the Commission considers the new tools to be complementary to EU trade defence instruments and WTO Agreements. It notes that, contrary to established instruments, the new tools would not cover the subsidised import of goods from third countries to the EU, but only the subsidisation of an undertaking active in the EU (other than through trade in goods from the subsidising country) and the subsidised acquisition of an EU target. However, because the Commission nevertheless intends to rely on WTO jurisprudence as guidance, questions as to the legality of the approach under international law may arise.

The Commission also regards the new tools to be complementary to the FDI screening mechanisms which come into effect in October 2020. While the FDI Screening Regulation does not introduce FDI screening at EU level and is limited soft harmonization of the assessment of threats to public security and public (i.e., critical or strategic) assets and introducing a cooperation mechanism between the Commission and the Member States, the newly proposed instrument would assess potential distortions in the internal market more broadly, without any limitation on the type of assets. Moreover, while the FDI Screening Regulation targets all types of FDI, the trigger for a review under the newly proposed tools is foreign subsidies that may or may not be linked to an investment. However, procedural overlaps may exist if an FDI constitutes an acquisition that is facilitated by a foreign subsidy, while also raising concerns with regard to security and public order, leading to parallel procedures. As a result, such a foreign-backed acquisition would have to be notified to several relevant public authorities under both the FDI screening mechanisms and the possible new tool, considerably adding to the administrative burden.


Conclusion and next steps

The White Paper is extremely far-reaching and if adopted into legislation would be a significant change for foreign investors into the EU. However, it only reflects a policy proposal and is likely to be the subject of significant debate during the legislative process between the European Parliament and the Council. That debate will have to balance different interests: some EU governments need and want foreign investments and are thus less concerned about whether the investor has received subsidies in its home jurisdiction outside the EU. But the proposal is another manifestation of growing protectionism, whether for national security or wider economic or geo-political reasons.

At this stage, the Commission is inviting stakeholders to take part in an open public consultation (closing on 23 September 2020).4 The Commission will then, in light of the responses received, consider whether to issue specific legislative proposals. Any such proposals would then have to be adopted by the EU legislature, involving the European Parliament and the Member States in the Council. This process can take around two years, depending on the degree of consensus among these institutions, and the Commission’s proposals will no doubt be subject to debate and amendments along the way.

The devil will be in the detail here. The Commission’s proposals still lack clarity on several counts, which are important to understand how they would work in practice. For example, the lack of a clear definition of “material influence”, plus the difficulty of establishing the level of financial contribution with precision, coupled with a mandatory ex ante notification regime, could (if not corrected) lead to many precautionary notifications of transactions which do not fall with the intended ambit of the regulations. This would generate unnecessary delay and red tape.

The new measures increase uncertainty, as companies making investments into the EU may potentially have to file notifications under the new mandatory procedures, “regular” merger control and pursuant to national FDI regimes prior to closing their transactions. And then, subsequently, may be subject to further review under the ex post regime. The proposed adjustments to the EU public procurement rules would equally create uncertainty for companies participating in European tenders.


1 European Commission, ‘White Paper on levelling the playing field as regards foreign subsidies’ (17 June 2020), available at:
2 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union [2019] OJ L79I/1.
3 The recently concluded anti-subsidy investigation into imports of Glass Fibre Reinforcements from Egypt is a rare case in this direction: indirect Chinese subsidies (preferential financing) given to companies in the China-Egypt Suez Economic and Trade Cooperation Zone were attributable to Egypt because the latter had recognized and endorsed the preferential financial support of the Chinese authorities and adopted it as its own. See Commission Implementing regulation (EU) 2020/776 of 12 June 2020 imposing definitive countervailing duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People's Republic of China and Egypt and amending Commission Implementing Regulation (EU) 2020/492 imposing definitive anti-dumping duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People's Republic of China and Egypt, [2020]OJ L 189/1, notably at paragraphs 676-699 and 706-725.

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