From 12 July 2023, parts of the EU Foreign Subsidies Regulation (FSR) will start to apply. Just two days prior, the European Commission finally adopted rules for its implementation in the FSR Implementing Regulation. The package also includes notification forms for filings related to M&A deals (Annex I – Form FS-CO) and public procurement procedures (Annex II – Form FS-PP). Even though the notification-based provisions of the FSR will not take effect until 12 October 2023, these forms are already critically important for preparing FSR filings, and upcoming pre-notification contacts with the European Commission.
The adoption of the FSR Implementing Regulation has been long awaited. The initial draft published in February 2023 had been fiercely criticised by companies and business associations during the consultation process. One focus of this criticism was the far-reaching reporting obligations for foreign financial contributions (FFCs) received by companies (see article of 8 February 2023: M&A Deals Under the New Foreign Subsidies Regime – A Taste of What to Expect).
Simplified preparation of FSR filings for M&A deals
The European Commission has responded to this criticism and significantly reduced the reporting obligations on FFCs filed using the Form FS-CO.
Instead of the “catch all” approach provided for in the initial draft (line-by-line reporting of all FFCs worth EUR 200,000 or more), the European Commission has now opted for a much more focussed approach:
First, companies need to provide detailed information about FFCs that may fall into any of the categories of foreign subsidies most likely to distort the internal market as defined in Article 5(1) FSR (“high risk FFCs”).
Second, high-level information on certain other FFCs needs to be made available in aggregate form (“other reportable FFCs”).
Information on such FFCs needs to be reported for the three years prior to the signing of the M&A deal. Importantly, the reporting obligation only applies to individual FFCs worth EUR 1 million or more.
Line by line reporting of “high risk FFCs”
This category of FFCs comprises the following measures/transactions considered by the FSR most likely to distort the internal market:
FFCs granted to an ailing undertaking, i.e. the relevant entity was at any point in time in the last three years an undertaking was likely to go out of business in the short or medium term in the absence of any FFC; or
FFCs granted in the form of an unlimited guarantee for the debts or liabilities of an entity, namely without any limitation as to the amount or duration of such guarantee; or
FFCs that qualify as an export financing measure not in line with the OECD Arrangement on officially supported export credits; or
FFCs that directly facilitate a concentration (i.e. M&A transactions involving a change of control).
FFCs that fall into any of these categories need to be reported individually both by the notifying party/parties and by the target company.
High level reporting of other FFCs
Unlike high risk FFCs, only the notifying parties – but not the target company (nor the seller) – have to report other FFCs. Such other FFCs do not need to be reported line by line. Rather, the Form FS-CO provides a template (table) to be completed with high level information for each type of FFC (e.g. direct grant, loan, tax advantage, guarantee, risk capital instrument, equity intervention, debt write-off, etc.) and the estimated aggregate amount of FFC per non-EU country (by using ranges).
No information is required for non-EU countries where the notifying party/parties has/have received an estimated aggregate amount of FFCs below EUR 45 million within the relevant time period. Importantly, FFCs granted in the context of the provision/purchase of goods/services (except financial services) at market terms in the ordinary course of business no longer need to be reported. Finally, there are important alleviations for investment companies, such as PE firms. Under certain conditions, they no longer need to include FFCs granted to other investment funds (or their portfolio companies) managed by the same company.
The final version is very much in line with the unofficial rumours that have been spreading since April (see article of 24 April 2023: Update on EU Foreign Subsidies Regulation (FSR). In a nutshell, it is fair to say that the European Commission has taken the significant concerns raised by stakeholders regarding the excessive reporting obligations under the initial draft FSR filing forms seriously – and remedied them to at least a certain extent.
While significantly less information needs to be disclosed, the legal and factual complexity of the information gathering process has increased. In fact, the references to complex legal concepts such as high risk FFCs within the meaning of Article 5 FSR and the multi-layered system of exceptions and counter-exceptions for other reportable FFCs (including the new EUR 45 million threshold) will make it even more challenging for companies to apply the FSR.
For instance, it remains to be seen to what extent companies, in particular multinational corporations, will be able to estimate whether they exceed the EUR 45 million threshold per non-EU country. This could be challenging, for instance where the corporate group in question has more than one legal entity active in a given non-EU country. And things are even worse under the FSR’s public procurement tool, where the EUR 45 million threshold is replaced by a significantly lower EUR 4 million threshold.
Finally, it is important to bear in mind that the re-adjustment of the scope of reportable FFCs for the FSR filings has no impact on the assessment of the filing obligation (i.e. the EUR 50 million FFC threshold for M&A deals). For the latter, things have not changed, meaning that each and every FFC still needs to be counted towards the threshold (including, for instance, FFCs below EUR 1 million, FFCs granted in the context of transactions concluded at market terms, and FFCs granted to portfolio companies controlled by an investment fund managed by the same PE firm).
Next steps: What companies can and should do now
The final FSR Implementing Regulation confirms that the new system will have a major impact on potentially notifiable M&A transactions. The adjustments in the final implementing regulation are a step in the right direction. However, they do not change the fact that the FSR requires many EU and non-EU companies alike to immediately engage in an extensive, time-consuming and complex information gathering process.
With regard to the reporting obligations under the FSR, in particular, it will be key to establish an internal information gathering system to collect the requested information on a global and group-wide basis for the past three years. At least those companies that can already foresee or cannot rule out that they may have to make a FSR filing within the next 12 to 24 months should kick off this process sooner rather than later. Since the timeframe of the reporting obligation is linked to the date of signing of the M&A agreement (for M&A deals) or the notification (for public procurement procedures), the system should also be designed in a way to allow for regular future updates.
We are working on legal tech solutions to help companies collect information in a way that minimises their administrative burden. For more information, please do not hesitate to contact us.