The mandatory and suspensory notification obligation to the European Commission (Commission) under the FSR for M&A transactions arises if the following thresholds are met:2
at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generated an aggregate turnover in the EU of at least EUR 500 million in the preceding financial year;3 and
the parties were granted combined aggregate foreign financial contributions (FFCs) of more than EUR 50 million from non-EU countries4 in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.
Notably, the relevant undertakings that are taken into account for the turnover threshold depend on the type of transaction. In a straightforward acquisition of control, only the target’s turnover is relevant. In the case of a joint venture, the turnover threshold must be met by the joint venture (and not its shareholders), which means that greenfield joint ventures or joint ventures with no or limited turnover in the EU are not caught by the FSR. This is different from the turnover threshold under the EUMR5 where the thresholds can be met by two acquirers, even if the joint venture has no activities in the EU, often resulting in notification requirements for transactions with limited EU nexus. In case of mergers, the threshold must be met by one of the merging parties.
By contrast, for the FFC threshold, the FFCs received by all the undertakings concerned including their respective group (i.e. the ultimately controlling parent undertakings and all their subsidiaries) are relevant (similar to the group of undertakings relevant for the calculation of the EUMR turnover thresholds).6
The concept of FFCs is unique to the FSR and goes far beyond comparable definitions of subsidies and State aid, as FFCs do not require a measure to be specific or to bring about a benefit. FFCs include any transfer of funds or liabilities (e.g. grants), the foregoing of revenue that is otherwise due (e.g. tax advantages even where they are not specific to certain businesses), or the provision and purchase of goods and services, including arms’ length transactions concluded in the ordinary course of business (e.g. the sale of machines to a public customer outside the EU).7
The extensive information gathering obligations on foreign financial contributions raise the question whether the EU managed to ‘strike a balance between the effective protection of the internal market and the need to limit the administrative burden on undertakings subject to this Regulation’
FFCs must be granted by a non-EU State, which includes any government authority or public or private entity whose actions can be attributed to a State. The FSR contains little guidance on when actions can be attributed to a State and we would expect that the future decisional practice will provide more clarity on this. As a similar question arises under EU State Aid law when determining whether aid is ‘imputable’ to a State,8 we expect that the Commission will apply the same principles by analogy as a starting point.
The wide definition of FFCs causes practical difficulties, as identifying FFCs is not straightforward: ordinary course activities such as obtaining VAT refunds could be construed as FFCs, as they entail a ‘transfer of funds’, albeit in the form of a repayment. Similarly, purchasing public utilities from a non-EU State-owned provider could be considered a FFC, as FFCs include the purchase of goods from a government entity. Given the wide-ranging definition of FFCs, we would consider it prudent to adopt an expansive approach on which measures are taken into account to assess whether the FFC threshold is met.
Notably, while all FFCs have to be considered for the purpose of the jurisdictional test and all FFCs that do not fall into specific exempted categories must be notified in the notification forms (see below), the EC’s substantive assessment is limited to assessing whether foreign subsidies9 (and not FFCs) distort the internal market in the context of the proposed transaction.10 This means that while undertakings must provide information on a wide range of measures in the notification forms and must take even more measures into account for the jurisdictional assessment, only a subset of FFCs will be relevant for the EC’s substantive assessment.
If the thresholds are met, a notification is mandatory and suspensory and the same gun-jumping rules with fines up to 10% of global group turnover11 apply as under the EUMR. In addition, the Commission may impose a broad range of remedies12 in case a transaction is closed without prior clearance including an order to unwind the transaction.13
Undertakings need to be ready to answer questions especially on the approach to collecting and reporting foreign financial contributions, the transaction structure and its financing
Even if the jurisdictional thresholds are not met, there are situations where the Commission may still investigate whether foreign subsidies distort the internal market in the context of a M&A transaction. Similar to the principles laid down in the Commission’s approach to merger control in Illumina/Grail14, the FSR includes powers for the Commission to review transactions below the thresholds before closing (Art. 21(5) FSR). After closing, the Commission may potentially open an investigation under the ex officio tool15 – very much like the EC’s investigation of a completed transaction from a competition law perspective in the Towercast case.16 However, due to the limited enforcement capacities of the EC, it can be expected that only clearly subsidized transactions will face a meaningful call-in or post-closing investigation risk.