On 12 July 2023, the long-awaited EU Foreign Subsidies Regulation (FSR) came into effect. The FSR radically expands the European Commission's (EC) scrutiny of subsidised firms active in the EU under state aid rules to those receiving subsidies outside the EU (irrespective of where the firm is domiciled).

With the FSR now in force:

• The EC now has the power to conduct own-initiative investigations into mergers, public procurement processes or other economic activities where it considers foreign financial contributions (FFCs) may have had a "distortive" effect in the EU market.
• Any deals signed from 12 July onwards may require mandatory pre-closing notification to the EC prior to closing (unless they complete before 12 October 2023). 

Some other recent key developments to be aware of: 

• On 10 July 2023, the EC published the Implementing Regulation to accompany the FSR. The Implementing Regulation provides more detail on the procedural aspects of how the FSR regime will operate, in particular the ex ante notification and approval process (e.g. time limits, process for notifications, access to the Commission's file, use of confidential information etc). 
• The Implementing Regulation also includes template notification forms for transactions (Form FS-CO) and for public procurement tenders (Form FS-PP). Similar to the EC's merger notification form, both notification forms require detailed information about the parties, transaction, FFCs, as well as information to help the EC assess whether any contributions could be distortive. Helpfully, full details will only have to be provided for those FFCs that exceed €1 million in value and are of the type that are most likely to distort the internal market (e.g. subsidies granted to ailing undertakings, unlimited guarantees, export financing and subsidies that directly facilitate a transaction or unduly advantage a tender). Summary information will need to be provided for other FFCs. This will reduce the administrative burden for parties preparing notification forms. However, businesses must still keep track of all FFCs received in order to determine whether the relevant notification thresholds under the FSR are met.
• On 12 July 2023, the EC updated and expanded its FAQs, providing further detail on several key issues. These include, amongst other things, treatment of tax exemptions, how the EC assesses a change of control for determining whether a transaction is notifiable, and the circumstances under which financial contributions from private entities may nevertheless be attributed to a non-EU state. 
• On 13 July 2023, the EC published a Communication on the technical specifications for transmission of documents to the EC.

Now that the FSR regime is up and running, the potential for notifications to the EC must be factored into deal and bid timetables. Failure to seek ex ante approval for a notifiable M&A transaction or public tender can result in fines of up to 10% of aggregate worldwide turnover of the parties concerned. In relation to merger control, the EC has equivalent fining powers which, in practice, it uses (recently fining Illumina €432 million for example).

Parties should be mindful that the EC has extensive redressive measures under the new regime. Their powers include, for example, the unwinding of a transaction/prohibiting the award of a public contract, reducing capacity/market presence, publishing R&D results, repaying foreign subsidies with interest and/or adapting the governance structure. These may significantly undermine the commercial rationale of a transaction or tender bid.

For further information on the FSR regime, see our full update.