On 12 October 2023, the notification requirements under the Foreign Subsidies Regulation (FSR) take effect. From now on, qualifying companies doing business in the EU via M&A, JVs or tendering for large EU public projects must make a mandatory, pre-closing notification to the European Commission (EC).

As the notification regime goes live, the EC has indicated that it has 17 notifications in pre-notification stage. These will presumably move into the formal review phase upon the notification regime going live or shortly thereafter. Given the EC initially estimated it might receive up to approximately 40 notifications per year, this number would appear to support our view that the number of transactions/projects caught by the FSR notification regime will be significantly higher than the EC's estimate.

The FSR has been introduced to ensure a level playing field within the EU (as between both EU and non-EU companies active in the EU), by granting the EC extensive powers to review and investigate potentially distortive foreign subsidies. For companies, the FSR requires extensive tracking of any foreign financial contributions (FFCs) received from non-EU states and potentially the submission of mandatory pre-closing notifications to the EC, if the thresholds are met.

Is my transaction caught by the new notification regime?

As the notification obligations begin, several key issues around the FSR remain unresolved:

• How best to approach data collection for FFCs: Most businesses will not currently have effective financial data collection systems in place to track FFCs. The new notification regime places a heavy burden on businesses to monitor this information. Some companies may prefer to record granular detail on every FFC, whilst others may take a more pragmatic approach by only determining whether the notification threshold is met. However, so far, the EC has not indicated how often it will request further details from notifying parties with regards to specific FFCs, nor has it indicated whether or not it would grant parties waivers for missing information.
• How the FSR will impact contracting authorities running tenders for public projects: Under the open procurement procedure, a bidder will only be required to submit a notification to the EC as part of the bidder's initial tender submission. However, under the multi-stage procedures, a bidder will be required to notify the EC twice: (i) first with the bidder's initial request to participate in the tender; and (ii) secondly, alongside the final tender submission. This will place a considerable burden on both bidders and contracting authorities alike as the notification and assessment procedure is likely to cause significant delays to the procurement timeline. Bidders may even start to think about entering pre-notification dialogues with the EC early, before producing tenders in order to reduce the risk of being excluded midway through the process. The full extent of the impact will not be known until we see the EC review notifications for public projects. However, it is clear that contracting authorities will need to consider the possible timetabling impact of investigations (both Phase 1 and Phase 2) when creating their procedural bidding models.
• How timelines for parallel notifications will work in practice: For companies that are required to make both a merger notification and an FSR notification to the EC for a given transaction, the EC has indicated that it intends to run the pre-notification periods for both notifications in parallel. Parties are encouraged to start pre-notification early and at the same time to reduce the potential for delays.
• How the contributions of Limited Partners (LPs) of investment funds/Private Equity (PE) firms will be dealt with: FFCs are defined broadly and include contributions made under normal market conditions. There is no clear indication that investments from state-linked LPs should not contribute towards an investment fund/PE firm's total FFCs for the purpose of the notification thresholds. Investment funds/PE firms will need to remain alert to this possibility and keep a record of the contributions made from their state-linked LPs until clarification is provided.
• If a business does not need to notify, what is the likelihood they are in the clear? The EC can launch ex officio investigations where it suspects that foreign subsidies may distort the internal market. As such, transactions or bids that fall short of notification could still end up in the EC's firing line. The EC has yet to provide an indication of how it will use these powers.
• Whether in practice the FSR will only impact certain sectors or FFCs from certain countries: The EC has made clear that it will not discriminate between FFCs from particular sectors or countries. However, there is a particularly high value threshold (€250 million) to meet for mandatory notification in relation to public works contracts. Projects within certain industries, such as public transport and IT, appear prime candidates for procurements of the value necessary to meet the requirements for mandatory notification. However, the EC has reiterated that the FSR is not intended to target certain sectors or countries and accepted that it does not know at this stage which areas will raise substantive concerns.
• When we can expect more guidance as the regime evolves: The EC has stated that it intends to update the Q&A on its website with questions that are frequently asked, but has not given a timeline for this. The EC has also committed to making Phase 2 decisions public. Formal guidance is expected to be issued by 2026 at the latest. However, revisions to the substantive laws, namely the Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market and the Commission Implementing Regulation (EU) 2023/1441, seem unlikely, even if significant issues are encountered. The interim Competition Commissioner Didier Reynders appointed last month is essentially a caretaker commissioner following Commissioner Vestager going on unpaid leave in light of her nomination to head the European Investment Bank. Moreover, 2024 is an election year for the European Parliament, making it highly unlikely the FSR will be of sufficient priority for parliamentary attention before the current term heads into election mode.

For further information on the FSR, please see our previous updates available here and here.