The European Commission has published its much awaited Implementing Regulation under the Foreign Subsidies Regulation (FSR). The Implementing Regulation offers important guidance on the practicalities of the FSR and, in particular, on the scope of the information businesses will be required to disclose to the EC as part of the filing process. 

In this post we summarise some helpful improvements made to the Implementing Regulation (compared to the initial proposal back in February) and what it all means for companies preparing for this new regulatory hurdle. 

What is the FSR? 

As a quick reminder, in case you had intentionally blanked the prospect from your mind, the FSR gives the EC powers to address distortive effects of non-EU subsidies via three enforcement tools. The first two involve ex ante notifications requiring businesses to submit mandatory filings where certain thresholds are met. The third enforcement tool is a ‘catch all’ instrument, giving the EC broad investigatory powers (see our dedicated FSR page here for further details). 

Disclosure heavy approach remains 

Where a notification is triggered, companies will need to submit significant detail on their dealings with non-EU countries to the EC. This will include not only transactions involving genuine subsidies, but also numerous financial transfers made (ostensibly) on market terms, covering the three years preceding the signing of the deal / submission of a tender. 

The original scope of the information gathering detailed in the draft Implementing Regulation was, understandably, a source of major concern for businesses. In particular, the administrative (and associated financial) burden imposed due to the information to be disclosed (which included all manner of ordinary course business transactions) appeared disproportionate to achieve the aims of the FSR (see our previous blog post).

The final Implementing Regulation now published considers the strong feedback received. That said, while it includes several helpful changes, it comes short of the aim from Executive Vice-President Margrethe Vestager of “ensuring that the compliance burden on smaller entities is kept as low as possible”. Indeed, the administrative burden placed on businesses remains significant and getting ready for the FSR will require significant efforts. 

But, a few steps in the right directions… 

Key takeaways from the final Implementing Regulation and what it will mean for future FSR notifications:

1. Focus on high-risk financial contributions. Rather than line-by-line information on all financial contributions, detailed information will be required for transfers deemed to be “high risk”, e.g., unlimited guarantees, support to ailing companies, support directly facilitating M&A / public procurement tenders. 

For all other financial contributions, the scope will be more limited, with the EC requesting summaries of the types of transfers and estimated values. 

2. Exemptions for certain day-to-day business dealings. A particularly welcome change is that certain ordinary course transactions will be exempted from disclosure:

• Sale/purchase of goods/services at market terms will no longer need to be disclosed. However, from this helpful change, the EC has carved-out financial services. Details on financial services will therefore be subject to disclosure, also where on market terms. 
• Certain tax incentives / exemptions provided these are provided on a general basis.

3. Investment funds: Financial contributions granted to other funds managed by the same investment company will be excluded (subject to certain limitations) from disclosure under the M&A tool.

4. Increased de minimis thresholds: Only financial contributions individually exceeding EUR 1 million will be subject to disclosure (an increase from EUR 200k).

How not to let it spoil your holiday…

While the changes outlined above are helpful the practical benefit may be limited given companies will still need to determine whether the disclosure exemptions apply to individual payments. Businesses will need to develop a proportionate strategy to identify relevant financial contributions for inclusion in the notification forms and to respond to EC questions in order to minimise risk of delay.

Key points to bear in mind are:

1. Set the wheels in motion on information gathering before you head to the beach

An immediate next step for businesses will be to establish an effective data collection exercise. Most businesses do not have a system that identifies and captures financial contributions, and it will be important to streamline the information collection process.

2. Transaction planning to avoid ending up on the rocks this summer

Be aware of the need to notify and the knock-on effect on deal timetables as completion will not be permitted until the transaction has received green light from the EC.

The notification obligation applies to transactions that (i) sign on or after 12 July 2023 but have not closed by 12 October 2023; or (ii) that sign on or after 12 October 2023. Importantly for category (i), the EC will not accept formal notification prior to 12 October so the earliest such deals will be able to close will be late November (see next point).

3. Waivers as the way for smooth sailing

Businesses involved in live deals that are likely to meet notification thresholds should initiate pre-notification contacts with the EC as soon as possible. Pre-notification are explicitly “encouraged” by the EC (also before 12 October). Importantly, these contacts may result in “significant” reduction of the information required thanks to the EC’s ability to grant waivers.

In case you missed it, read more on the latest developments across antitrust enforcement and M&A regulatory hurdles, in our Summer’s Antitrust and Foreign Investment Top Stories 2023 publications.