The impact of the EU’s new Foreign Subsidies Regulation (FSR), and in particular the scope of the information businesses will be required to disclose to the European Commission, is a source of major concern for many companies and investors we talk to. The EC’s public consultation on the Implementing Regulation (the Proposal) offered important insights into the procedural aspects of the FSR, including the draft notification forms for M&A transactions and public tenders that meet the thresholds (for details on the thresholds, as well as the FSR more broadly, see our overview).

According to Executive Vice-President Margrethe Vestager, the FSR is “a net designed to catch the big fish” and a “top priority in implementation will be on ensuring that the compliance burden on smaller entities is kept as low as possible”. However, while the EC has tried to streamline the procedures under the FSR, the Proposal still imposes a considerable administrative and financial burden on companies. The scope and detail of information requested will raise significant challenges, bringing to mind the Oscars favourite Everything Everywhere All at Once.

In this post we outline a number of suggested areas for improvement, to the benefit of both companies and the EC (for further details, see our full response to the EC’s consultation). Importantly, in introducing these improvements, the EC could largely benefit from following the well-trodden paths under merger control and State aid rules.

Our wish list: Matching FSR objectives to the reality of businesses

The scope of information to be disclosed upfront should be reduced

Information requirements from companies notifying M&A transactions and public tenders should be limited to what is strictly needed to achieve the objectives of the FSR. In particular:

• Rather than requesting details on a significant number of largely innocuous “financial contributions”, upfront disclosure should be limited to the most distortive categories of foreign subsidies and financial contributions linked to the notified transaction. This would align with the scope under EU merger control proceedings, where parties are only required to provide detailed information for overlapping and/or related markets (and not exhaustively detail all their activities irrespective of relevance).
• The de minimis threshold, above which financial contributions are reportable, should be increased. The EC has stressed that the FSR is to focus on large transactions, and considering the deal values concerned and size of the target’s EU activities (i.e. EU turnover exceeding EUR 500 million), it is disproportionate to require a description of financial contributions which individually exceed EUR 200,000.

A pragmatic approach to internal documents and auction information

• The acquirer may not always have access to detailed information on bidding processes. This information should therefore not be requested from the acquirer. Where deemed necessary in an individual case, the EC could request this information from the seller.
• Due diligence reports are unlikely to be relevant to the EC’s assessment, given that the reports focus on target specific (typically, legal and financial) risks, and the EC should therefore not include a blanket request for such documents. Disclosure of non-legally privileged due diligence reports and supporting documentation from the entity granting the financial contribution should in any event be aligned with merger control rules, i.e. limited to those prepared for or received by the boards or shareholders meeting in taking a decision to effect a transaction.

Wavering about waivers…

A welcomed element of the Proposal is the possibility to request waivers in relation to the provision of certain information. The Proposal is however light on both the scope of such waivers, as well as the likelihood that the EC will grant them.

• Further guidance on which information is deemed suitable for waiver requests and in what circumstances should be provided. An example is the willingness to grant waivers for investment companies / funds where, absent a waiver, reporting obligations would span across an entire (potentially extensive) portfolio in relation to markets unrelated to the target business.
• For businesses likely to notify several transactions, the EC should consider granting a standing waiver, valid for a certain period of time, on the basis of information provided in the first submission. The business would then only have to submit limited supplementary information for subsequent deals.

Learning to walk before we are forced to run – enforcement and transition

In light of the extensive information requirements, the limited time remaining before the notification obligations kick in, and that businesses may not currently have adequate reporting systems, we suggest that the EC, at least during a transitional period:

• Does not impose sanctions for failure to provide complete information where such a failure is due to the novel and imprecise nature of the concepts and definitions under the FSR (including that historic information is simply not available).
• Only imposes sanctions for failure to provide information, or for providing incorrect or misleading information, where such a failure is the result of an intentional attempt to mislead the EC.

Next steps

Following the public consultation, in Vestager’s words, the EC “will carefully review the feedback and make any necessary changes, before publishing the Implementing Regulation”.

We expect the EC to adopt the final version of the Implementing Regulation only in June, with the FSR starting to apply shortly thereafter, on 12 July 2023. Following a grace period of three months, the notification obligations for M&A and public procurement will kick in on 12 October 2023.

If your business’ M&A or public procurement strategy involves deals that can meet the thresholds, be aware of the need to notify your deal and the knock-on effect on deal timetables, long-stop dates and execution risk.

More pressingly, considering the limited timeline and the wide-ranging scope of information the EC has suggested will need to be provided, you should establish a process to identify “financial contributions” within the corporate structure, and be prepared (absent substantial changes being made to the Implementing Regulation) to gather and provide a vast number of items - most of which businesses will have never tracked for this kind of purpose.