European Commission white paper on leveling the playing field as regards foreign subsidies
Posted by Chantal Lavoie on 18 June 2020
The European Commission released for consultation on 17 June 2020 its much-awaited white paper on levelling the playing field as regards foreign subsidies (the White paper). Its purpose is to address distortions to the internal market resulting from foreign subsidies. The paper is based on a “model of open strategic autonomy” for Europe. The public consultation is ongoing until 23 September 2020. The article below discusses the scope and content of the White paper and comments in particular on the impact of the proposed measures on acquisitions of EU targets.
The White paper - scope and content
The paper proposes a framework to address what is viewed as a “regulatory gap” in dealing with foreign subsidies distorting the internal market. The framework consist of different modules or measures depending on the type of foreign subsidy. Competent supervisory authorities would be designated by the European Commission and Member States and would have shared competences and enforcement powers to be determined. A cooperation mechanism along the lines that currently exists between the Commission and national competition authorities through the European Competition Network would be put in place.
Module 1 - General instrument to capture foreign subsidies
Under this module, foreign subsidies granted to a beneficiary active in the EU could be subject to a two-step review process consisting of a preliminary review, followed by an in-depth investigation. Ultimately, should the investigation show that “the proper functioning of the internal market may have been or may be distorted through the foreign subsidy”, measures to redress these distortions may be adopted. Redress could take the form of structural remedies (e.g. divestment), behavioural measures (licensing on FRAND terms; third party access), redressive payments, or outright prohibition of certain investments or subsidised acquisitions.
This module would apply to foreign subsidies in all ‘market situations’, whether they benefit the production of goods, services or investments in the EU (although some products such as agricultural products may be excluded). A beneficiary active in the EU would include undertakings established in the EU as well as possibly other undertakings active in the EU. As regards the notion of distortion in the internal market, actual and potential distortions would be relevant. Categories of foreign subsidies according to their likelihood of causing distortions may be established. These could include foreign subsidies to facilitate an acquisition; tax reliefs, government debt guarantee, debt forgiveness and export financing. However, foreign subsidies below a certain threshold may be presumed not to distort the internal market. The threshold could be set at EUR 200,000 granted over a consecutive three-year period – in line with de minimis EU state aid threshold.
The substantive test for assessing a distortion in the internal market would involve a balancing test to the extent that the foreign subsidy has a “possible positive impact” in the EU or on public policy interests recognised by the EU. This is referred to in the White paper as the “EU interest test” and it is proposed that the European Commission should have exclusive competence to assess if the EU interest test is met.
Module 2 – Instrument to review foreign subsidies facilitating the acquisition of EU targets
Under this module, subsidised acquisitions of an EU target would be subject to a mandatory suspensive pre-filing obligation. The competent authority could also review the transaction ex officio in the event the acquirer fails to file a notifiable transaction. The question whether the European Commission would have exclusive competence or shared competence with national competent authorities is an open point.
The concept of acquisition would extend beyond the acquisition of control as defined under the EU Merger Regulation to include also acquisitions of a material influence in an EU target. As a result, foreign subsidies facilitating the acquisition of a significant minority shareholding would be covered by this review process. An EU target refers to an undertaking established in the EU. The filing obligation could be triggered as a result of:
- the EU target meeting certain thresholds such as turnover thresholds in the EU; and
- an acquirer having received a financial contribution above a certain threshold in the past three years or expected in the coming year.
The paper draws a distinction between foreign subsidies granted to facilitate an acquisition directly or de facto. The former which refers to a subsidy granted for the acquisition of an EU target would likely be considered as distorting the internal market. The latter which refers to subsidies which “reinforce the financial strength” of the acquirer would require an assessment of its distortive effects, based on criteria such as the size of the subsidy, the situation of the beneficiary, situation on the market and the level of activity.
The filing obligation would be a two-step process consisting of a preliminary investigation, followed if necessary by an in-depth investigation. A standstill obligation would apply while the investigation is ongoing. If the competent authority concludes to a distortion resulting from foreign subsidies facilitating an acquisition, the transaction could be subject to remedies similar to those set out under Module 1 or be prohibited.
Module 3 – Foreign subsidies in public procurement
Under this module, measures would be put in place to review the distortive effect of foreign subsidies in the context of public procurement procedures. Again the objective is to ensure that a level playing field is preserved in the context of public procurement. A similar distinction as above for Module 2 is made between foreign subsidies that enable an entity to participate in the public procurement process and de facto foreign subsidies which increase the financial strength of the recipient. In certain cases, a distortion may be presumed; in other cases, an assessment based on the criteria mentioned above under Module 2 would be needed.
The procedure would require notifying the contracting authority whether a financial contribution has been received in the last three years or is expected in the coming year. Filing thresholds may be imposed to reduce the administrative burden. A review would be carried by the competent authority with a view to delay the least possible the procurement process. Nevertheless the contracting authority would be prohibited from awarding the contract to the entity under investigation until the review is completed. If the competent authority concludes that an entity has received distorting foreign subsidies, it would be excluded from the procurement process. It may also be excluded from future procurement procedures for a maximum of 3 years.
Foreign subsidies in the context of EU funding
The White paper proposes measures to ensure that EU funding does not favour companies benefitting from distorting foreign subsidies. The paper targets specifically EU funding in the context of procurement and grants. To the extent the funding is managed by the EU, the measure would consist in the exclusion of a company from a procurement or grant process if there is evidence that it has received a distorting foreign subsidy in the previous three years or that it is expected to receive it during the execution of the contract.
If they materialise, the proposals contained in the White paper will introduce significant regulatory constraints for companies which benefit from foreign subsidies and which are planning (or have) economic activity in the EU. In particular, as regards acquisitions of EU targets:
- acquirers will be required, as part of the regulatory process leading to an acquisition, to carry out an internal due diligence process to identify whether any entity within its group forming an economic unit has received a foreign subsidy in the preceding three years or will benefit in the coming year for purposes of facilitating an acquisition. The Commission proposes to apply the concept of ‘undertaking’ as used under the EU Merger Regulation and developed by the Court of Justice such that the due diligence would apply to all companies in the acquiring group forming part of the economic unit. This exercise may prove particularly challenging for large corporate groups or companies without an internal mechanism for tracking financial contributions received from non-EU governments or public bodies. In addition, the wide scope of the proposed definition of ‘foreign subsidy’ contained in the White paper risks catching a wide range of financial contributions such as capital injections, loan guarantees, debt forgiveness and fiscal incentives. This will require a difficult self-assessment exercise by acquirers to determine whether any foreign financial contribution received has conferred upon it a benefit such that a filing may be required. In particular, benchmarks will need to be used to assess whether a financial contribution provided to a company within the acquirer’s group is comparable, for example, to private investor standards.
- acquirers who may have benefitted from a foreign subsidy for purposes of facilitating an acquisition of an EU target will need to add a potential ex ante filing requirement to their regulatory timetable for completion of a deal. This will have several consequences, in particular the prohibition to complete the transaction until the competent authority has completed its review and the added risk of redressive measures or prohibition of the deal in the event distorting financial contributions are found. This notification process would apply separately and in parallel to any applicable merger filing process under EUMR or national merger control rules. As a result, legal documentation will require additional conditions precedent clauses to account for these timing constraints and transaction approval risks.
- acquirers subject to parallel EU/NCA merger filing obligation(s) and a foreign subsidy filing may need to navigate complex situations, particularly where different commitments may be required to address merger control concerns and to redress the distorting effects of a foreign subsidy.
The White paper marks a significant step to address the distorting effects of foreign subsidies in the internal market, particularly when used to facilitate acquisitions of EU targets. It is also a recognition that EU merger control is not an appropriate tool to deal with such level playing field concerns. Indeed, the purpose of EU merger control rules is to review whether an acquisition will significantly impede effective competition, regardless of the country of establishment of the acquirer and with limited regard for the origin of subsidies received to facilitate an acquisition. As we know, protectionism does not play a role in EU merger control. Indeed, EU merger control rules apply equally to EU and non-EU companies, without treating EU companies more favourably. This is exemplified by the recent Siemens/Alstom merger for the creation of a European champion which was prohibited by the European Commission under EU merger control rules. Nevertheless, in its statement announcing the Siemens/Alstom prohibition decision on 6 February 2019, Commission Vestager did recognise the limitations of merger control rules to address industrial policy and European competitiveness concerns and was already setting the groundwork for what would become the White paper:
“ So, competition rules are one of the keys to keep Europe competitive in global markets. We need to combine several tools not only to get the full picture but also the full effect: an effective industrial policy and competition enforcement, together with our international policy instruments. And we must engage in a strategic reflection about how to maintain and advance European competitiveness and autonomy.(…) That being said, we must also ensure a global level playing field for European companies. ” 
The current economic crisis resulting from the covid pandemic has given more prominence to these concerns and in my view given impetus to repeated demands to protect EU industry and assets from unfair competition. The proposals in the White paper will affect not only non-EU companies but also EU companies established in the EU which benefit directly or indirectly from foreign subsidies or which are targeted for an acquisition of a controlling interest (or significant non-controlling interest) by a foreign subsidised company. The White paper and resulting legislative instruments are therefore expected to have wide-ranging repercussions on investments and M&A activity in Europe, both for EU and non-EU companies benefiting from foreign subsidies.