Guide to the Foreign Subsidies Regulation, part 2: Notification of concentrations | In Principle

Mergers, acquisitions and joint ventures on the EU market are now subject to review not only for antitrust considerations, but also with regard to support from third countries. Below we examine when a transaction must be notified under the FSR and how to prepare for the new procedure.

What is a concentration under the FSR?

For purposes of the regulation, a concentration is a transaction resulting in a change of control on a lasting basis over an undertaking or part of an undertaking. Such a change in control may occur as a result of:

• Merger of two or more previously independent undertakings (or parts of undertakings)
• Acquisition of direct or indirect control over an undertaking (or part of an undertaking) by one or more undertakings
• Creation of a joint venture.

The key concept of “control” over an undertaking is understood to mean “rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking.”

Thus control can be exerted over an undertaking thanks to holding all or part of an undertaking’s assets, or holding rights to influence the composition, voting or decisions of the undertaking’s authorities.

So, by way of illustration, there would be a “change of control on a lasting basis” in the case of:

• Acquisition by a Chinese company of a majority of the shares in a Polish IT company (acquisition of control)
• Merger of two large manufacturers of home appliances in Europe (merger of undertakings)
• Establishment of a joint-venture company by a French energy company and an American energy company (new company under joint control).

When is it necessary to notify a concentration to the European Commission?

A notification obligation arises when two conditions—threshold of turnover in the EU and threshold of financial contributions from third countries—are both met.

If one or more parties to the transaction with their registered office in the EU generated combined turnover of EUR 500 million or more on the internal market in the preceding financial year, the undertakings involved in the concentration will need to examine the amount of financial contributions they have received.

If a party involved in the concentration received financial contributions of EUR 50 million or more within the three years preceding the concentration, it will be required to notify the financial contribution before carrying out the transaction.

Note! When calculating turnover and financial contributions, affiliated companies (subsidiaries, parent companies, and other entities from the capital group) must also be counted. The most errors crop up in identifying these connections and aggregating the data—particularly in groups with a complicated structure.

Examples:

• Company X, based in Germany, had EUR 600 million in turnover in the EU in the previous year, and during the past three years it received EUR 55 million in support from its parent company in the United States. The transaction must be notified.
   
• Company Y from Poland (annual turnover in the EU of EUR 520 million) plans to acquire a company from Turkey. The combined support from third countries (including from Turkey) over the past three years was only EUR 25 million. Notification is not required, because the threshold of financial contributions was not met.

Note! Pursuant to the “standstill obligation,” the transaction cannot be closed before obtaining formal approval of the European Commission. This means that ownership of the shares or assets cannot be transferred, nor can the joint venture begin operating, until receiving the green light from the Commission. Premature closing of the transaction, known as “gun jumping,” is exposed to very high fines, even up to 10% of the annual worldwide turnover of the undertakings participating in the concentration.

How does the notification procedure work? (form FS-CO)

In the case of a merger (e.g. of two equal companies), the notification is filed jointly by all entities taking part in the merger. In the case of an acquisition (e.g. purchase of a majority stake by another company), the notification is filed by the entities acquiring control. And when creating a joint-venture company, the notification is filed by all of the founders of the new company.

Example:

Company A (from the EU) and company B (from China) plan to establish a joint venture in Poland. The two companies together prepare the FS-CO form, in which they must describe not only the new JV company, but also their capital groups, ownership structure, and all sources of financing (including any grants or loans from the Chinese government or sovereign funds). The transaction cannot be finalised (i.e. the JV company cannot be established) until they receive approval from the Commission.

What information and documents are required in the notification (on form FS-CO)?

Form FS-CO is an official document that must be filled out and submitted to the Commission if the transaction (merger, acquisition or joint venture) meets the thresholds set forth in the FSR. Detailed information must be presented in the form concerning the transaction as well as financial support received from third countries.

Form FS-CO covers the following elements:

1. Basic information about the transaction

• Parties to the transaction: full list of all participants (including contact details, subsidiaries, group structure)
• Type of transaction: merger, acquisition, or joint venture
• Description of transaction: the nature of the transaction, its main aims, strategic and economic rationale
• Value of the transaction, how it was determined, how it will be financed
• Dates: planned closing date, timetable of activities

2. Structure of ownership and control

• State before and after the transaction: a clear presentation of who will exercise control post-closing, and in what respect (diagrams and breakdown of shareholdings encouraged)
• Description of mechanism of control: whether control results from shareholdings, contracts, voting rights, right to appoint members of corporate authorities, etc

3. Profile of undertakings

• Description of activity: main business areas in which each participant operates
• Financial results: recent financial reports of the parties (typically from the past three years)
• Market position: basic information on market share, competitors, customers, potential barriers to market entry

4. Information on financial contributions from third countries

• In the case of contributions ≥ EUR 1 million, the following should be provided for each contribution separately:
  • Form (grant, loan, guarantee, tax incentive, compensation etc)
  • Amount of support
  • Third country or entity providing the support
  • Conditions for award and use of support
  • Aim of the support and economic rationale
  • Whether access to support is available on market terms
  • Whether access to support is legally or factually restricted
  • Whether the contribution concerns exclusively the operating expenses connected with the specific concentration (note: even if the contribution only concerns operating expenses, this does not exempt it from the notification obligation or from aggregation up to the threshold of EUR 45 million)

• If the sum of all contributions of ≥ EUR 1 million received from a single third country exceeds EUR 45 million over the course of three years, it is necessary to:
  • Prepare a summary list of such contributions
  • Provide the name of the third country, the total contributions within a range (e.g. EUR 45–100 million, EUR 100–500 million, etc), and identify the specific contributions (if required by the Commission at the verification stage)

• In the case of contributions < EUR 1 million (but above EUR 300,000), the list is optional.
  
  Contributions whose unit value does not exceed EUR 1 million, but which jointly exceed EUR 300,000 from one third country, do not need to be notified. However, a list of such contributions may be enclosed voluntarily, with a brief description naming the third country and providing brief information on the form and purpose of the support (without providing the exact amount).

Note! This information should be gathered sufficiently far in advance. This often requires cooperation with the finance and compliance functions in different countries.

Remember: A contribution is considered to be “received” at the time it is awarded, for example on the date of the decision, award of the grant, or signing of the contract, even if the funds have not been disbursed yet.

5. Supplementary documentation

• Copies of decision by authorities, analyses, presentations or reports concerning the concentration and the rationale for the transaction (also concerning support received from third countries)
• Internal documents (if any) used in the process of planning the transaction

6. Information on other proceedings and notifications

• Here it should be indicated whether the transaction has been or will be notified to other authorities (e.g. competition authorities in the EU or elsewhere, or national FDI authorities)
• Notifications which the parties to the concentration have made over the past three years (under the FSR or the Merger Regulation) should be provided

7. Protection of confidential information

• Information may be marked as “confidential,” with the reasons why the information should not be disclosed
• If multiple parties to the concentration file a joint notification, each party may submit its confidential information in a separate encrypted file

8. Signatures and attestations

• The form must be signed by the parties’ lawful representatives
• The signatures and statements must attest to the accuracy and completeness of the information presented.

What to remember in practice?

• Timetable for the transaction—factor in the time for preparing the documentation and the duration of the proceedings.
• If the transaction is subject to merger control, FDI oversight, and the FSR, it is worth considering drafting the submissions simultaneously, to help avoid delays or conflicting decisions.
• Sensitive data (e.g. trade secrets or financing details) may be covered by a confidential clause and filed separately—the Commission enables such documents to be filed in encrypted form.

Any major transaction in the EU now poses more than just an antitrust question. Preparing for the FSR requires careful analysis of the financing and coordination of activities among all the parties. The sooner you begin to collect data on financial contributions from third countries, the less risk of mistakes, delays and penalties.

The difference between FDI and foreign subsidies

Foreign direct investment is a situation where an investor from a third country (outside the EU) obtains a lasting influence over an undertaking operating in the EU, for example by acquiring shares, purchasing a manufacturing plant, or opening a company.

FDI is not the same as a foreign subsidy under the FSR, but in many instances the regimes complement each other:

In practice, the same transaction may be subject to review under the FSR, and also under the FDI regime and control of concentrations (antitrust). This is why it is essential to identify all relevant legal regimes, coordinate the timing and scope of the filings, and allow for these obligations in the timetable for the transaction.

Dr Anna Kulińska, Serom Kim, adwokat, State Aid & EU Internal Market practice, Wardyński & Partners