Impact of Foreign Subsidies Regulation on European Dealmaking

The European Union (EU) has entered into a new regulatory era with the introduction of the Foreign Subsidies Regulation (FSR). This regulation aims to tackle the distortive effects of subsidies granted by foreign countries to companies operating within the EU, ensuring fair competition across the internal market.

This new regulation has brought about challenges for foreign trade and investments involving European companies. Investors are concerned about the broad application of the FSR and its potential impact on foreign investments in the EU. Any mergers or public procurement activities must now consider the implications of the FSR, adding complexity to the already intricate merger control and Foreign Direct Investment regimes.

The European Commission has been given extensive powers to enforce the FSR, allowing them to investigate, evaluate, and intervene in transactions that may distort competition within the EU. The Commission can launch investigations if they suspect the presence of foreign subsidies, even up to five years after they are granted.

Since its inception, the FSR has seen proactive enforcement by the Commission, with notifications and filings exceeding expectations. While most cases are straightforward, there are concerns about the efficiency of the regulation and whether it truly targets the big players in the market.

In some cases, the FSR has had real impacts, leading to foreign investors pulling out of public procurement processes due to concerns raised by Commission investigations. This has made foreign investors more cautious when engaging in mergers or acquisitions in Europe.

The FSR has also faced its first legal challenge, with a company contesting the evidence obtained by the Commission during a dawn raid. This shows that companies are willing to challenge the enforcement of the regulation in court.

Moving forward, businesses must adapt to the FSR’s requirements, which include identifying and maintaining records of foreign financial contributions. Compliance challenges arise as this information is not typically captured in standard accounting systems. Strategic planning and early engagement with the Commission are key to meeting filing obligations and navigating potential investigations.

The FSR has already reshaped the landscape of business strategies, impacting deal timing and structures. Companies must now prepare for increased scrutiny and potential fines for non-compliance, highlighting the importance of transparency in business transactions.

As the FSR continues to evolve through new cases, its long-term implications for the EU market and global business practices will become clearer. Balancing the need for open and competitive markets in the EU while addressing challenges posed by non-EU financial contributions will be crucial for businesses operating in Europe.