New Hurdle for Some European Acquisitions and Tenders
New European Union notification and approval requirements will hit public tenders valued over €250 million and acquisitions of EU businesses with more than €500 million in EU revenue beginning on October 12, 2023.
The European Commission will need to determine whether subsidies that the groups involved may have received from non-EU governments will distort competition in the EU internal market.
Current monitoring and reporting systems do not capture the information required to notify, and adapting those systems is likely to require many months of work.
Given the tight timelines for acquisitions and public tenders, parties who have not launched compliance efforts well in advance risk being excluded from EU markets as of October 2023.
The new notification and approval requirements arise under Regulation 2022/2560 on foreign subsidies distorting the internal market, known as the foreign subsidies regulation or FSR.
Under the FSR, the Commission will acquire new powers to launch ex officio investigations into potentially distortive foreign (meaning non-EU) subsidies starting July 12, 2023. The Commission is likely to open only a few investigations per year and to focus on subsidies to state-owned enterprises.
The notification obligations will have a much wider impact. The notification thresholds are based on a combination of target revenues (in the case of acquisitions) or transaction value (in the case of tenders) and a new concept, “financial contributions.”
Financial contributions are defined very broadly and notably include a wide range of interactions with governments and affiliated entities, including investments, contracts and tax benefits, whether or not they involve a subsidy.
Notifications will require extensive information on the parties’ group-wide financial contributions over the prior three years — for example, 2020 to 2022 for notifications in the fourth quarter of 2023 — as well as information on the notified transaction.
The Commission will review this information to determine whether any financial contributions qualify as “foreign subsidies” and, if so, whether those subsidies risk distorting the EU internal market.
The notification requirement for mergers, acquisitions and joint ventures will apply only where the target generates at least €500 million in EU revenues and is thus limited to relatively large transactions.
This briefing focuses on the notification requirements for public tenders, which are likely to affect a larger number of parties and transactions involved in project finance.
Bidders in EU public tenders valued at €250 million or more (including lots of €125 million or more where such a tender is divided into lots) will trigger notification if the bidder’s and its main sub-contractors’ and suppliers’ groups received more than €4 million in financial contributions in any non-EU jurisdiction.
If a notification is required, bidders and their main sub-contractors and suppliers will need to provide detailed information on their groups’ financial contributions for their prior three financial years.
“Main” suppliers and sub-contractors are defined as those accounting for at least 20% of the tender value, or €50 million in a €250 million tender. When qualifying potential subcontractors and suppliers, bidders will need to assess their FSR-readiness as well as traditional credentials.
Where the thresholds are met, bidders will file an FSR notification to the contracting authority, which will transmit it to the Commission for review.
Since the €4 million financial contribution threshold is very low, all (or almost all) bidders in an in-scope tender will need to file FSR notifications.
The contracting authority may not award the contract to a bidder unless and until the Commission completes its review of the bidder’s notification.
The Commission will have 20 working days after receiving a complete notification to conclude its preliminary review, subject to extension for an additional 10 working days.
If the Commission decides to open an in-depth investigation, that investigation must be completed within 110 working days after receipt of the complete notification, subject to an extension for an additional 20 working days.
In the course of its investigation, the Commission has extensive investigative powers, including issuing binding requests for information and conducting site visits and interviews.
The Commission also has powers to impose interim measures and fines: for example, if a notifying party provides materially incorrect information or refuses to cooperate. (Bidders will not be liable for incorrect information provided by subcontractors and suppliers.)
If the Commission finds that a bidder benefits from foreign subsidies distorting the internal market, then it must prohibit the contract award to that bidder, unless the Commission receives binding commitments that fully and effectively remedy the distortion.
Commitments may take a variety of forms, including a bidder granting competitors access to its infrastructure on “fair, reasonable and non-discriminatory” terms, reducing capacity or market presence, divesting assets or repaying the foreign subsidies in question with interest.
The Commission may approve a tender in spite of a finding that a bidder benefits from distortive foreign subsidies based on a balancing of the negative effects of the distortion compared to its positive effects.
Forms and Compliance
The relevant notification forms will not be finalized until June 2023 at the earliest, but the Commission published draft forms in early February 2023. These forms — especially the procurement forms — raise many questions.
The final versions may be significantly revised, but the drafts confirm that notifications will require significant detail about individual financial contributions that multinationals do not currently collect.
The draft notification forms also require notifying parties to make legal judgments by identifying financial contributions that may meet the FSR criteria for “foreign subsidies” that are likely to be considered distortive.
Collecting three years of financial contribution information will require significant time and effort, but companies in sectors characterized by public tenders, such as energy, health care, infrastructure IT and transport, must make the investment or be excluded from EU markets.
Although no existing monitoring and reporting system currently captures financial contribution information in the form required, companies can leverage existing systems such as financial and tax reporting systems and supplier and customer databases.
Since the Commission has provided no guidance on ambiguous terminology in the FSR, companies will need to be creative and make judgment calls in consultation with experienced EU counsel.
For example, the Commission has extensive experience identifying entities “attributable to” non-EU governments in EU state aid law practice. To review hundreds or thousands of contract counterparties, however, companies will need to leverage existing know-your-client and anti-bribery and corruption compliance systems.
Similarly, to identify relevant “tax exemptions” and “fiscal incentives,” as required by the FSR, companies may seek to rely on applicable international and US accounting standards