On June 17, 2020, the European Commission (EC) announced the adoption of a white paper on levelling the playing field as regards foreign subsidies (the White Paper). The White Paper, as promised in the EC’s March 2020 industrial strategy, identifies potential distortive effects caused by foreign subsidies in the European Union (EU) and proposes far-reaching new legal powers to combat them. The EC launched a public consultation (the Consultation) seeking input from all stakeholders on the options set out in the White Paper by September 2020. The EC will likely follow up with proposed legislation as soon as this year.
The new EC powers would complement existing EU competition rules, trade defense instruments and public procurement rules. According to the EC, these tools leave a gap in the protection of European companies, because existing trade defense rules relate only to exports of goods and do not address distortions caused by non-EU subsidies that benefit companies active in the EU. While subsidies by EU Member States are subject to EU State Aid rules, subsidies granted by non-EU governments fall outside EU State aid control. Foreign subsidies can distort competition in the EU, for example by facilitating the acquisition of EU companies, distorting the investment decisions, market operations or pricing policies of their beneficiaries, or distorting bidding in public procurement.
The White Paper proposes three so-called “Modules” to address the distortive effects of foreign subsidies in (i) the EU Single Market generally (Module 1), (ii) acquisitions of EU companies (Module 2) and (iii) EU public procurement procedures (Module 3), as well as a general approach to foreign subsidies in the context of EU funding. The new powers, if adopted, would have major implications for non-EU companies from many jurisdictions and in many sectors. The proposals, however, raise fundamental questions that will need to be addressed as the proposals move through the EU legislative process.
In this article, I discuss the foreign subsidies and companies covered, the main options considered in Modules 1, 2 and 3, and the treatment of foreign subsidies in the context of EU funding. I conclude with observations on major issues raised by the White Paper and how the new instruments – if and when adopted – will relate to other European instruments, including merger review, foreign direct investment (FDI) screening and the EC’s proposed ex ante competition tool.
Scope – Foreign subsidies and companies covered
The White Paper defines a “foreign subsidy” very broadly as a financial contribution by a government or any public body of a non-EU State that confers a benefit to a recipient (including non-EU and EU companies) and which is limited, in law or in fact, to an individual company, industry or group of companies or industries, insofar as they directly or indirectly cause distortions within the EU Single Market.
Financial contributions can take various forms, including transfers of funds or liabilities (capital injections, grants, loans, loan guarantees, fiscal incentives, setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness or rescheduling); foregone or not collected public revenue, such as preferential tax treatment or fiscal incentives such as tax credits; and the provision of goods or services or the purchase of goods and services.
To determine whether a financial contribution confers a benefit, authorities would take into account private investors’ usual investment practices, market rates for financing, and the adequate remuneration for a given good or service. If there are no directly comparable benchmarks, existing benchmarks can be adjusted or market conditions can be established based on generally accepted assessment methods. Foreign subsidies below €200K would be presumed not to confer a benefit for these purposes.
Since the proposals are intended to address distortions caused by foreign subsidies in the EU, they would apply to companies established in the EU – including groups with an EU subsidiary – but could also apply to non-EU companies active in the EU in other ways. Where a subsidy is granted to an entity established outside the EU, the extent to which the benefit of the foreign subsidy can be allocated to the EU group entity would need to be established.
Module 1 -- General instrument to capture distortive effects of foreign subsidies
Module 1 would create a general “market scrutiny instrument” potentially covering any market situation in which foreign subsidies may cause distortions in the Single Market. This instrument could be used by national authorities or the EC under a shared system of review, perhaps modelled on the European Competition Network (ECN) for enforcement of EU competition law.Module 1 would include the possibility to review acquisitions facilitated by foreign subsidies and/or market behavior by a subsidised bidder in public procurement and as such could overlap with Modules 2 and 3.
A case would start with a preliminary review to examine whether there is a foreign subsidy that may distort the internal market. If there is evidence tending to show that a foreign subsidy may distort the proper functioning of the internal market, an in-depth investigation would follow.
Once the existence of a foreign subsidy is established, the authority would assess whether such subsidy causes a distortion in the internal market. Both actual and potential distortions would be considered. Certain categories of foreign subsidies would be considered likely to cause distortions, while other foreign subsidies would require a more detailed assessment. In any event, the concerned companies could also show that the foreign subsidy in question is not capable of distorting the internal market in the specific circumstances of the case.
To determine the impact of foreign subsidies, the White Paper proposes a non-exhaustive list of relevant indicators: the relative size of the subsidy; the size and capacity utilization of the beneficiary; market structure (e.g., markets with structural excess capacity, concentrated markets and fast-growing markets are more likely to be subject to distortions); the market conduct in question (e.g., outbidding in acquisitions or distortive bidding in procurement procedures); and the beneficiaries’ level of activity in the EU. Authorities would also consider whether the beneficiary has privileged access to its domestic market (through measures equivalent to special or exclusive rights) leading to an artificial competitive advantage that could be leveraged in the EU.
If the existence and distortive impact of a foreign subsidy are established, the authority would then impose measures to remedy the likely distortive impact, such as structural or behavioral remedies (assuming that repayment to the non-EU country are not suitable or feasible). Such measures could include prohibition of a subsidised acquisition; third party access, for example to mobility apps for providers of transportation services; licensing on fair, reasonable and non-discriminatory (FRAND) terms (e.g., if an undertaking receives subsidies and obtains telecom frequencies or provides access to networks using such frequencies); prohibition of specific market conduct linked to the foreign subsidy; or publication of R&D results so other companies can reproduce them.
A finding of distortive effects could be weighed against evidence of possible positive impacts that the supported economic activity or investment might have within the EU or on public policy interests recognised by the EU, such as creating jobs, achieving climate neutrality and protecting the environment, digital transformation, security, public order and public safety and resilience. If, on balance, the distortion on the internal market caused by the foreign subsidy is sufficiently mitigated by the positive impact of the supported economic activity or investment, no redressive measures would be required (the “EU Interest Test”).
Module 2 – New notification requirement for acquisitions facilitated by foreign subsidies
Module 2 would specifically address distortions caused by foreign subsidies facilitating the acquisition of EU companies by creating a mandatory ex ante notification system analogous to that created by the EU Merger Regulation. For this purpose, an “acquisition” would be defined as the acquisition – directly or indirectly – of control of an undertaking, a specific percentage of the shares or voting rights or a “material influence” in an undertaking. Module 2 would thus be broader than the EU Merger Regulation, which is triggered only where there is a change in control of the target.
Companies benefitting from financial support of a non-EU government would need to notify their acquisitions of EU companies, above a given threshold, to the competent supervisory authority. The actual thresholds would depend in particular on the options chosen regarding the EU target, the trigger for notification and the appropriate competent supervisory authorities. Thresholds could be based on turnover (e.g., €100 million), assets likely to generate a significant EU turnover and/or transaction value.
The notification requirement could also be limited to acquisitions facilitated by a certain volume of financial contribution from third-country authorities. Potentially subsidised acquisitions would be defined as planned acquisitions of targets established in the EU, where a party has received a financial subsidy in the last three calendar years prior to the notification or up to one year following the closing of the acquisition. This approach would require a degree of self-assessment by the companies involved, creating a risk of error or circumvention, but the EC notes that the identification of a financial contribution should be more objective than the identification of a financial subsidy, which requires an assessment of the competitive benefit of the financial contribution in the EU.
In a first step, acquirers would be obliged to file a short information notice containing basic information needed for the competent supervisory authority to identify possibly problematic operations involving foreign subsidies. This could include legal information, including ownership and governance; information on financing; turnover information for the last three years; description of the business; financing of the transaction; main sources of overall financing of the acquirer; financial contributions from third-country authorities received for the purpose of the transaction; any financial contribution from third-country authorities received in the past three years; and information on alternative prospective acquirers of the target in the last three years, including any bid that has been received as part of the sale process of the target.
Transactions could not be closed while the review is pending. Should the supervisory authority find that the acquisition is facilitated by the foreign subsidy and distorts the Single Market, it could either accept commitments by the notifying party that effectively remedy the distortion or prohibit the acquisition.
As in Module 1, the reviewing authority could allow a transaction that would otherwise be prohibited based on the EU Interest Test.
While the White Paper leaves open the possibility that reviewing authority under Module 2 could be exercised at the Member State level, there is a strong preference for the EC being the competent supervisory authority. This approach would provide a one-stop-shop control across the EU for acquisitions above the thresholds and avoid the need for several Member State authorities to review a single transaction in parallel. Member States would be involved through an information mechanism at the start and during the EC procedure and would be consulted on final decisions, following in-depth investigations. If Module 2 is combined with Module 1, moreover, Member States could in any case examine acquisitions ex officio, even below the thresholds set up in Module 2.
Module 3 -- Foreign subsidies in EU public procurement procedures
Module 3 is intended to address potential harmful effects of foreign subsidies in EU public procurement procedures. Foreign subsidies may enable bidders to gain an unfair advantage, for example by submitting bids below market price or even below cost, allowing them to obtain public procurement contracts that they would otherwise not have obtained. The White Paper proposes a mechanism whereby bidders would have to notify the contracting authority of financial contributions received from non-EU countries. The competent contracting and supervisory authorities would then assess whether there is a foreign subsidy and whether it made the procurement procedure unfair. In this case, the bidder would be excluded from the procurement procedure.
Foreign subsidies in the context of EU funding
Finally, the White Paper sets out ways to address the issue of foreign subsidies in applications for EU financial support. All economic operators should compete for EU funding on an equal footing, but foreign subsidies may distort this process by putting the beneficiaries in a better position to apply. The White Paper proposes options to prevent such unfair advantages, including a procedure similar to Module 3 in the case of funding distributed through public tenders or grants. International financial institutions that implement projects supported by the EU budget, like the EIB or EBRD, would also have to apply the EU approach.
The anti-subsidy tools proposed in the White Paper are an important part of the Von der Leyen Commission’s industrial strategy. There is significant political support for addressing the perceived gap in EU tools to address competitive distortions from non-EU subsidies. Thus, the White Paper is highly likely to lead to legislative proposals soon, perhaps as early as late 2020. Strikingly, however, the White Paper approach diverges from the demands by the French and German Governments in a February 2019 manifesto, which called for greater consideration the role of State controlled companies and non-EU subsidies in the framework of EU merger review, potentially allowing mergers between European champions that would otherwise be blocked. Rather than relaxing restrictions on mergers of EU companies to offset the effects of non-EU subsidies, the White Paper proposes to give the EC and national authorities new powers to address the effects of such subsidies directly.
The White Paper proposals come at an important moment in the expansion of EC powers to protect competition and ensure a level playing field in the EU. Earlier this month, the EC proposed a new “ex ante tool” to allow the EC to investigate markets and impose far-reaching remedies without the need to find any violation of EU competition rules. In parallel, the EC is proposing a new regulatory framework for online platforms, potentially including new enforcement authorities with broad powers to require structural or behavioural changes. Meanwhile, a new regulatory framework giving the EC a coordinating role in Member State FDI screening reviews will be applicable as from October 2020. Strikingly, the White Paper proposals would give the EC much more power than it has in the EU FDI screening framework. The EC is also considering revising the EU Merger Regulation thresholds to capture more transactions, especially of start-ups.
The White Paper proposals would overlap with these existing and other proposed powers. Modules 1 and 2, in particular, seem to create a significant potential for conflicts and duplication. Module 2 would create a new mandatory notification regime that would apply in parallel with existing merger review and FDI screening mechanisms, but with different triggers, procedures, enforcement authorities and standards of review. Although the EC prefers a one-stop shop modelled on the EU Merger Regulation, it also raises the possibility that Module 1 could apply to acquisitions also covered by Module 2. Thus, a transaction could be reviewed by Member State authorities under Module 1 in parallel with the nominally one-stop-shop EC review under Module 2. Transactions not meeting the thresholds for Module 2 notification could potentially be reviewed by the EC or Member State authorities, or both, under Module 1. Outside the acquisition context, Module 1 could potentially apply to a wide range of conduct and sectors and potentially overlap with the scope of the EC’s proposed ex ante tool powers.
The broad definitions of “foreign contributions” and “foreign subsidies” are also likely to create significant uncertainty, especially in the acquisition context where companies need to determine, often on short timelines, whether mandatory notification requirements apply. Although much of the commentary surrounding the White Paper focuses on Chinese companies, companies in many countries and sectors receive subsidies of various types. Especially as the world exits the pandemic, the companies potentially caught by the White Paper proposals may be far more numerous than the EC imagined when work on the White Paper started.
To minimize legal uncertainty, costs and administrative burdens, the EC will need to clarify a number of important points, including in particular how to measure the indirect effect of foreign subsidies in the EU. The relation between Modules 1 and 2 also require clarification. Most importantly, given the tight timelines involved in acquisitions and the need for legal certainty, transactions covered by any new Module 2 review process should preclude application of general review powers under Module 1. It will also be critical to align the timelines for any new Module 2 review with those of other applicable review processes.
In the coming months, it will be essential for non-EU companies with business in the EU – not just State-owned or Chinese companies – to consider the proposals carefully and help ensure that the final proposals create as little duplication and administrative burdens as possible.
|Jay Modrall, Partner, Norton Rose Fulbright Brussels LLP James R. Modrall is an antitrust and competition lawyer based in Brussels. He joined Norton Rose Fulbright LLP in September 2013 as partner, having been a resident partner in a major US law firm since 1986. A US-qualified lawyer by background, he is a member of the bar in New York, Washington, D.C. and Belgium.With 27 years of experience, he is a leading advisor for EU and international competition work, in particular the review and clearance of international mergers and acquisitions.Mr Modrall also has extensive experience with EU financial regulatory reform, advising the world’s leading private equity groups in connection with the new EU directive on alternative investment fund managers and leading banks and investment firms on EU initiatives including EU regulation of derivatives, EU reforms in financial market regulation and the creation of a new EU framework for crisis management, among others. Mr. Modrall’s native language is English, and he is fluent in Italian and proficient in Dutch and French.|