Commission considers yet another tool to address foreign investments – the White Paper on foreign subsidies
On 17 June, the European Commission adopted its anticipated White Paper discussing novel and far-reaching proposals to address the distortive effects of foreign subsidies in the EU. The Commission’s “White Paper on levelling the playing field as regards foreign subsidies” relates to economic activity within the EU single market that has profited from third states’ subsidies which have escaped existing EU competition and trade defence regulations. The Commission considers that the proposals are necessary to close a regulatory gap. The tools relate to a general market scrutiny instrument as well as pre-notification obligations of contemplated acquisitions and public procurement bids facilitated by foreign subsidies. All intervention measures would significantly add regulatory complexity to in-bound transactions and economic activity in the EU. The almost 50 pages document initiates a consultation period until 23 September 2020 during which stakeholders may provide their view to the Commission. A new legislation proposal is already projected for 2021.
The (perceived) regulatory gap to tackle distortions by foreign subsidies
In the last years, foreign investment in the EU by state-owned enterprises from third states has grown rapidly. The EU is the main provider and top global destination of foreign direct investments. Investments and financial flows into the EU as such are welcome, as the EU offers an open single market for economic operators from around the world under level playing field condition. However, the channelling of funds into the EU for companies owned or subsidised by third states, the acquisition of European targets by foreign-subsidised companies and the bidding by such companies for public procurements may have distortive effects on the internal market. Left unchecked, they threaten to unbalance the playing field for economic operators in the EU.
Yet, where EU State aid rules help to preserve a level playing field in the single market with regards to subsidies provided by Member States, no such rules exist for subsidies granted – directly or indirectly – by third countries. The existing competition rule books appear to be ineffective to address the effects of foreign subsidies. While trade defense rules capture the effect of foreign subsidies to the exports of goods from third countries into the EU, they do not address all distortions caused by foreign subsidies, in particular government-backed foreign financial flows facilitating acquisitions of EU companies, or respective support for the operation of a company in the EU.
The tools considered in the White Paper to level the playing field
The White Paper is the first step towards introducing a novel legal framework to address and remedy distortions in the internal market arising from foreign subsidies – being defined as a “financial contribution by a government or any public body of a non-EU State, which confers a benefit to a recipient and which is limited, in law or in fact, to an individual undertaking or industry or to a group of undertakings or industries.”
The framework consists of three modules: rules regarding distortions caused by foreign subsidies provided to an economic operator in the EU single market (Module 1), rules in the context of acquisitions of EU targets (Module 2) and rules in the context of public procurement procedures (Module 3). The Modules may apply separately or in combination.
General market scrutiny instrument (Module 1)
Module 1 entails a general market scrutiny instrument that should enable the supervisory authorities – that may be the Commission or national authorities – to investigate all possible market situations in which foreign subsidies granted to a company established in the EU may cause distortions in the single market. The competent authority would act ex officio on the basis of information that foreign subsidies exist, and investigate the distortive effects.
While the White Paper recognizes that subsidies may have a positive impact, which would lead the authority not to continue its investigation (so-called “EU Interest Test”), certain categories of subsidies will be considered to most likely have distortive effects, such as export financing, subsidies to ailing companies, tax reliefs etc. Foreign subsidies below a certain threshold are deemed unproblematic – known from the deminimis threshold in EU state aid, the Commission suggests to target only foreign subsidies above EUR 200.000, granted over a consecutive period of three years.
Where the subsidy is found to have a distortive impact on the proper functioning of the single market, the authority has the power to issue redressive measures against the subsidy’s recipient. These may entail a wide range of structural and behavioural measures linked to the foreign subsidy: divestitures; blocking certain investments; prohibition of a subsidised acquisition; granting third party access; prohibition of a specific market conduct; publication of certain R&D results; or redressive payments).
Notification requirement for acquisitions of EU targets facilitated by foreign subsidies (Module 2)
Under Module 2, the Commission would review contemplated acquisitions of EU companies which involve or are being facilitated by foreign subsidies under a mandatory notification mechanism. The module would apply to the acquisition of (i) “control” (within the meaning of the EU merger control regulation); (ii) a yet to-be-defined percentage of shares or voting rights; and (iii) “material influence” (a concept below the level of “control” that is not used in EU merger control but known e.g. in the UK and to some degree in Germany).
Companies receiving financial support from a non-EU government would be required to notify their contemplated transaction to the Commission (one-stop shop) if the investment exceeds a certain threshold defined by, e.g., turnover or deal value. The Commission would enjoy enforcement powers that are comparable with those pursuant to EU merger control. Importantly, the acquirer would not be able to close the transaction during the review process. Should the substantive assessment yield the result that the acquisition is facilitated by foreign subsidies and distorts the single market, the Commission could effectively require the notifying party to offer appropriate commitments, similarly as for Module 1, or prohibit the acquisition.
Notification requirement for public procurement bids facilitated by foreign subsidies (Module 3)
The White Paper’s Module 3 addresses the distortive effects that can arise from companies financed via foreign subsidies bidding in public procurement procedures. The foreign subsidies may allow bidders to obtain public procurement contracts that they would not have obtained without the foreign subsidies’ benefits, e.g. by entering bids below market price or even below cost. When submitting their bid in a public procurement procedure, economic operators would have to notify to the contracting authority whether they or any of their consortium members, subcontractors or suppliers have received a financial contribution constituting a foreign subsidy within the last three preceding years, and whether such financial contribution is expected to be received during the execution of the contract. On the basis of the notification, the contracting authority as well as the supervisory authorities would review whether there is a foreign subsidy and whether it conferred upon the bidder an unfair advantage in the procurement procedure.
Redressive measures can be the exclusion of the economic operator from the ongoing procurement procedure and eventually an exclusion from future procurement procedures for a maximum of three years.
Assessment and outlook
The White Paper is part of a political response of the Commission – traditionally a strong supporter of open markets – to growing concerns in the EU concerning foreign investments. The blocked Siemens/Alstom merger opened (again) the discussion on the need for political considerations in merger review, and for European Champions capable of competing in global markets against state-owned and subsidized companies. With the tools proposed in the White Paper, the Commission tackles the detrimental effects of foreign subsidies in the single market without compromising the political neutrality of the merger assessment. However, the unprecedented and broad intervention rights would, if implemented, significantly raise the regulatory burden for foreign investors – not only from China. It therefore may raise trade barriers with any non-EU country and discourage foreign direct investments (in that context, note that the Covid-19 pandemic prompted the Commission to call for more action to protect EU companies and critical assets (see our news of 30 March 2020 on the Guidance concerning foreign direct investments of 25 March 2020).
Technically, the White Paper does not address the interplay between the trade defense, state aid, merger control and public procurement regimes, and it leaves important concepts unclear (e.g. distortion in the internal market) as well as the coordination of concurrent competences of authorities. What seems clear is that the new instruments would considerably change the regulatory environment for foreign investments that in addition to merger control and FDI screening reviews may face another layer of scrutiny.
We will monitor the developing issue closely and keep you posted!
Any questions? Please contact: Dr Jens Peter Schmidt, Dr Bärbel Sachs or Dr Carl-Wendelin Neubert
Practice Group: Regulatory & Governmental Affairs