European Commission targets foreign subsidies causing market distortions
19 June 2020
As part of a broader effort to reshape the EU’s trade policy, the European Commission (EC) proposes to expand its toolbox to tackle foreign subsidies undermining the level playing field in the EU’s internal market.
In a White Paper published on 17 June 2020, the EC opens a public debate on new legal instruments to remedy market distortions caused by companies supported by public entities outside the EU. At a press conference in Brussels, Commissioners Vestager and Breton highlighted the importance of preserving a fair and open European market, yet acknowledged that the White Paper is “not uncontroversial”. If the EC’s proposals are adopted, foreign subsidies would come under intense scrutiny in the EU, and the EC and/or Member States would be granted extensive enforcement powers.
Filling the regulatory gap
The EC is of the view that the current regulatory framework is not fit for protecting European interests. The risk of vulnerable European businesses becoming the target of foreign buyers has been exacerbated by the Covid-19 crisis but concerns have deeper and older roots – as evidenced by the debate on the prohibition of the merger of Siemens and Alstom’s rail activities.
European companies, subject to the EU’s stringent State aid rules, perceive an imbalance with foreign companies supported by their governments. And EU anti-dumping and anti-subsidy rules, as well as WTO law, are insufficient to fully address subsidies as they are limited in scope and many WTO members appear not to play by the WTO’s book.
Other legal instruments are too narrowly focused to properly address the issue of foreign subsidies. Merger control and antitrust rules focus on consumer welfare, whilst national foreign investment control regimes (and the EU’s common screening framework that will come fully into force in October) are mainly centred on the protection of national security and public order.
The EC’s White Paper intends to fill this regulatory gap with various options all aimed at curtailing the subsidy race at global level. The overall objective pursued by the EC is to ensure a level-playing field, yet strike the right balance between:
- ensuring an efficient allocation of global resources;
- safeguarding the ability of companies to compete on an equal footing and be granted a fair opportunity to expand their operations and stay at the technological frontier; and
- preserving the benefits that international competition and foreign investment deliver.
To that end, the EC proposes new legal instruments to control foreign subsidies specifically aimed at facilitating acquisitions of European businesses as well as, more generally, those subsidies distorting competition on the merits in European markets.
Vetting foreign-backed acquisitions of European businesses
The EC is determined to prevent European businesses from being scooped up by firms relying on the deep pockets of foreign States. A new mandatory ex ante filing mechanism would ensure that foreign subsidies do not confer a benefit on their recipients when acquiring stakes in European companies, either directly by explicitly linking a subsidy to a proposed acquisition or indirectly by de facto increasing the financial strength of the acquirer.
In order to lower the overall administrative costs and to increase legal certainty, the EC proposes to set up a centralised review system at EU level, enabling a one-stop-shop control comparable to the one under the EU Merger Regulation, in which the EC would be exclusively competent.
The EC sets out several options to determine what transactions would trigger a filing obligation. Depending on which options are retained, the EC’s net could be cast very wide. In particular, the EC suggests that the acquisition of minority shareholdings falling short of granting control (as defined under the EU Merger Regulation) but conferring “material influence” could get caught. The EC also put forward several proposals for filing thresholds (eg acquisition of companies generating European revenues of EUR100 million, or public support to the foreign acquirer of a certain percentage of the deal value), but leaves open the possibility that all transactions, irrespective of their size, could be targeted.
The review process would happen in two steps:
- acquirers subject to a filing obligation would be required to provide detailed information to enable the EC to identify problematic operations. This ‘foreign subsidy’ filing would be separate from, and run in parallel to, any other filing under merger control or foreign investment control mechanisms. A suspension obligation, preventing the acquirer from closing the transaction, would be attached to the filing. If, on the basis of a preliminary review (the duration of which is left open), the EC has sufficient evidence that the acquirer benefits from foreign subsidies facilitating the acquisition, the EC would be able to launch an in-depth investigation; and.
- if, at the end of the in-depth investigation (the duration of which is also open to discussion for now), the EC finds that an acquisition is facilitated by foreign subsidies which distort the internal market and are not balanced by any positive impact under an “EU interest test”, it would be able to accept commitments offered by the acquirer which effectively remedy the distortion. These could include, for instance, the divestment of certain assets or an obligation to grant access to infrastructure or license technologies. In the absence of an agreement on suitable remedies, the EC could, as a last resort, prohibit the acquisition.
Additionally, to ensure effective implementation of the filing obligation, the EC would also have the right to launch an ex officio review of transactions where acquirers fail to notify, including after closing. This review could ultimately result in the prohibition of a transaction or, if it is already completed, in its unwinding. And there would be administrative sanctions for violation of procedural rules too – with “a deterrent effect” likely to be comparable to the harsh penalties imposed by the EC on infringements of the merger control rules.
Curbing other forms of anti-competitive foreign subsidies
The EC’s concerns go beyond acquisitions.
A general instrument
First, the White Paper proposes a general, ‘catch-all’ instrument to capture all forms of foreign subsidies that have caused distortions in the internal market (including smaller acquisitions that would not be subject to a mandatory ex ante filing obligation) and are provided to a beneficiary that is established or active in the EU.
In that context, there would be no notification mechanism. Instead, the responsibility of monitoring foreign subsidies would be shared between the EC and the relevant authorities at Member State level. They would be able to act ex officio and launch a preliminary review upon any information indicating the granting of a foreign subsidy to a beneficiary active in the EU – up to ten years after the alleged subsidy has been granted.
If the competent supervisory authority suspects that a foreign subsidy may distort the internal market, an in-depth investigation would follow (unless the case is not a priority). The investigation would be administratively closed if the existence of a foreign subsidy is not confirmed, if there is no indication of a distortion or if the distortion is mitigated by the positive impact of the subsidy within the EU or on a public policy interest recognised by the EU (such as job creation, environmental protection or digital transition). Otherwise, the competent supervisory authority would have the possibility to impose “redressive” measures or accept legally binding commitments. The remedial measures could take multiple forms and may consist of structural or behavioural commitments, prohibition of market conduct, FRAND licensing and payments and transparency obligations.
Foreign subsidies in public procurement
Second, the White Paper proposes that foreign companies participating in public procurement procedures in the EU notify the contracting authority as to whether they have received support from foreign entities within the last three years, or are expecting such support during the execution of the contract.
The relevant information would be reviewed by the relevant authorities at Member State level and communicated to the EC and other Member States. During the investigation, which would be subject to strict time limits, the contracting authority could pursue the tender procedure but would be barred from awarding the contract to a foreign company under review. A foreign company would be excluded from the tender procedure concerned (and possibly from future tender procedures run by the same contracting authority) if it is eventually determined that it received support distorting that procedure.
Foreign subsidies in the context of EU funding
Third, the White Paper proposes that, for all economic operators to compete for EU financial support on an equal footing, EU funding should not be available to companies that have received distorting foreign subsidies. Mechanisms mirroring those proposed for public procurement procedures should therefore be put in place for award procedures for EU-funded grants.
Interplay with WTO rules and FTA obligations
The White Paper makes it clear that the EC is proceeding on the basis that its proposals are compatible with and complementary to WTO law and the approach taken in the EU’s free trade agreements (FTAs). However, third States may consider that the proposals are contrary to the EU’s existing international law obligations. Consequently, one interesting dynamic, as the proposals enter the EU’s legislative process, will be the response of third States and if any threaten retaliatory action should the proposals enter into force.
No doubt, the EC’s proposals are partly a reaction to the on-going dysfunction at the WTO and the failure of the multilateral trading system to discipline subsidises in an effective way. However, the White Paper comes at an important juncture for the WTO as the selection process for its next Director-General heats up and the Appellate Body remains in paralysis following the U.S. government’s continued refusal to allow the appointment of new members. So, it might be argued that it is an inopportune moment for the EU to act unilaterally in a way that could be perceived to be undermining, yet further, the multilateral trading system.
When presenting the White Paper, Commissioners Vestager and Breton insisted on the positive contribution – and indeed the necessity – of foreign investment into the EU. Yet considering the significant impact of the measures proposed by the EC, which will reach all firms backed by non-EU governments and public entities, the legislative process may be fraught with difficulties and backlash from multiple corners can be expected, not least from Member States resisting additional power-grab by the EC.
Investors around the world – and European businesses alike – need to keep a close eye on legislative developments. Understanding and navigating the rules that will be adopted, and ensuring a smooth interplay with the other applicable regulatory regimes (in particular merger control, WTO rules and FTA obligations, and foreign investment reviews), will be key for successfully managing deals in the EU.