On 26 July 2024, the European Commission published a Staff Working Document (SWD, available here) discussing some of the key concepts under the Foreign Subsidies Regulation (FSR), including situations where the foreign subsidy will be considered distortive to the internal market and the EC’s approach to the balancing test.
The Document confirms that while there must be a causal relationship between the foreign subsidy and the undertaking’s activities on the internal market, the EC is also entitled to examine subsidies with no such apparent link, if the foreign subsidies are used to cross-subsidise relevant activities (e.g. an intra-group transfer used to fund the transaction). The foreign subsidy must also – actually or potentially – affect competition in the internal market by improving the competitive position of an undertaking. Unlike state aid – where distortion of competition is presumed as soon as selective advantage is granted – there is no automatic presumption of distortion of the internal market in the FSR assessment.
The EC’s approach to unlimited guarantees (one of the categories of foreign subsidies most likely to distort the internal market) is also expanded on in the guidance. The inclusion of the section on unlimited guarantees in the SWD is most likely based on initial conclusions from the Commission’s ongoing Phase II investigation into the proposed acquisition by e& of PPF which, so far, is the only Phase II investigation under the M&A tool. The guidance clarifies that unlimited guarantees may take many forms, for instance, indications that the State will intervene in the case of illiquidity may already signal the existence of an unlimited guarantee.
Beyond this, many uncertainties remain. This is partly due to the EC’s intentional decision not to publish Phase I decisions. This lack of more substantive guidance appears to be affecting undertakings’ ability to self-assess the risks associated with FSR investigations. Indeed, earlier this month, Purmo (a Finish manufacturer of heating and cooling solutions) has quoted “the limited number of precedent processes under the FSR” as a factor contributing to the Board’s decision to opt for a significantly lower bid (Statement of the Board is available here).