Conceived as the answer to the missing link in the Commission’s ability to address distortions on the market - filling the gap between state aid, antitrust, trade and public procurement rules - every movement of the three-headed beast that is the FSR has been closely monitored. Over the last 12 months, concerns have been raised both as to the scope of the FSR, as well as to the burden of its obligations and its impact on deals, public tenders and more generally on the ability of companies to operate in the EU. Here, we reflect on some of these concerns and comment on the Commission’s enforcement track record to date.

Drowning in discretion

Despite the passing of the last 12 months, the breadth of the FSR, the lack of transparency and Commission’s wide discretion has meant that there is still significant uncertainty as to what the Commission is actually looking for, how it assesses a distortion in the internal market, what it considers to be the link between subsidies and distortion in the EU, and how it conducts its balancing test.

The recent e& transaction is a case in point, giving rise to more questions than answers. In the context of the FSR merger review, the FSR provides that when assessing whether foreign subsidies in a concentration distort the internal market, “that assessment shall be limited to the concentration concerned”[1]^. One could be forgiven in thinking that in the context of an FSR merger notification, the Commission’s assessment would therefore look at the relationship between the foreign subsidies and distortion related to that concentration, and even more specifically, whether this was a subsidized acquisition[2]. This, however, was not the case here. Ultimately, the Commission had objections not because the subsidy allowed e& to outbid other purchasers, but because of the potential impact of the foreign subsidy in future conduct by the merged entity. The Commission expressed concern that the foreign subsidies would artificially improve the merged entity’s financial abilities and, as a result, the merged entity “could have” engaged in investments or acquisitions that would (by definition?) be distortive. On that basis, commitments of at least 10 years from the parties were extracted – a somewhat novel approach to FSR enforcement in the context of a merger filing.

While it is fair to say that parties coming into transactions (or public tenders) specifically with any of the foreign subsidies listed in the Regulation as being “most likely” to distort competition[3] should be alive to the heightened risk of scrutiny, few would expect having to offer commitments just in case future investments take place.

Beyond substantive law, the FSR puts into the Commission’s hands a wide arsenal of enforcement tools – much wider than is available under antitrust or trade law. Its arsenal is in fact a combination of the two: for example, it has the choice to impose fines on companies for non-cooperation (as it does in antitrust investigations) or rely on the “best facts available” approach[4] to adopt decisions (as it does under the EU State aid and trade rules). It can launch dawn raids (again, an antitrust tool) and it can go on “inspection” visits abroad if the government of the third country agrees (a trade tool). It is not so much about having your cake and eating it, but an all-out buffet.

Even the two FSR filing regimes are extremely broad in scope: not only are the thresholds at the lower end of the scale[5], the Commission also retains the power to investigate cases below the thresholds. The breadth of procedural options coupled with no signs of restraint mean that there is absolutely no “safe harbour” for companies wanting to do business or investments in the EU. Companies looking to enter the EU market by acquiring a EU company would be – provided thresholds are met - subject to the mandatory FSR filing regime (in addition to a potential national security review and/or antitrust merger review), and if the thresholds are not met, at risk because of the Commission’s call-in powers. If the company were to make a greenfield investment, the Commission could still in principle later challenge the funding, technology or asset transfers to set up the investment under the FSR’s ex officio powers.[6] For companies (perhaps of a certain profile), the outcome could be damned if you do, damned if you don’t.

Public interventions of whatever nature - and subsidies in particular - play an important role and is a structural part of economies throughout the world, even if their magnitude varies from one country to another. The message of the FSR and its current enforcement appears to be that foreign economies have the binary choice of falling in line with EU market principles or risk being de-coupled from the EU altogether.

Awkwardness of the FSR

There are several elements of the FSR that sit awkwardly, and it remains to be seen how these will be dealt with by the Commission and the EU courts (if at all). The first is the transition phase. The FSR applies to foreign subsidies granted in the five years prior to 12 July 2023 where such foreign subsidies distort the internal market after 12 July 2023. With regard to mergers and public procurement procedures, the FSR applies to foreign financial contributions granted in the three years prior to 12 July 2023. The consequence of these transitional provisions is that companies need to be looking back on their foreign financial contributions received well before the FSR was even adopted. There is, at the very least, the legally awkward position of the retroactivity of the FSR which puts companies in a position where they need to defend aid that was granted to them at a point in time when no value judgement was attached to those financial contributions by the Commission; a situation at odds with the EU fundamental principle of legal certainty.

It also remains to be seen whether and how the Commission will clarify the interaction between the FSR and actions taken under traditional trade remedies, the latter being dealt with by a third Commission Directorate, DG Trade. Some may question whether there is sufficient coordination between DG Comp (in charge of FSR merger reviews) and DG Grow (in charge of FSR public procurement notifications). Adding DG Trade to the mix may also further complicate matters, but is likely to be entirely necessary in some cases.

Another issue is the lack of transparency. Given that the three-headed beast was born at a time of uncertainty and concerns relating to foreign interference in the EU, the lack of transparency as to the process, the rights of third parties, and the criteria on which the Commission will rely for the purpose of applying the balancing test provided by the FSR, was perhaps rationalized by legislators as being necessary to guard the FSR’s status as a tool that is as much about politics and policy as it is about anything else. In the absence of formal guidelines, however, the Commission has resorted to disseminating information about the FSR through its officials speaking at conferences, and through a sporadically updating a “Q&A page” on its website. The Commission's merger unit has also published a “100 days paper” reflecting on the first 100 days of the FSR merger notification procedure. While the document is not an official document and specifically caveats that its contents do not necessarily reflect the official position of the Commission and that the views expressed belong to the authors, it contains significant implications for those preparing notifications.[7]

Enforcement not country-agnostic

Although careful not to specifically call out against Chinese subsidies, concern about investments from China have featured from very early on in the Commission’s thinking in developing a tool against foreign aid. In two case studies examined by the Commission prior to the adoption of the FSR, two acquisitions by Chinese players over EU businesses were called out as clear indications of the potential for foreign subsidies to distort the internal market through subsidized acquisitions.

The track record over the last 12 months also shows a heightened interest in Chinese companies operating in Europe. The first in-depth probe under the FSR was launched in February 2024 against a Chinese maker of rolling stock in relation to a Bulgarian public tender. In April 2024, two further in-depth investigations were opened in the solar photovoltaic sector. Both involved bids from Chinese players. There have also been two ex officio investigations to date, one relating to Chinese suppliers of wind turbines, and the other involving a Chinese security company, where the Commission also carried out dawn raids in two Member States. In relation to FSR merger cases, there has so far been one in-depth review resulting in the adoption of binding commitments. In this case the acquirer was from the United Arab Emirates.

What’s next?

After the European Parliament elections in June 2024, a new set of European Commissioner candidates have been nominated and face European Parliament questioning before their approval at the beginning of November 2024. Teresa Ribera Rodríguez is scheduled to be responsible for overseeing DG Comp and Stéphane Séjourné for DG Grow. Both candidates will be coming in off the tail of departures of two ardent FSR promoters, Commissioner Margrethe Vestager and Commissioner Thierry Breton. How aggressively the FSR will be enforced following their departures depends on the objectives and strategies pursued by the EU, and also indirectly on the balance of powers between Member States within the EU. Since the overall top-down instructions are given by the existing and incoming Commission President Ursula von der Leyen, her role will likely be crucial. The results of the US election and the trade policy pursued by the next US administration vis-à-vis the EU may eventually also have an effect on the geographical scope of the FSR application.

We would expect the Commission to continue to build its team, given how the workload was greatly underestimated in the first place. It is understood that the Commission has received over 1,200 notifications under both the merger and public procurement regimes, but had expected only a small percentage of this.[8] The last known press report on the Commission’s team dealing with public procurement cases stated that the team consists of around 20 officials, with the FSR merger team around double that. Questions about the Commission’s ability and resources to effectively review these cases have surrounded the Commission since the inception of the FSR, and unless the team is bolstered, is likely to continue to haunt them. How the Commission approaches staffing will give an indirect signal about where it sets its priorities.

We would also expect complainants to continue to come forward. The FSR provides that the Commission can investigate distortions based on information from any source, including companies or associations. There have been several publicly announced complaints, and a few days ago another complaint was made public, with a State-owned French energy company complaining to the Commission about a Czech public procurement tender that was awarded to a South Korean company. The trend, it seems, is that the publicity around the FSR is leading more EU companies to come forward as complainants, and not only against Chinese companies.[9] In this context, further FSR dawn raids are also likely to take place. Emboldened by the message of “support” from the EU’s first-instance court, the Commission’s enforcement activity under the FSR is unlikely to wane.