The European Commission released today its regulation proposal for an instrument to control “foreign subsidies distorting the internal market”.
The proceeding combines the methods of a ‘trade defence’ proceeding and of a state aid investigation by the Commission’s competition authorities.
The new legislation unveiled today gives the EU executive the right to investigate any international company take-over and any public procurement bid by a non-EU company in the EU above a certain monetary threshold.
Relevant companies entering such transactions will be required to file information to the EU executive body and cooperate in case there are further questions.
Focus on bigger deals
The Commission will look into subsidy amounts that are larger than € 5 million. Regarding mergers, the Commission would investigate transactions leading to a turnover of more than € 500 million on the EU market and related subsidies of more than € 50 million in aggregate over the previous three calendar years.
The subsidies the EU will investigate include “capital injections, grants, loans, loan guarantees, fiscal incentives, setting off of operating losses, compensation for financial burdens (….), debt forgiveness, debt to equity swaps or rescheduling”. The subsidies it will focus on in particular are subsidies “to an ailing undertaking”, “unlimited guarantee for debts or liabilities”, “a foreign subsidies directly facilitating a concentration”, or a subsidy that would allow a bidder in a tender to offer “an unduly advantageous tender”.
Fines and penalties will be calibrated to take into account any ‘positive’ effect of the investment for the EU.
The new legislation will apply across the board to all non EU companies operating in the single market – of which the Commission estimates there are currently around 100 000.
But the regulation’s very existence is mainly a response to the rising presence of state-owned or state-backed Chinese companies in the European market.
This partly explains the approach taken by the Commission in analysing the source of subsidies. Among others the Commissions will look at funds or guarantees offered by “foreign public entities (….) taking into account elements such as the characteristics of the entity, the legal and economic environment prevailing in the state in which the entity operates including the government’s role in the economy”.
The finding of a distortion can lead the EU to demand redress – such as repayment of the subsidy or restrictions in the operations in the EU such as a cap on market share.
The EU will mainly undertake investigations on EU territory and will ask for permission by the foreign government to investigate in their country if necessary. An entire article (Article 14) is dedicated to what the EU would do in case of non-cooperation by the investigated company. Here the EU allows itself to unilaterally set penalties on the foreign buyer or bidder.
Such penalties may go as far as banning a transaction or excluding the bidder from a tendering process. Non-cooperation can also lead to fines of up to 10% of the company’s turnover and periodic penalty payments “not exceeding of the average daily aggregate turnover of the undertaking concerned”.
Among others the EU would act “where (…) a public undertaking which is directly or indirectly controlled by the State fails to provide the necessary information to determine whether a financial contribution confers a benefit to it”.
The new regulation is part of a wider panoply of tightening controls over foreign investors and foreign bidders in the EU market.
The EU is currently rolling out a new EU-wide investment screening mechanism. The Commission also hopes that member states will finalise their negotiations over a new ‘reciprocity’ regulation for public tenders.
All in all, the amount of paperwork for foreign bidders and cross-border transactions will increase – and whilst China is the elephant in the room, many other transactions will fall under the new system.