EU Foreign Subsidies Regulation: Further red tape for tech M&A in Europe
Semiconductor industry under particular scrutiny
The EU Foreign Subsidies Regulation is likely to crack down on tech M&A as well as governmental support, write Ina Lunneryd, Managing Associate and Neil Hoolihan, Partner at Linklaters
The European Union (EU) has added a new regulatory tool to its toolbox that will give the European Commission (EC) broad powers to review the impact of subsidies granted by non-EU countries on the EU market.
The EU Foreign Subsidies Regulation (FSR), coming into force in mid-2023, is targeted at companies operating in the EU that may have received financial advantages from countries not bound by the EU's strict state aid rules.
Under the FSR, companies will need prior approval from the EC for certain M&A transactions and large public tenders. The EC will also have wide-ranging powers to call in M&A falling below the thresholds, and launch investigations into potentially distortive subsidies (for example, on the basis of complaints by third parties).
While non-EU based companies are most likely to feel the impact of the FSR (as they are more likely to have received financial support from non-EU governments), it could also affect EU-headquartered companies with activities outside the region.
The FSR also does not distinguish between the country of origin for the subsidies; whether the financial benefit derives from the USA, the UK, China or the Middle East will not, on its face, affect the EC's powers.
To date, the EC has provided limited guidance about enforcement priorities and the sectors it will target. However, as the EU's digital transformation is amongst the EC's top priorities, we expect the tech sector to be high on the agenda for scrutiny under the FSR.
Tech M&A a likely focus
One key concern the FSR addresses is subsidised acquisitions of European companies by foreign investors, such as promising tech start-ups. Such concerns have been raised in the semiconductor industry, where acquisitions of EU targets may have been enabled by foreign subsidies. Similarly, the gaming industry has encouraged the EC to identify acquisitions 'that are supported by foreign subsidies and present a danger to EU values, market fairness and overlying policies.'
These concern echo alarms raised in relation to so called 'killer acquisitions', where competition authorities have taken measures to ensure such deals do not escape scrutiny. In the same vein, the EU's Digital Market Act will come into force next year, and firms designated as 'gatekeepers' will be under an obligation to report all M&A activity to the EC.
Against this backdrop, the FSR is expected to further embolden the EC to review M&A in the tech sector (either ex ante for larger targets but also, in principle, ex post for targets falling below the thresholds).
Support favouring foreign tech companies
A further area likely to end up in the spotlight is subsidies - including 'covert' ones such as tax exemptions, R&D grants and equity injections - benefitting foreign tech companies and granting them an advantage over their EU competitors. The semiconductor industry has been mentioned by the EC as an industry where support, and in particular preferential tax treatment in non-EU countries, distorts trade and competition.
In recent weeks we have also seen opposition to the US's Inflation Reduction Act, linked to fears that it could disadvantage EU companies. Tech companies benefiting from this Act risk falling within the scope of the FSR. If such support is found to distort competition in the EU, this could lead to the EC taking action under its new powers (which include ordering repayment).
Be prepared for what's coming
While the FSR will create new red tape for M&A transactions, it is expected that the majority of notifications will be technical and clearance obtained relatively easily.
If the EC finds that a subsidy is capable of distorting competition in the EU, it can block the acquisition or impose conditions. These conditions can be far reaching, ranging from repayment of the subsidy to divestment of assets, reduction of market presence and changes to governance structure.
Tech companies with an eye to M&A activity in the EU should start thinking about gathering information on their relationships with governments (or other public / administrative bodies) in non-EU countries. Once these dealings have been identified, an assessment of whether they may entail an element of distortive subsidy (and hence potentially be viewed problematically by the EC) should be considered. Outside the M&A context, consideration should also be given to whether such relationships could be the subject of challenge (e.g. as a result of a complaint by competitors not benefitting from similar arrangements).
Until there is more clarity from the EC on how it will apply and enforce the new rules, tech companies will need to be cautious. Forward-planning will be critical to avoid deal delays or be ready for inquiries.