M&A: New Merger Control through Foreign Subsidies Regulation


published on 22 February 2023 | reading time approx. 5 minutes

On 12 January 2023, the Regulation on foreign subsidies distorting the internal market (Regulation (EU) 2022/2560; "FSR") entered into force. The FSR aims to prevent distortions of competition through foreign subsidies. In this respect, the EU legislators identified a regulatory gap because neither antitrust law nor state aid law or other regulations prevented foreign subsidies from giving a market participant an unfair advantage in the internal market. This article summarises the instruments the FSR provides to the Commission and what consequences the FSR has for companies, especially in transactions.

Principles and instruments of the FSR

The FSR applies from 12 July 2023. Unlike the foreign investment control regimes, for example, it is not limited to certain economic sectors. The Commission's Directorate-General for Competition, which is also responsible for antitrust and state aid law, is responsible for enforcement.

The FSR makes use of various instruments, which are mainly comparable to antitrust law, merger control and state aid law. These are essentially:

  • Obligation to notify concentrations and prohibition of implementation if a concentration exceeds certain thresholds (see below for more details).
  • Obligation to notify for approval when participating in public procurement procedures if:
  • Estimated volume of procurement of at least 250 million EUR,
  • Financial contribution of at least EUR 4 million per third country.
  • Initiation of investigations "ex officio" in case of suspicion of competition-distorting foreign subsidies, including inspections.

The Commission can impose fines of up to 10 percent of a company's total annual turnover if it fails to comply with the obligations of the FSR.

When is a concentration subject to notification under the FSR?

The obligation to notify only applies if there is a "concentration". The definition of a concentration is the same as in EU merger control law. It covers a merger, an acquisition of control and full-function joint ventures. The (non-controlling) minority shareholding is not subject to notification. In addition, certain turnover and contribution thresholds must be reached for a notification obligation:

  • EU turnover of target or merging company of at least 500 million EUR,
  • Foreign subsidies of at least 50 million EUR for the companies involved.

Finally, the target company (or the merging company) must be established in the EU.

Substantive test of a concentration

If the obligation to notify exists, the Commission examines whether 1. a subsidy granted by a third country exists which 2. leads to a distortion of the internal market. In doing so, the Commission may 3. carry out a balancing test.

  1. Foreign subsidy

  2. A foreign subsidy within the meaning of FSR exists if
    1. a third country provides, directly or indirectly, a financial contribution,
    2. which confers a benefit on an undertaking engaging in an economic activity in the internal market and
    3. which is limited, in law or in fact, to one or more undertakings or industries.

    This could be, for example, interest-free loans, preferential tax treatment or unlimited guarantees. Even though the FSR specifies certain aspects of the definition in more detail, the very broad definition is likely to lead to application difficulties and uncertainties in practice.

  3. Distortions in the internal market
    Distortion in the internal market shall be deemed to exist where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market. Here, the FSR specifies various indicators (including the amount and type of foreign subsidy, the situation of the company, the purpose). It also lists categories of when a distortion is likely or unlikely.
  4. Balancing test
    In the balancing test, the Commission may balance the negative effects of a foreign subsidy that distorts the internal market against any positive effects. In doing so, it may also take into account other EU policy objectives. Due to the general criteria, the balancing test is also likely to lead to a high degree of legal uncertainty.

Further aspects of merger control

The obligation to notify a concentration applies from 12 October 2023. The FSR contains a prohibition not to implement the concentration before notification and clearance. Violations are subject to fines. Like the existing EU merger control, the FSR merger control procedure is divided into a preliminary review and an in-depth investigation (Phase I and II) with comparable deadlines. In the proceedings, the parties or the Commission have the possibility to eliminate an identified distortion through commitments and redressive measures and thus avoid the prohibition of a concentration.

Challenges for M&A practice

In addition to many interpretation issues in the formal and substantive examination, the possibility of intervention "ex officio" is likely to cause considerable legal uncertainty. For example, in the case of transactions below the thresholds, the Commission could intervene "ex officio" even after closing, carry out an examination and, in the worst case, order a concentration to be reversed.

What is unfortunate for the companies concerned is that the procedure under the FSR and the existing national and EU merger control regimes are applicable in parallel. This means that the Commission may have to examine and clear the concentration in two different procedures. Alternatively, the Commission may examine a concentration under the FSR, while the competition authorities of the Member States conduct their own merger control proceedings in parallel. In each case, different decisions are possible because the standards of review are different.

Overall, the FSR will entail significantly more bureaucracy, time and costs for potentially affected companies. In addition, there are additional transaction risks for various reasons.

Considering the FSR in the M&A process

In the M&A process, it must be taken into account that transactions may require further clearance by the Commission in the future. In this respect, the potential obligation to notify a concentration must be established as a further checkpoint in the M&A process, at such an early stage that, if necessary, there is still enough time to prepare and carry out the merger control proceedings. Similar to the existing EU merger control, this can easily extend to several months in complex cases.

Foreign subsidies and the FSR should also be considered beyond this in the transaction process. For example, it should be examined and assessed whether intervention "ex officio" is conceivable in transactions below the thresholds or whether there could have been breaches of the FSR in connection with the target company in the past.

When drafting the contract, the corresponding closing condition should be considered and provisions on the workflow of the merger control proceedings (information, participation rights, etc.) should be included. It should also be considered to what extent the various uncertainties and risks arising from the FSR should be contractually covered.


The FSR establishes a further merger control, which joins the existing (national and EU) merger control and foreign investment control regimes. It remains to be seen how the Commission will handle such proceedings, especially in the first few years, and what hurdles will arise. Commission guidelines do not yet exist. However, the Commission published a draft implementing regulation in early February 2023, which is open for comments until 6 March 2023. Regulatory gaps, undefined legal terms and a lack of experience lead to a considerable degree of uncertainty as well as legal and economic risks for companies operating in the internal market. It is now important for potentially affected companies that the FSR and the resulting risks are taken into account at an early stage as a further point of examination in the case of M&A transactions. Otherwise, companies may face painful sanctions, among other things.

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