The European Commission canvasses new broad powers to neutralise market distortions from foreign subsidies

The European Commission today published its White Paper on levelling the playing field as regards foreign subsidies (see here). The White Paper outlines significant new powers of investigation and remedial intervention for the Commission and EU Member States’ authorities. The broad new powers are designed to fill a regulatory gap, which has been identified, to address distortions to the EU’s internal market caused by non-EU governments’ subsidies. An attempt to level the playing field? Or raising the trade war stakes?

The White Paper aims to close what the Commission perceives as a regulatory gap. The EU and the Member States have well-developed systems of antitrust, foreign investment control, state aid, merger control, trade remedies such as anti-subsidy/countervailing measures, and public procurement. But these tools do not enable the EU to sufficiently address distortions of competition in the EU internal market that are specifically caused by foreign subsidies.

Several EU Member States, and firms based in the EU, have called for stronger measures to address competitive imbalances arising from foreign subsidies. The White Paper provides an answer to those calls. The proposals happen to coincide with the Covid-19 pandemic, at a time when EU Member States, like governments world-wide, have committed to unprecedented aid, stimulus and rescue packages (see here for our analysis of the EU’s Temporary Framework in relation to specific sectors). The White Paper emphasises the “importance of preserving the level playing field within the internal market, even in exceptional economic circumstances.” One implication is that, if adopted, the regulatory tools foreseen in the White Paper will gain very broad application.

The approach proposed in the White Paper is innovative. It targets third-country subsidies benefiting operators established or operating in the EU. It enables increased protection against foreign-subsidised services and investments. It would apply in parallel, and in extension, to the block’s current regulatory frameworks. It would certainly add complexity to certain M&A transactions, beyond the existing rules on merger control and the tightened rules on foreign investment control (see here). But it would also add complexity to public tender procedures and to foreign-supported businesses that operate in the EU.

Given the far-reaching scope of the new regulatory system envisaged in the White Paper, this alert includes only a summary of the proposals. We will supplement this with a series of commentary pieces in relation to specific areas such as antitrust, foreign investment, merger control, procurement, state aid and trade.

Foreign subsidies and distortions to the EU’s internal market

The White Paper identifies three complementary tools (referred to as “Modules”) to remedy “distortions” to the EU’s internal market that are caused by “foreign subsidies”. In principle, all, or a combination of, these systems could be adopted:

• First, “Module 1”: a system for investigation and possible remedial action in respect of foreign subsidies which have been put in place.
• Second, “Module 2”: a compulsory system for pre-notification, investigation and potential remedial action vis-à-vis foreign subsidies that support acquisitions of EU-based businesses.
• Third, “Module 3”: a compulsory notification system for foreign subsidies in the context of individual public tender procedures.

The modules use a broad notion of “foreign subsidy”, which is different from the EU notion of “state aid”: Basically, any financial contribution by a non-EU State entity, provided that the contribution directly or indirectly confers a benefit to a firm that is active or established in the EU. The competent authority would only have powers to take remedial action where a subsidy has a distortive effect within the EU’s internal market.

Module 1: Investigation and enforcement of foreign subsidies

The aim of the first enforcement tool would be to remedy distortions to the EU’s internal market caused by foreign subsidies. The Commission and Member States’ authorities would be given concurrent powers to act on confidential complaints and conduct own-initiative investigations. The Commission would have the ultimate say on whether a subsidy would be investigated by: (i) a single national authority; (ii) several national authorities acting in parallel; or (iii) the Commission.

Scope: The White Paper notes that Module 1 would apply to companies established in the EU. It adds that consideration should be given to the measures also applying to any company active in the EU that benefits from foreign subsidies, regardless of where it is established. Subsidies of less than EUR 200,000 would not be investigated.

Assessment criteria: As noted, the notion of a “foreign subsidy” is broad, and the White Paper identifies several categories that are likely to cause distortive effects. This category includes subsidies that are export-contingent; directed at “ailing” firms (for instance, debt forgiveness without parallel restructuring); unlimited government guarantees; tax reliefs; or directly aimed at facilitating takeovers. Other categories of subsidies would be examined in more detail to assess whether they could be distortive. The review would draw experience from EU anti-subsidy investigations.

Procedure: Investigations would cover two stages. The first stage would involve a preliminary review of an existing foreign subsidy and the possible distortions of competition caused in the EU. The second stage would involve an in-depth investigation. Beneficiaries would be encouraged to cooperate, or, failing that, could face fines and period penalty payments. An in-depth investigation would be closed with no action, or, alternatively, subject to remedies proposed by the beneficiary or imposed by the competent authority.

Remedies: Remedies would aim to neutralise the distortion to the internal market that has been identified. This includes “redressive payments” to the EU or to Member States. The White Paper also identifies a variety of alternative measures, including prohibition of investments, divestment of assets, access rights, conduct remedies or prohibition of certain conduct.

Module 2: Pre-notification for foreign-subsidised acquisitions

The aim of the second enforcement tool would be to specifically address distortions caused by foreign subsidies that facilitate the acquisition of EU businesses. The Commission would have exclusive jurisdiction to investigate the effects of such subsidies under a “one-stop-shop” system, similar to that of the EU Merger Regulation. Likewise, mandatory pre-closing notification would apply to transactions in scope, as well as a standstill obligation, a procedure with tight time-limits, and strict sanctions (including “significant fines”) for failure to notify and the possibility of blocking or unwinding completed transactions.

Scope: The White Paper envisages that the system would apply to the acquisition of: “control”, more than a threshold percentage of shares or voting rights (yet to be specified) or “material influence” over a company. Notification would be required where the notifying parties have received a foreign subsidy to support the transaction in a limited relevant period (e.g. three years prior to notification or a year post-closing).

Transactions that meet certain quantitative thresholds would qualify for pre-notification. The White Paper identifies transactions that involve an “EU target”; i.e. any company established in the EU, that meets:

• a qualitative threshold, for example in relation to assets likely to generate a significant EU turnover in the future and/or a quantitative threshold, to be set with reference to the value of the relevant transaction; or
• a quantitative threshold based on turnover, for example more than EUR 100 million, but with other thresholds or alternative approaches also being considered.

The White Paper also envisages that a filing would be triggered where third-country financial contributions exceed a certain (to be specified) amount or percentage of the acquisition price.

Assessment criteria: The assessment would cover two elements: whether the acquisition is facilitated by a foreign subsidy and whether the internal market is distorted as a result. The effect might arise either directly, by explicitly linking a subsidy to a given acquisition, or, indirectly, by increasing the financial strength of the acquirer. The investigation would presumably also draw on the Commission’s experience in anti-subsidy investigations.

Procedure: Notification would be mandatory for in-scope transactions, and acquirers would not be able to close the transaction for a certain number of working days (to be specified) after filing a complete notification. The review process would comprise two stages: a preliminary review phase and, where relevant, an in-depth investigation. At the end of an in-depth investigation, an acquisition might be cleared, cleared subject to remedies proposed by the parties, or prohibited.

Remedies: A broad range of structural and behavioural remedies are possible, similarly as for the Module 1 review system. However, the White Paper recognises that redressive payments and transparency obligations might, in principle, not be considered effective remedies in the Module 2 system.

Module 3: Foreign subsidies and public tenders in the EU

The White Paper also recommends, among other areas, the establishment of a review mechanism designed to tackle distortions by foreign subsidies in the context of public tender procedures.

Under this mechanism, a participant in a public tender would need to notify, to the contracting authority, whether it is a beneficiary of any foreign subsidy. Following an investigation of the effects of the subsidy, the participant could, in certain circumstances, be excluded from the tender as well as future tenders or have any existing contracts terminated.

Scope: The tender participant should benefit from a foreign subsidy within a limited period (e.g. three years preceding the tender, during performance of the tendered contract, and up to one year thereafter). Certain materiality thresholds would apply. Notification would only be required where:

• the foreign subsidy exceeds a certain value; and
• the value of the tendered contract significantly exceeds the thresholds set out in the EU Public Procurement Directives.

The White Paper recognises that this system would require a degree of self-assessment by tender participants. The White Paper encourages third parties and competitors to inform a contracting authority where they believe that a notification should have been made in the procedure.

Procedure: The effect of any foreign subsidy would be assessed in relation to a specific procurement procedure. A relevant foreign subsidy would be referred to the competent authority, which may start an investigation. The preliminary review would need to ensure that the tender procedure, which generated the referral, is delayed as little as possible. The White Paper envisages that strict time limits, which could be extended in certain circumstances, would be introduced (e.g. 15 working days for the preliminary review and no more than three months for the in-depth review). However, during the investigation, the contracting authority is barred from awarding the contract to the investigated economic operator. Otherwise the procurement procedure is pursued. If it is confirmed that the tender participant has received a distortive foreign subsidy, the contracting authority will determine whether that subsidy has distorted the public procurement procedure. If so, the tender participant will be excluded from the ongoing procurement procedure.

Remedies: The subsidised bidder may be excluded from the ongoing public tender procedure. It may also be excluded from future public tender procedures for a maximum period (e.g. three years).

Initial observations and next steps

There are elements of reciprocity to any system aimed at the assessment of foreign subsidies. In an international law and trade context, the contemplated new instruments may be seen as unilateral moves to revise trade rules on foreign subsidies. If adopted by the EU, the White Paper’s tools may provoke reaction by third countries in, for instance, Asia as well as the Americas. The reactions could manifest themselves, for instance, in the form of trade retaliation, or the adoption of corresponding instruments that target authorised EU state aid or awards of EU funds. This means that the net effects may be tangible only in the long term.

The White Paper is detailed, but several key concepts need further development. For instance, the central notion of a “distortion” to the EU’s internal market would need to be developed, as would the notion of “material influence” and competence-sharing among agencies. There are also fundamental questions as to how the mechanisms in the White Paper would interact with the frameworks for antitrust, foreign investment, merger control, procurement, state aid and trade. For instance, how could the different investigation systems operate in practice? We are keen to hear your views in this respect. We will also share our evolving analysis in the coming period.

The Commission is inviting comments on the proposals and questions raised in the White Paper. The consultation period is open until Wednesday 23 September 2020. The results of the consultation will prepare the ground for choosing the most appropriate way to address the distortions created by foreign subsidies and will feed into a proposal for a legal instrument. Following the consultation period, the Commission will publish a proposal for a revised foreign subsidies regime, which is expected in 2021. This will then be subject to the EU legislative procedure. Any such reforms would normally not be expected to take effect for more than a year, but Executive Vice-President Vestager commented earlier this week (see here) that she hopes the envisaged new tools are operational “within months”. The consultation page including the White Paper can be found here.