The EC’s White Paper on levelling the playing field as regards foreign subsidies (see here) comes at a time when foreign investment control is rising to the top of enforcement priorities.

In recent years, and accelerated by the Covid-19 pandemic, there has been a trend towards heightened foreign investment control in Europe, with several Member States (e.g. the UK, Italy, Spain, France and Germany) sharpening their tools or introducing new rules (see here). Other countries (e.g. Denmark, Finland, the Netherlands and Sweden) have announced plans to introduce or amend existing regimes. This has resulted in a significantly more complex landscape for M&A across many sectors. Industries and companies engaged in M&A-activities will need to factor these further complexities into their transaction plan and timetable.

Impact of the White Paper

The White Paper contains proposals aimed at remedying distortions to the EU’s internal market caused by foreign subsidies. Of particular interest in a foreign investment control context is “Module 2”, which contains a compulsory system for pre-notification, investigation and remedial action.

Specifically, the proposed system would:

• apply to all sectors, as opposed to targeting critical infrastructure or other “key” foreign investment sectors;
• cover not only the acquisition of control, but also shareholdings / voting rights or “material influence” in an undertaking below the “control” threshold; and
• tackle the broad “issue of distortions caused by foreign subsidies”, as opposed to assessing the impact of foreign investment on security and public order.

The White Paper acknowledges that the proposed tools may overlap with existing foreign investment regimes and lead to parallel proceedings before different regulators, applying different legal tests.

Filling an enforcement gap?

Despite the traditional focus of foreign investment rules on certain critical industries, Member States have introduced rules allowing intervention in sectors that are not likely to be objectively considered critical from a national security perspective but are regarded as critical by the respective Member State (e.g. from an industrial policy or domestic economy perspective). This has led to more transactions than ever being in scope of foreign investment regimes. Beyond this, some Member States (e.g. Germany) have residual jurisdiction to investigate foreign investment in all sectors of the economy.

Member States therefore already have powers to assess the implications of foreign-subsidised acquisitions across an increasingly broad range of industries. The White Paper nonetheless proposes a further layer of control that would apply not only to sectors already captured by foreign investment controls, but across all sectors.

In a similar vein, foreign investment control is typically linked to certain minimum acquisitions of voting rights or equity participations, although thresholds have been lowered significantly across Europe (in some Member States down to 10%-participations). The White Paper similarly proposes thresholds below the standard level of control for merger review purposes, thereby capturing a wide range of acquisitions.

While the details of the mechanism remain to be worked out it is clear that, as proposed, Module 2 would, in a number of ways, involve a degree of duplication with existing foreign investment controls.

A broader substantive test?

The White Paper notes that foreign investment control does not specifically tackle distortions caused by foreign subsidies.

However, many foreign investment regimes are sufficiently wide in scope to enable consideration of the influence by foreign states. For example, German foreign investment filings require the disclosure of influence by foreign states through means other than equity participation (including by way of financial support). Similarly, the EU’s new FDI Screening Regulation explicitly considers whether an investor benefited from significant funding, including subsidies, by the government of a “third” country.

The substantive tests however are different: under FDI rules the test of whether foreign investment is acceptable is a question of “national security and public order”, whereas the proposed anti-subsidy mechanism would focus on distortions in the internal market.

Indeed, according to the White Paper, “the FDI Screening Regulation does not specifically tackle the issue of distortions caused by foreign subsidies.”

Implications for M&A

The EC’s proposal would not only introduce a new hurdle for foreign-government backed acquisitions of EU-businesses but also raises the prospect of an additional (and parallel) layer of scrutiny being imposed on acquisitions by non-EEA investors in sectors already captured by foreign investment controls.

Interestingly, the EC’s approach to centralised jurisdiction in relation to Module 2 stands in contrast to the position under the EU Screening Regulation, where Member States have retained autonomy over the scope/nature of their rules and associated enforcement.

An important aspect to be considered in the consultation will be how these regimes can co-exist in a way that suitably minimises the administrative burden on merger parties and avoids conflicting competencies (and potentially results). Without a doubt, any additional system will add a further layer of complexity, procedural uncertainty, delay and expense to M&A transactions backed by foreign governments (directly or indirectly).