The EU nears new rules to curb unfair competition from foreign subsidies

The EU is on course to secure new powers that will enable the Commission to review market-distorting subsidies from outside the block. The EC’s much debated proposal, published last year (see our reporting here), aims to fill a gap in the EC’s policy toolbox and represents a significant hardening in the block’s approach to what it sees as unfair competition from outside Europe.

Under the proposal, the EC will have the power to intervene in, and possibly stop, concentrations and public procurements involving companies which have benefitted from foreign subsidies which the EC deems to significantly distort competition and affect the level playing field within the internal EU market. While the focus areas are M&A and public procurement, the tool also empowers the EC to investigate all other market situations that are affected by foreign subsidies.

The new tool is expected to have a significant impact on dealmaking as it adds a new regulatory requirement, in addition to merger control and foreign investment screening. As such, investors and companies will need to factor in the timing and regulatory process of this new tool when considering their strategy for M&A transactions or participation in significant public procurements in the EU.

In this post, we provide an update on the status of the legislative proposal (which is going through the EU Council and the EU Parliamentary stages), and the key amendments which have been proposed as part of the process.

Full speed ahead

Last week, we saw the EU Parliament and the EU Council pushing ahead towards final negotiations on the legislative proposal:

  • The Parliament voted in favour of a proposal that includes a widened scope of the EC’s powers, reduced red tape and improved legal certainty (see press release here). The amendments introduced by the Parliament would also significantly increase the EC’s workload compared to the original proposal.
  • The Council has not been idle either, and Member States have issued their views on the tool, demonstrating a willingness to kick-start negotiations (see press release here). While proposed amendments may seem more limited than those of the Parliament, their impact is not to be underestimated.

Thresholds at the crossroads

While the institutions appear closely aligned on many key points, the politics are never far away. Each institution has its own agenda, and the monetary thresholds stand out as a key area of contention. The Parliament supports expanding the deals and public procurements which would be mandatorily reviewable, while the Council seems to go in a different direction:

  • The Parliament proposed to lower the thresholds for deals to be notified from EUR 500 million to 400 million. However, the Council has taken a different route by suggesting to raise the threshold to EUR 600 million.
  • Similarly, the Parliament recommends lowering the thresholds for procurement bids that are to be pre-notified from EUR 250 million to 200 million. True to its colours, the Council advocates an increase to EUR 300 million.

The thresholds in the EC’s initial proposal may be the golden midway. In view of the perceived urgency, this may also allow for the new regime to enter into force as soon as possible, which seems a shared goal for the three institutions.

The easy road

On other points, a smoother ride may be in sight:

  • No benefit left behind: Both lawmakers want the EC’s power to cover any benefit that may give an artificial competitive advantage. This would be a marked expansion, covering measures deemed equivalent to financial contributions, such as (inadequately remunerated) exclusive or special rights.
  • Brakes on retroactive application: To increase legal certainty, the Parliament and the Council suggest reducing the tool’s retroactive reach. While the EC proposed 10 years, the Parliament’s view is that 7 years strikes the right balance, and the Council goes even further by limiting the retroactive application to 5 years. A reduction seems beneficial as the passing of time will render it more difficult for the EC to establish the required link between the subsidy and its distortive effects.
  • A call for EC guidance: The EC was keen on introducing a new vocabulary, thereby ensuring a margin of appreciation and avoiding being tied to established EU law terms. The Parliament and the Council, however, call for clarity and guidance. The Parliament also seems eager to somewhat limit the EC’s flexibility by tying some concepts closer to well-known State aid terms.
  • Procedural efficiency and effectiveness: The Parliament and the Council suggest streamlining the investigation procedures, notably by reduced deadlines for the EC and the introduction of pre-notification discussions. Equally, the Parliament highlights the need for sufficiently dissuasive penalties for companies providing insufficient, incorrect, or misleading information. Finally, to ensure effectiveness, redressive measures, commitments and fines could be applied simultaneously where necessary.
  • More dialogue: Both institutions promote structured cooperation with other stakeholders (including Member States and companies) for evaluating and signalling distortive effects of foreign subsidies. The Parliament also suggests that a subsidy regime – matching the EU’s State aid rules – at the level of a foreign state could result in a more lenient assessment. At a first glance, it is difficult to point to a regime that would be up for the task. But it brings to mind an early criticism of the EC’s proposal: that this is really about exporting EU State aid rules to third countries.

Outlook going forward

The European institutions have put the pedal to the metal and negotiations are set to advance quickly. The current geopolitical situation should facilitate reaching a consensus, making a political agreement possible as early as June or July 2022. And, while legal complexity and institutional politics may always result in a rocky road, considering the current speed, the new tool could be a reality by the beginning of 2023. So fasten your seatbelts…!