Corporate and Mergers & Acquisitions (M&A)

The Foreign Subsidies Regulation – An M&A Perspective

29 May 2024

9 min read

Authors: Ruth Galea & Rebecca Galea

What is the Foreign Subsidies Regulation?

The Foreign Subsidies Regulation, Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market which entered into force on 12 July 2023 (the “FSR”) introduced an additional element of EU-level control over merger and acquisition (“M&A”) transactions. Indeed, since its coming into force, consideration must now be given to the necessity of making an FSR filing in addition to merger control and FDI-related filings.

Aim of the FSR

The aim of the FSR is to address a regulatory gap where financial contributions (state aid/subsidies) given by non-EU countries (“foreign subsidies”) historically went unchecked. This position was in stark contrast with controls concerning subsidies granted by EU Member States, which are heavily regulated under EU State Aid legislation. Foreign subsidies can distort the EU’s Internal Market by giving unfair advantages to companies receiving them. Regulating and overseeing foreign subsidies ensures a level playing field and fair competition for all companies operating in the Single Market. The FSR seeks to introduce such level playing field.

The European Commission as the sole enforcer of the FSR

The European Commission (“Commission”) acts as the sole enforcer of the FSR tasked with investigating foreign subsidies granted to companies active in the EU and addressing distortions caused by such subsidies. Additionally, the Directorate-General for Competition (“DG COMP”) is responsible for enforcing the FSR in matters concerning M&A activity.

Scope of the FSR

In the context of M&A transactions, an FSR notification is required for all concentrations if at signing:

  1. The target group has €500 million of turnover in the EU; and
  2. The target group and/or the acquiror group (on combined basis) have received €50 million financial contributions from non-EU states during the previous three years.

Significantly, in addition to a notification-based procedure, the FSR vests the Commission with powers to carry out ex officio procedures to ‘investigate all other market situations’ and thereby carry out reviews of M&A transactions on its own initiative. In practice, this means that the Commission has the authority to, for example, demand the notification of potentially subsidized M&A transactions falling beneath the notification thresholds that have not yet been completed, if it believes that the concentration warrants an ex ante review due to its potential effect within the Union.  Additionally, in situations where the concentration has already taken place without the need for prior notification due to the transaction not meeting the notification thresholds, the FSR states that the Commission should have the authority to require the undertakings to dissolve the concentration if it determines that a significant distortion has occurred such that it cannot be remedied by behavioural or structural measures or by the repayment of the subsidy.

The definition of what constitutes a “financial contribution” is very wide in scope and covers any contribution attributable to a non-EU government which could include, for example, loans, capital injections, grants, tax incentives and the supply of goods and services (including where this is on market terms).

It is important to note that the notification requirement under the FSR applies to EU and non-EU companies alike and it may also capture non-EU -to- non-EU transactions.

Companies engaging in M&A deals fall within the scope of the FSR for deals signed on or after 12 October 2023 and transactions signed on or after 12 July 2023 but not closing until 12 October 2023.

The notification process under the FSR is very similar to the merger control notification under Council Regulation (EC) No 139/2004. In practice, the information which will need to be submitted in connection with an FSR notification will likely overlap with that required in connection with a merger control notification for the same transaction, and accordingly there will be a high degree of coordination between the FSR and the merger control teams.

Whilst an FSR review is ongoing, concentrations cannot proceed and the Commission will analyse whether the financial contributions give rise to a “subsidy” (i.e. a benefit which would not represent normal market conditions). If an in-depth investigation by the Commission results in the presence of a foreign subsidy causing distortion, the Commission will weigh its adverse effects against its beneficial impacts to decide on suitable redress measures or whether to approve proposed commitments from the parties involved. The FSR outlines potential remedies which may be requested by the Commission including asset divestment and infrastructure access and/or reimbursement of the subsidy. If notified transactions lack effective remedies to address distortion, the Commission can block the completion of the M&A transaction.

Should parties to M&A transactions fail to notify to the Commission that a concentration falls within its scope or transacts without the Commission’s approval, the Commission may levy a fine of up to 10% of the parties’ total turnover from the previous year. Additionally, the FSR may impose penalties whenever incorrect or incomplete data is provided to the Commission.

Impact on M&A Transactions

From a practical perspective, the introduction of the FSR impacts M&A transactions at various stages of the M&A cycle:

Bidding Phase

Bid process letters should now require bidders to present an analysis of the necessity to make an FSR notification if the target group has €500 million of turnover in the EU. Accordingly, prospective acquirors need to have information concerning financial contributions in their corporate group readily available. In practice, the fact that a prospective acquiror has received qualifying financial contributions could impact the competitiveness of the bidder.

Due Diligence

With the introduction of the FSR, the due diligence process should now require an analysis of information by specialized advisors on both the part of target and the acquiror, similar to an anti-trust assessment. Advisors to prospective acquirors should ensure that the due diligence request list which is sent to the target group should now include a request for information from the target to determine whether an FSR notification is required, including whether the target company has received funds from non-EU governments in the three years preceding the proposed transaction, and if so, whether such  subsidies amount to more than €50 million. The due diligence phase should also allow the prospective acquiror to determine whether the target generates at least €500 million in EU turnover. This information request should be made early in the transaction process to ensure timely notification to the Commission, if needed, to avoid delays in completing the M&A transaction.

Transation Documentation (SPA)

Share purchase agreements (“SPAs”), should now include a condition precedent requiring an FSR notification, where necessary. The transaction should be contingent upon notifying the Commission and obtaining a determination that the foreign subsidies under examination will not distort competition in the Internal Market. Consequently, if the FSR thresholds are met and clearance is required for a particular transaction, the transaction cannot be completed until the notification process is finalised.

Transaction documents should also address potential Commission decisions following the notification and the corrective actions and commitments it might propose, such as divestment, access remedies, reimbursement of the subsidy, or outright blocking of the transaction. Parties to the agreement should covenant to undertaking any obligations and making all efforts necessary to obtain the required regulatory approvals, often referred to as ‘Hell or High-Water Clauses’.

Additionally, the parties to the transaction should warrant that they have not received funding from non-EU governments in the preceding three years. This warranty is crucial even if the target company’s turnover is below the FSR threshold, given the possibility of the Commission investigating transactions independently of these thresholds. Seller and buyer pre-closing covenants (addressing the period between signing and completion of the transaction) should also be widened so that neither party shall be allowed to receive non-EU financial contributions that could affect the FSR analysis.

FSR in action

According to DG COMP’s FSR Brief ‘The Foreign Subsidies Regulation – 100 days since the start of the notification obligation for concentrations,’ as of January 20, 2024, there have been pre-notification discussions in fifty-three M&A cases, with fourteen formally notified, nine fully assessed, and one abandoned at the pre-notification stage. This exceeds the estimated thirty cases per year from the 2021 FSR Proposal.

These cases cover various sectors, including fashion retail and high technology, with about half also subject to FDI screening in one or more Member States. Notably, around a third of the transactions involved an investment fund as the notifying party. None of the nine fully assessed cases required an in-depth investigation, indicating no significant impact on competition from foreign subsidies. Common types of foreign financial contributions assessed include capital injections, equity contributions, loans from financial institutions, state guarantees, direct grants, and tax benefits for research and development and investment projects.


Given the above considerations, within the context of M&A transactions, it is imperative not to underestimate the impact of the FSR on the timing and completion of the transaction. Additionally, while transactions caught by the FSR thresholds are of a certain size in terms of EU turnover and non-EU financial contributions received, the significance of the Commission’s ex officio powers cannot be overstated, and FSR-related considerations should certainly be catered for under the transaction documents in an adequate manner. Parties to M&A transactions should therefore give FSR implications the same degree of attention as anti-trust and FDI requirements and remain up to date and informed on developments concerning the FSR in order to navigate the complexities of cross-border transactions effectively.

Disclaimer: The information provided in this article does not, and is not intended to, constitute legal advice. The content is for general informational purposes only.

If you require any further information and/or assistance regarding the Foreign Subsidies Regulation and its impact on M&A transactions contact us on


Get in touch with us