Analysis of the first conditional approval application under the EU Foreign Subsidies Regulation

LABEL： One Belt One Road International LegalBusiness , Dispute Resolution and Litigation , Corporate and M&A ,

On September 24, 2024, the European Commission ("the Commission") announced its decision to impose additional restrictive conditions under the Foreign Subsidies Regulation ("FSR Regulation") on the acquisition of sole control of Dutch PPF Telecommunications Group ("PPF") by Emirates Telecommunications Group ("Emirates Telecom"). This transaction is the first merger and acquisition approved with additional restrictive conditions since the FSR Regulation came into effect on July 12, 2023. At the same time, the European Commission's analysis of the types of foreign government subsidies received by Emirates Telecom in this transaction and their distortion effects on the EU internal market, as well as the accepted commitment plan, will help to further clarify the analytical framework and enforcement approach of the European Commission's determination of the distortion effects of foreign government subsidies on the EU internal market from a practical perspective.

This article will interpret the relevant concerns in the European Commission's decision and provide practical recommendations for Chinese companies to respond to the FSR Regulation from a practical perspective, taking into account the relevant background of this case.
1、 Review of FSR application review

Emirates Telecom is the telecommunications operator in the United Arab Emirates, with its ultimate controller being the Emirates Investment Authority (EIA), the sovereign fund of the UAE. PPF is a Dutch telecommunications operator with operations in the Czech Republic, Bulgaria, Hungary, Serbia, and Slovakia. Its main business scope includes telecommunications companies and related infrastructure operations. The timeline for the FSR declaration of this transaction is as follows:

On April 26, 2024, Emirates Telecom submitted an FSR declaration to the European Commission regarding this transaction.

On June 10, 2024, after a preliminary review, the European Commission concluded that there were "sufficient indications" that Emirates Telecom may have received foreign government subsidies that distorted the internal market of the European Union, and decided to launch an in-depth investigation.

During the preliminary review, the European Commission determined that the types of subsidies received by Emirates Telecom included unlimited guarantees received from the UAE government and loans directly obtained from UAE state-owned banks to facilitate this transaction. This type of subsidy belongs to the subsidy types listed in the FSR Regulations that are most likely to have a distorting effect. The European Commission believes that the above-mentioned subsidies may enhance the ability of Emirates Telecom to complete this transaction and support the merged entity to conduct business in the EU by providing preferential financing conditions, thereby improving its competitive position. Therefore, the European Commission has decided to conduct an in-depth investigation to further evaluate whether the foreign government subsidies received by Emirates Telecom have/may have a distorting effect on competition in the EU internal market.

On September 24, 2024, the European Commission announced its decision to approve this transaction with additional restrictive conditions.

During the in-depth investigation, the European Commission evaluated and made a decision on this transaction from the following perspectives:

           

To address the concerns of the European Commission about the distorting effect of this transaction on competition in the EU internal market, Emirates Telecom and EIA have voluntarily proposed the following commitment plan:

(1) The articles of association of Emirates Telecom will not deviate from normal UAE bankruptcy laws and will cancel unrestricted government guarantees;

(2) EIA and Emirates Telecom will not provide any funding for PPF to operate in the EU internal market. For funds used for PPF non EU activities and emergencies, EIA and Emirates Telecom can provide them, but such funds will also be subject to review by the European Commission. Other transactions between EIA, Emirates Telecom, and PPF must also be conducted under market conditions;

(3) Emirates Telecom will declare its future acquisition transactions in the European Union to the European Commission, even if it does not meet the declaration criteria stipulated in the FSR Regulation.

The European Commission has accepted the above-mentioned commitment plan, believing that the measures can remove the unrestricted government guarantees received by Etihad Telecom and ensure that Etihad Telecom and EIA will not use foreign government subsidies for the EU internal market through the merged entity after this transaction. In the public decision, the European Commission did not provide a detailed analysis on whether the loan directly obtained by Emirates Telecom from the UAE state-owned bank to facilitate this transaction has a distorting effect. The decision of the European Commission to impose restrictive conditions actually allows the occurrence of the loan. We understand that this may be due to the European Commission's belief that the loan did not have an impact on the outcome of this acquisition. By imposing restrictive conditions, the European Commission believes that such conditions can compensate for the competitive distortions that this transaction may cause to the internal market of the European Union.

The validity period of the above commitment plan is 10 years, which can be extended for another 5 years after expiration, or further extended with the agreement of the European Commission and Emirates Telecom. Under the supervision of the European Commission, an independent trustee will oversee its implementation.
2、 The restrictive conditions that the European Commission can impose on relevant transactions under the FSR system

According to the FSR Regulation, when the European Commission reviews foreign subsidies, it has the right to take appropriate and necessary remedial measures against enterprises to fully and effectively correct any distortions caused or likely to be caused by foreign government subsidies to the EU internal market. If the investigated enterprise makes commitments to correct the distorting effects caused or likely to be caused by foreign subsidies, and the European Commission considers that the commitments made by the investigated enterprise can fully and effectively correct such actual or potential distorting effects, then these commitments can be accepted and made binding through a decision without taking remedial measures. The FSR Regulation lists in a non exhaustive manner the following restrictive conditions that the European Commission may impose:

(1) Open infrastructure, including research facilities, production or basic facilities obtained or supported through foreign subsidies that distort the internal market, under fair, reasonable and non discriminatory conditions, unless the Union legislation has provided for the opening of such facilities;

(2) Reduce production capacity or market participation, including through temporary restrictions on commercial activities;

(3) Avoid specific investment behaviors;

(4) Licensing assets acquired or developed through foreign subsidies on fair, reasonable, and non discriminatory terms;

(5) Publish the results of research and development;

(6) Divest some assets;

(7) Require the operator to terminate the concentration of operators involved in the case;

(8) Repaying foreign government subsidies, including appropriate interest rates calculated according to the calculation rules published by the European Commission;

(9) Require operators to adjust their governance structure.

In order to monitor the implementation of the aforementioned commitments/relief conditions, the European Commission may also impose reporting obligations and transparency requirements.

However, it can be seen that in the UAE/PPF case, the conditions ultimately imposed by the European Commission, including a commitment not to accept subsidy types that are most likely to be identified as having distorting effects in the future (unrestricted government guarantees), restrictions on the use of foreign government subsidies, and voluntary commitments to declare future transactions, did not strictly fall into the measures listed above. It can be seen that in practical cases, conditions applicable to specific trading parties and exchanges can be negotiated with the European Commission based on the trading party, trading type, industry situation, etc.
3、 Suggestions and inspirations for Chinese enterprises
1. Avoid obtaining subsidy types recognized by the European Commission as having the most distorting effects

Article 5, paragraph 1 of the FSR Regulation stipulates that the following five types of foreign government subsidies are most likely to have a distorting effect: (1) providing subsidies to enterprises on the brink of bankruptcy in the absence of feasible restructuring plans; (2) Provide unlimited or indefinite guarantees for corporate liabilities; (3) Export financing measures that do not comply with the Organization for Economic Cooperation and Development's (OECD) Official Support for Export Credit Arrangements; (4) Directly facilitating specific merger and acquisition transactions; Or (5) subsidies that give enterprises an unfair competitive advantage in public procurement.

The types of funding obtained by Emirates Telecom belong to the above-mentioned "providing unlimited or indefinite guarantees for corporate liabilities" and "directly facilitating specific merger and acquisition transactions". The European Commission's approach in reviewing this transaction is consistent with Article 5 of the FSR Regulation, which focuses on examining the subsidy types that are most likely to have distorting effects and evaluating their impact. Therefore, where feasible, efforts should be made to avoid obtaining subsidies that are most likely to be identified as having the most distorting effects.
2. Even if a subsidy type that may be deemed to have a distorting effect has been obtained, it is still possible to avoid or reduce the potential adverse effects/distorting effects of the subsidy type by carefully designing the transaction documents and governance documents of the post transaction entity

As mentioned above, among the subsidy types received by Emirates Telecom, the unlimited guarantees received from the UAE government and the loans directly used to facilitate this transaction obtained from UAE state-owned banks are considered to have the "most likely" distortion effect. In its proposed and accepted commitment plan by the European Commission, the main idea of Emirates Telecom is to remove the potential impact of subsidies on competition in the EU internal market after this transaction, including specifically stipulating in the company's articles of association that bankruptcy matters should normally comply with UAE bankruptcy laws, and promising not to use financing obtained from the UAE government for EU business.

Therefore, to avoid causing competition concerns for the European Commission, companies can specify in advance in the transaction documents or governance documents of the entities after the transaction the purpose of the government subsidy funds they may receive (such as not being used for EU business), or clarify that the establishment, operation, and dissolution of the company shall be carried out in accordance with the laws and regulations of the place where the company operates, and shall not apply special preferential treatment or subsidies from foreign governments.
3. Voluntary declaration of relevant transactions that do not meet the standards can be one of the conditions for the company's commitment

The FSR Regulation stipulates that in order to strike a balance between effectively protecting internal market competition and avoiding excessive burden on operators, only transactions that exceed the EU turnover threshold and foreign government subsidy threshold stipulated in the FSR Regulation are required to undergo mandatory pre declaration. Specifically, mergers and acquisitions that meet the following criteria must be declared to the European Commission [5]:

(1) At least one merging party, the acquired company or joint venture is established in the European Union and generates a total turnover of at least 500 million euros in the EU; as well as

(2) The total amount of foreign financial assistance received by all parties from a third country within the three years prior to the transaction is at least 50 million euros.

In the commitment plan of this transaction, Emirates Telecom proposes to declare transactions that do not meet the reporting standards stipulated in the FSR Regulation. This commitment further increases transparency and enables the European Commission to more conveniently and effectively monitor the impact of the merged entity on market competition. The European Commission ultimately agreed to accept this commitment from the enterprise. From this, it can be seen that such voluntary declaration commitments demonstrate the willingness of enterprises to comply with the FSR Regulation, and may also add points to the final conditional approval of relevant transactions by the European Commission.
4. The applicant and the European Commission actively cooperate and propose effective commitment plans, which may significantly shorten the review time

According to the FSR Regulation, if the European Commission initiates an in-depth investigation no later than 25 working days after receiving a complete declaration, a decision must be made within 90 working days after the investigation begins. If the operator proposes a commitment plan, the deadline should be extended by 15 working days [6].

The European Commission received the complete declaration of this transaction on April 26, 2024 and announced an in-depth investigation on June 10, 2024. Therefore, a review decision needs to be made within 90 working days after the in-depth investigation, that is, before October 15, 2024. The European Commission conditionally approved this transaction on September 24, 2024, three weeks earlier than the latest deadline stipulated in the FSR Regulation. We understand that Emirates Telecom actively cooperated with the investigation and provided effective commitment plans, which accelerated the progress of the European Commission's review. Therefore, we recommend that companies fully prepare before filing and actively cooperate with the European Commission's review work after filing, while protecting their own rights and interests. They should maintain communication with the European Commission, understand its key concerns, and propose targeted commitment plans to avoid the Commission extending the review timeline, proposing stricter relief measures, or even banning transactions.