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Towards a New EU ‘Anti-Subsidy Tool?’

June 10, 2020

The European Commission (EC) is currently working on legislative proposals (the White Paper) that would grant the EC new enforcement powers to address potential competition distortions caused by companies operating in or entering into the EU’s Internal Market, which benefit from subsidies from third-country governments.

In essence, the objective of the proposed White Paper is to empower the EC to tackle distortions involving foreign government subsidies currently beyond its reach as the EC can only fully challenge subsidies received from EU governments under its state aid rules. Other tools at the EC’s disposal, such as state aid control, antitrust investigations, and trade defense measures are insufficient to tackle unfair behavior of foreign-state-backed companies active in the EU.

The full draft of the White Paper will be published around June 17, 2020. However, some key features of the proposal under discussion have already emerged. The new anti-subsidy tool would feature two new enforcement mechanisms:

Foreign Subsidy Control Mechanism in Case of Market Distortions

The “foreign subsidy control mechanism” would empower the EU or its member states’ authorities to detect and prohibit subsidies causing a distortion on the EU’s Internal Market, and potentially impose measures to correct said distortion. The basis for the allocation of jurisdiction between the EU and its member states has not yet been set out.

Some of the criteria under discussion, which would factor in the EU’s assessment of a presumed EU market distortion, are (1) the type of subsidy; (2) the level of concentration in the industry; (3) the characteristics of supply and demand; and (4) the presence of other state-owned or subsidized players.

The types of “red flag” behavior prompting an EC investigation would also include (1) production restrictions inconsistent with market conditions; (2) sales prices not reflecting market prices and/or production costs; or (3) investments in assets that are insufficiently or not at all profitable.

The substantive test currently on the table reportedly is an “EU interest test,” according to which the distortive effects of the foreign subsidies would be weighed against positive effects brought about by the restriction of competition, such as the promotion of digital development, environmental protection, or climate transition. This is somewhat similar to a balancing test operated under current antitrust rules.

It is further proposed that if a distortion in violation of EU rules were to be found, the EU could require the repayment of the subsidy, impose behavioral remedies or restrictions similar to antitrust and anti-dumping probes or even, as a last resort, prevent the company from operating in the EU Internal Market altogether.

Mandatory Notification Mechanism for Foreign-Subsidies-Backed Takeover of EU Assets

With this second “mechanism,” the EC proposes to review foreign subsidies handed out to companies allowing them to invest into EU assets through a centralized “one-stop-shop” system akin to the current merger control process. The EC - and not the member states - would like to review proposed acquisitions of EU assets backed by foreign subsidies through a mandatory notification regime. The thresholds for mandatory notification are so far uncertain but the EC is looking into requiring any acquisition of control or of at least 35% of shares in an EU company by a Chinese (or possibly other foreign state) backed company to be notified.

It is still under discussion whether the review would apply to all acquisitions or only those involving subsidies, and how to determine the thresholds. Thresholds could be based on the amount of subsidies received, the turnover of the target company, or the combined turnover of the companies in a given transaction. The idea is to establish a three-step procedure: (1) a mandatory notification; (2) a preliminary review of whether the subsidy helped the deal; and (3) an in-depth probe if concerns arise.

The substantive test currently contemplated is the same as the one for the control mechanism for foreign subsidies, i.e., weighing the distortion against the benefits brought about in other areas, such as environmental protection or the digital economy.

In case a problem were to be found, the EC could request “redress measures” which, as mentioned above, would likely consist in behavioral or structural remedies, repayment of the subsidies, or a straight prohibition to operate on the EU Internal Market.

Analysis

A number of open questions remain. For example: (1) the legal basis for any new regulation; (2) the division of powers between the EC and member states; (3) the freedom for member states to control their own trade flows; and (4) how these new powers would interact with the preexisting EC’s powers to review foreign investments and international trade distortions.

Additionally, not all member states will be willing to give away these powers to the EC or may not want to introduce stricter supervision of foreign subsidies at all. After publication, the White Paper will be open for public consultation, after which it will go to the EU Parliament and Council of Member State governments, in the form of a legislative proposal, by next spring.

The proposal is the latest in a series of EU measures demonstrating that the EU has become increasingly sensitive with regard to the economic and financial influence of third-country governments on its Internal Market. These fears have increased during the coronavirus (COVID-19) pandemic, which has left companies in a state of vulnerability.

Last year, the EC published its first foreign investment screening tool (FDI Framework Regulation)[1], which member states have to implement by October 2020. The pandemic has accelerated implementation in many member states and the EU had called upon member states to take all measures including “stake building” in the meantime, to protect EU companies from “predatory buyers” who would buy them at a value significantly decreased by the pandemic.

The anti-subsidy tool would be yet another step towards plugging existing regulatory gaps to protect EU companies from perceived unfair competition from companies benefitting from foreign subsidies, which are not controlled and/or limited in the same way as is funding from EU member states or EU funds. Whether the EU and the member states will be willing to adopt such a far-reaching new enforcement tool and reach agreement on jurisdiction is not yet entirely clear. Ultimately, the openness of the EU’s Internal Market for investment is at stake.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Brussels
Izzet Sinan
Christina Renner

Frankfurt
Michael Masling

London
Frances Murphy
Omar Shah
Joanna Christoforou

Washington DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Heather C. Sears
Katelyn M. Hilferty
Christian Kozlowski
Charles C. Rush



[1]   Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 791 of 21 March 2019, p.1.