China-backed companies could see M&A, procurement blocks in draft EU law

Companies supercharged by subsidies from foreign governments such as China and Russia will face probes and potential EU blocks on acquisitions and public-procurement awards, according to a draft proposal seen by MLex.

A new regulation planned for next week will see the European Commission create a new subsidy-review power allowing the EU’s top regulator to force companies to sell off assets or agree to closer regulation.

The sweeping proposal would make any company that has received more than 5 million euros ($6 million) from a foreign state over three years liable to investigation.

Dealmakers that have received support from outside the bloc will also have to notify the regulator of plans to buy any EU company with turnover of more than 500 million euros and then wait for approval.

The proposal, set to be published next week, sees the commission respond to concerns that EU companies are struggling to compete when state-backed rivals, benefitting from government aid, can win tenders or sell more cheaply than they can.

The regulation gives the commission sole power to “examine foreign subsidies on its own initiative.” For mergers and public procurement, officials will be able to study the impact of subsidies after a “prior notification” by the company involved.

Officials will have to first study the existence of foreign aid, concentrating on the benefit it confers on economic activity. It can do this by looking at the “comparable tax treatment,” the financing available, guarantees or financial contributions.

Once it has found a subsidy, the commission will then do a “case-by-case” assessment to see if it distorts Europe’s markets. This will be influenced by the “amount and nature of the subsidy, the purpose and conditions attached to the foreign subsidy as well as its use in the internal market.”

— Methodology —

The commission appears to acknowledge that obtaining information on such subsidies from foreign governments will be difficult.

So, it says it will use "indicators" such as whether the foreign aid covers a "substantial part" of a tender contract or an M&A price-tag to determine if it's "distortive."

Equally, subsidies can be beneficial, the draft proposal accepts. The upside of state support will be “weighed” against the disadvantages and this “balancing” exercise could mean the company has to accept “appropriate redressive measures or accept commitments.”

“Categories of foreign subsidies that are deemed most likely to distort the internal market are less likely to have more positive than negative effects,” the draft reads.

The proposal expresses special concern for any aid in the form of unlimited guarantees or that is subsidizing a takeover. Support given to a company that would otherwise be on the verge of collapse will also raise immediate alarm bells.

A company could offer to repay the subsidy to its home government, “with appropriate interest,” but the commission notes the difficulty in tracking whether this repairs the harm being done to the market. The regulator could force companies to divest assets or comply with conduct promises.

When investigating, the commission will have the power to impose interim measures, conduct dawn raids, issue questions and fine companies that do not provide information or comply.

The proposal has a dual legal footing, built on EU treaty powers that allow the commission to draw up a common trade policy as well as draft measures to ensure a functioning internal market.

While the commission admits that national governments are yet to draw up their own plans to regulate this sector, it says this might happen and could risk legal fragmentation.

— Merger review —

Takeovers will have to be notified to the commission in advance and can't be closed until the regulator has completed its review.

The obligation is triggered where one of the companies is European and has a revenue of 500 million euros in the EU, and the other has received at least 50 million euros of subsidies in the last three years.

But the regulator would also be able to call in other deals and has the power to block them outright.

Like existing M&A scrutiny, the regulator will have 25 working days to review the acquisition, which can be extended by 90 working days in the case of concerns.

Companies that fail to notify a deal could be fined up to 10 percent of their revenue, while giving incorrect official information can lead to a sanction of 1 percent.

Companies applying to participate in tenders in the EU and which have received foreign subsidies must flag the information to the public authority in charge, which must in turn inform the commission.

It will have the power to investigate, impose commitments or block the application outright.