On 17 June 2020 the European Commission (“Commission”) published a White Paper on new enforcement powers regarding foreign subsidies. This initiative pursues two objectives, first it sets out a general policy approach for foreign subsidies, and second, it provides a number of proposals  to address a perceived regulatory gap. More specifically, the White Paper suggests new tools to manage what the Commission regards as unfair competition and other distortions of competition within the internal market caused by foreign subsidies.

The White Paper proposes these new review powers of the Commission and/or other competent authorities in addition to already existing tools such as antitrust and merger control, State aid and FDI screening. As such, the Commission outlines a complementary toolbox aimed to facilitate transparency regarding foreign subsidies and maintain a level playing field within the EU internal market.

Concerns related to foreign subsidies that the Commission seeks to address

The Commission appears to be concerned that companies benefiting from foreign subsidies may have an advantage and may create distortions in the EU internal market. While reiterating the block’s general openness to trade and investment, the Commission states that in today’s intertwined global economy, “foreign subsidies can however distort the EU internal market and undermine the level playing field in favor of the beneficiaries”.

In the view of the Commission, greater openness to foreign investment has come with opportunities for the EU economy, but also with increased risks. In this regard, the Commission identifies three issues:

  • First, the Commission stresses that state intervention generally bears the risks of facilitating inefficient outcomes;
  • Second, the Commission refers to foreign acquisitions within the EU and to situations under which foreign subsidies lead to excessive purchasing power, while at the same time preventing non-subsidized acquirers from achieving efficiency gains or accessing key technologies;
  • Third, the Commission points at EU procurement markets where subsidized companies may be able to make more advantageous offers, expressing the concern that distortive effects can occur when companies benefitting from foreign subsidies seek access to funding from the EU budget.

The existing regulatory framework and perceived enforcement gaps

In its White Paper, the Commission describes the existing regulatory tools available and discusses the extent to which these tools may address some of the concerns relating to foreign subsidies. However, the White Paper concludes that there is a regulatory gap as the issue of distortions of competition through foreign subsidies is not exhaustively addressed by any of the existing instruments:

  • As regards competition law, the Commission finds that neither EU antitrust rules nor EU merger control specifically take into account whether an economic operator may have benefited from foreign subsidies and those laws do not allow the Commission or Member States to intervene and decide solely or even mainly on this basis. However, even under the existing law, State participations and foreign subsidies may have a significant impact on the competition law assessment. The German Federal Cartel Office (“FCO”) has recently published a case report to provide further guidance on the assessment of participations by state-owned companies under German merger control. Within the case report the FCO took a very close look at the potential impact that State funding may have on competition and provided guidance on the merger law assessment. For further information please see our previous blog post on this.
  • With regard to EU State aid rules, the Commission recalls that these rules do not apply to financial support granted by non-EU authorities to undertakings in the EU, either directly or through their parent companies outside the EU.
  • The Commission acknowledges that the EU anti-dumping and anti-subsidy rules apply to the import of goods into the EU and allow the EU to react to situations where products have been manufactured with the support of non-EU funding. The Commission points out, however, that the rules do not cover trade in services, investment or other financial flows in relation to the establishment and operation of undertakings in the EU, concluding that the existing rules do not allow to address all foreign subsidies affecting the internal market.
  • Concerning potential Foreign Direct Investment (“FDI”) screening, the Commission stresses that the scope of such screening is limited to grounds of national security and public order and does not tackle the issue of distortions caused by foreign subsidies.
  • As regards the existing EU framework in the field of public procurement the Commission recalls that contracting authorities enjoy a wide margin of discretion both in the design of a public tender procedure as well as in the evaluation of tenders submitted in the procedure. Nonetheless, contracting authorities are not legally required to investigate the existence of foreign subsidies when evaluating offers and no specific legal consequences are attached to the existence of foreign subsidies causing distortion.
  • Finally, relating to EU funding the Commission concludes that none of the EU financial support rules take into account the existence of foreign subsidies and their impact on the ability of a company, irrespective of its place of establishment, to access EU funding on the basis of such subsidies.

The proposed instruments

The White Paper develops a possible legal framework to address the alleged regulatory gap. This framework entails three options (so-called “Modules”) aiming at the identified risks as outlined above and caused by foreign subsidies (1) in the single market generally (Module 1); (2) in acquisitions of EU-companies (Module 2); and (3) during EU public procurement procedures (Module 3). The Commission considers these three Modules to be complementary to each other. In more detail, the Modules would have the following features:

  1. A General Instrument to capture distortive Effects of foreign Subsidies – Module 1

Under Module 1, a general market scrutiny instrument would be established to address perceived  distortions in the internal market caused by foreign subsidies. The White Paper suggests that where the existence of a foreign subsidy is established, the competent authority would have the power to impose measures to remedy any likely distortive impact, such as remedial payments and structural or behavioral remedies.

  1. Foreign Subsidies facilitating the Acquisition of EU Companies – Module 2

Module 2 would comprise a new notification procedure under which companies that are considered to be benefitting from financial support of a non-EU government would be required to notify any acquisition of an interest in an EU company, above a given threshold, to a competent supervisory authority. The White Paper proposes the Commission as the supervisory authority and that it would be given powers to prohibit or condition any such acquisition that is found to be facilitated by foreign subsidies and to distort the Single Market.

  1. Foreign Subsidies in EU Public Procurement Procedures – Module 3

Under the third Module, the White Paper proposes a mechanism where bidders would have to notify the contracting authority of financial contributions received from non-EU countries. The competent contracting and supervisory authorities would then assess whether there is a foreign subsidy and whether it made the procurement procedure unfair. In that case, the bidder would be excluded from the procurement procedure.

Additionally, the White Paper proposes options to prevent advantages of economic operators in regard to the application for EU financial support. Among others, in case of funding distributed through public tenders or grants, a similar procedure would apply as the one foreseen for EU public procurement procedures. Moreover, the White Paper calls upon international institutions implementing projects supported by the EU budget, like EIB or EBRD, to mirror the approach to foreign subsidies.

Comments and outlook

With this White Paper, the Commission continues its policy of cautioning about foreign influence into the EU. It has already called upon Member States to apply existing FDI screening regimes to foreign investments vigorously, where such regimes are already in place, and to introduce new systems, where Member States cannot yet screen foreign investments on the grounds of security or public order (See our blog post); also “golden shares” are back on the table (See our blog post). With the new proposals as set out in the White Paper, the Commission extends its focus from security and public order objectives to economic objectives in the form of perceived distortions of competition. While the Commission is stressing the block’s openness in principle to foreign investors, the proposed measures, depending on how and in what rigor they would be adopted, could have a significant impact on foreign business activities within the EU.

The White Paper needs to be seen against a wider political development within Europe. Protective measures are not only pursued by the Commission. Awareness about potential foreign influence is rising within Member States, and a number of new national FDI screening mechanisms are being introduced that would at least allow a screening of foreign investments on security and public order grounds across many sectors. It is worth mentioning in this regard that some Member States go even further; for example, Germany has recently announced an acquisition of a 23% stake worth EUR 300m in the Germany-based pharmaceutical company Curevac. As newspapers reported, the motivation behind this was also to prevent R&D activities drifting abroad, in this case specifically from Germany to the U.S.

It will have to be seen what impact the White Paper will have on these developments; clearly, the White Paper intends to launch a broad discussion with stakeholders on the new proposals. The public consultation will be open until 23 September 2020, and its results will feed into a proposal for a legal instrument.

Photo of Peter Camesasca Peter Camesasca

Peter D. Camesasca is a partner in Covington’s Brussels and London offices, with 25 years of experience in all major aspects of EU competition law. Peter also co-chairs the firm’s Foreign Direct Investment Regulation initiative, and, has a particular focus on in-…

Peter D. Camesasca is a partner in Covington’s Brussels and London offices, with 25 years of experience in all major aspects of EU competition law. Peter also co-chairs the firm’s Foreign Direct Investment Regulation initiative, and, has a particular focus on in- and outbound aspects of the Asia/Europe interface.

Peter’s experience includes cases under Articles 101, 102 and 106 TFEU, national and multijurisdictional merger and joint venture notifications (including FDI assessments), investigations by multiple enforcement authorities and global antitrust litigation and monopolization issues (including IP cross-over issues). In addition, he advises and litigates on horizontal and vertical cooperation issues, prepares and executes various compliance and dawn raid programs and participates in the installation of in-house training programs, and heads a vibrant private enforcement practice.

Peter has acted before the European Commission, the European courts, the German Bundeskartellamt, the UK Office of Fair Trading and the Competition and Markets Authority, the Belgian Competition Council, and various national courts.