Foreign Subsidies Regulation: what inbound investors and their lenders should prepare

When the Foreign Subsidies Regulation entered into application, the prevailing view among advisers was that it would matter mostly at the margins — a supplementary filing for large deals already going through merger control. Experience has been different. The notification thresholds catch acquisitions well below the size at which a board would expect regulatory complexity, the definition of a financial contribution is broad enough to reach ordinary commercial relationships with state-owned counterparties, and the Commission has used its power to request notification of deals below the thresholds.

For inbound acquirers from China this is not a hostile development so much as an administrative one. Groups whose lenders, major customers or shareholders include state-owned entities will almost always have contributions to declare. Declaring them is not an admission that they distort the market; it is the beginning of an assessment that, in most cases we have observed, ends without conditions. The cost is in the preparation and the time, and both are manageable if planned for.

Three filters, one timetable

An inbound acquisition of any size now typically passes through three reviews: merger control at Union or member-state level, investment screening under the national regimes coordinated by the Union framework, and the subsidies review. They are conducted by different authorities on different clocks, and the deal cannot close until the slowest has finished. The practical consequence for acquisition financing is that the period between signing and closing has lengthened, and commitment letters, certain-funds periods and long-stop dates need to reflect that.

We have seen financing packages designed around a merger-control timetable fail because the subsidies notification was not complete when the parties thought it was — and the review clock does not start until the Commission agrees the file is complete. A pre-notification discussion, which the Commission encourages, is the single most effective way to remove that risk, and it costs weeks at the beginning rather than months at the end.

The Regulation is not asking whether an acquirer is subsidised. It is asking the acquirer to prove the negative, on a clock that only starts when the file is complete.

China Everbright Bank Europe — Public Policy

Build the inventory once

The most expensive way to comply is to assemble the financial-contributions inventory from scratch each time a deal arises. Groups that expect to be active acquirers in Europe are better served by maintaining a standing record: loans and guarantees from state-owned banks, tax measures, grants, public procurement contracts and equity from state investors, across every jurisdiction in which the group operates, updated annually. The inventory is also the basis for the public-procurement notifications the Regulation requires, so it pays for itself twice.

• Maintain a group-wide inventory of financial contributions from non-EU public bodies, refreshed annually.
• Engage in pre-notification contact before signing where the deal is close to the thresholds.
• Draft acquisition finance around the slowest of the three reviews, with a long-stop date and fee mechanics that assume it.
• Treat state-owned lenders’ facilities as declarable and price the documentation effort into the deal budget.

What it means for the lender

From our seat, the Regulation has changed how we structure acquisition financing for inbound clients rather than whether we do it. Commitment periods are longer, conditions precedent name all three approvals explicitly, and we ask early for the contributions inventory because the quality of that document is a good predictor of how smoothly the review will run. Clients who have prepared it are, in our experience, also the clients whose deals close on the timetable they planned.