The EU Foreign Subsidies Regulation: The Final Piece of the Regulatory Puzzle to Ensure Competitive Neutrality in Cross-Border M&A?

Abstract

State-owned enterprises (SOEs) that have undue competitive advantages can distort the market in cross-border mergers and acquisitions (M&A transactions) and consequently lead to economic inefficiencies and welfare losses. Nevertheless, the issue of competitive neutrality regarding international M&A transactions has been left largely unaddressed in international trade and investment law as well as domestic competition, investment screening and anti-subsidy regimes. The new Regulation on Foreign Subsidies distorting the Internal Market (FSR) aims to fill this regulatory gap by introducing a kind of merger control regime for transactions facilitated by foreign subsidies. The tools provided in the FSR will allow the Commission to investigate M&A transactions undertaken by companies that benefit from foreign subsidies. In cases where the Commission finds that the foreign subsidy irremediably distorts the internal market, the concentration may even be prohibited. The tools of the FSR are generally well suited to prevent undue competitive advantages enjoyed by foreign SOEs in M&A transactions. However, as the tools are not mirroring those under EU state aid law, they potentially distort the level playing field. Several recently concluded international investment agreements (IIA) address the issue of competitive neutrality. In contrast to the FSR, they focus mainly on requirements for SOEs and deal only to a limited extent with subsidies in the context of cross-border M&A. To increase coherency and to reduce unpredictability and uncertainty regarding its new regulatory tools, the EU should aim to include general principles on subsidies and prohibitions of specific subsidies in its IIA. Finally, the extent to which the tools of the FSR are compliant with the EU’s national treatment obligations as stipulated in its IIA must be carefully examined.