New European Regulation that can affect Brazilian companies comes into force

On July 10, 2023, the European Commission adopted a new regulation establishing procedures and requirements for notifications of mergers and public tenders, as well as requirements for investigations in cases of suspected trade-distorting foreign subsidies across European Union (“EU”) member states.  

This legislation entered into force on July 12, 2023, after an intense process of scrutiny and public consultations in the past months.

The legislation under discussion is known as the Foreign Subsidies Regulation (“FSR”). It is intended to remedy any distortions in the EU internal market caused by foreign governments on companies operating in the EU.

The proposed regulation creates three new tools with which the European Commission can take action, as follows:

• A first tool based on notifications by companies involved in a merger and acquisition operation, to further investigate mergers involving financial contributions granted by governments outside of the European Union where the acquired company, one of the merging parties or the joint venture generates a turnover in the European Union of at least EUR 500 million, and the transaction involves foreign financial contributions greater than EUR 50 million;
• A second tool based on notifications carried out by companies participating in public procurement procedures involving financial contributions from non-EU governments where the estimated contractual amount is at least EUR 250 million, and the bidding involves a foreign financial contribution of at least EUR 4 million by a third country; and
• A third general tool to investigate all other market situations, through which the European Commission can initiate a review at its own discretion (that is, ex officio) to investigate foreign financial contributions in general.

As of the current date, the FSR authorizes the European Commission to block or remedy certain M&A transactions involving companies that receive subsidies – those considered as significant – from non-EU governments, even though the regulation under discussion does not provide for the mandatory notification of these transactions and contracts when these criteria are met, which will only occur in October 2023.

In addition, the European Commission may already request, prior to the closing of the transaction, the notification of any transaction that does not meet the notification criteria, thus triggering the obligation for the closing of the transaction to be put on hold until it is approved. This can be carried out for up to 10 years after the granting of a foreign subsidy, provided that the company has received such subsidy in the three years prior to the closing of the transaction.    

One of the expected difficulties in the debates involving the topic concerns the concept of financial contributions, which covers all levels of government – national/federal/regional/state/district/municipal – and is considered very broad and may include, among others:

• The transfer of funds or liabilities (e.g. capital contributions, grants, loans, loan guarantees, tax incentives or preferential tax treatment, compensation for financial charges, debt forgiveness and conversion of debt into shares);
• The waiver of state revenue (e.g. tax waivers, granting of special duties without adequate remuneration); and
• Supply or purchase of goods or services.

Our understanding is that the legislation is likely to affect large multinational companies based outside of the European Union, provided that they operate in the continent. Thus, the Brazilian business groups that carry out business of various natures in the European Union may be affected by the new regulation. Similarly, the regulation under discussion will affect European companies that carry out operations in Brazil, provided that these companies have received some type of government financial contribution that meets the criteria of the new legislation.

By establishing regulations for financial and investment flows, the new regulation fills a gap in the World Trade Organization’s subsidies, anti-dumping and safeguard agreements, thus allowing for the approval of measures (additional tariff to the import tax) aimed to neutralize unfair trade, only in the case of imports of goods. This comes in the wake of several other measures adopted by the European block to protect European industries, such as:

• Carbon Border Adjustment Mechanism (CBAM), a carbon tax adopted by the EU for imports of iron, steel, cement, fertilizers, energy, aluminum and hydrogen.
• “Deforestation Act”, which will prohibit the entry into the European market of certain commodities (cattle, cocoa, coffee, palm oil, soybeans, wood and rubber, among other derived products, including bovine leather and skin, chocolate, furniture and wood works, paper, tires and natural rubber and its derived products), originating from deforested areas or in the process of environmental degradation.

Demarest is suitably structured with a multidisciplinary group to best assist our clients and potential interested parties regarding this matter, providing them with the necessary information, as requested by the European Union, in partnership with international law firms, to provide the best assistance to their clients from the perspective of the local legislation.