On 24 September 2024, the European Commission (“Commission”) conditionally approved the acquisition of parts of PPF Telecom Group B.V. (“PPF”), a European telecoms operator, by  Emirates Telecommunications Group Company PJSC (“e&”), the UAE state-owned telecommunications company.

This is the first time that the Commission has accepted commitments in a merger case reviewed under the EU Foreign Subsidies Regulation (“FSR”), and the first publicly announced FSR merger clearance by the Commission.

Background

The FSR aims at addressing distortions in the EU internal market caused by foreign subsidies. Of particular concern to the Commission in the development of the FSR was the lack of tools in addressing foreign subsidies involved in the context of concentrations that may have given their recipient an unfair advantage to acquire companies. The often-cited concern was that bidders benefiting from foreign subsidies would be able to outbid bidders without access to such subsidies. The ability for the Commission to review concentrations under the FSR was therefore a crucial part of its narrative, and alongside public procurement reviews and standalone investigations, it is one of the key pillars of the FSR.

Since 12 October 2023, parties involved in M&A activity have had to notify their concentrations to the Commission for an FSR merger review - on top of any other regulatory review (such as “traditional” merger control and foreign direct investment) - where two cumulative thresholds were met:

1. at least one of the merging companies, the acquired company, or the joint venture is established in the EU and generates EU turnover of at least €500 million; and

2. the parties were granted at least €50 million in combined aggregate foreign financial contributions from third countries in the three years prior to the concentration.

Once a merger notification under the FSR has been made to the Commission, the parties are under a standstill requirement, and the transaction cannot close until clearance is received.

The Commission can then review the concentration in up to two phases, with the preliminary review taking 25 working days, and an in-depth investigation (i.e. a “phase II") taking 90 working days (although extensions are possible). The outcome of the merger review can go one of three ways: (i) a prohibition; (ii) a clearance; or (iii) a decision to clear the concentration with binding commitments.

The FSR provides that, where imposed, commitments must be proportionate, and fully and effectively remedy the distortion actually or potentially caused by the foreign subsidy in the internal market. Examples of commitments listed in the FSR include both structural and nonstructural commitments such as the divestments of certain assets, offering access to infrastructure, the reduction of capacity or market presence, the repayment of the foreign subsidy, or changes to the parties’ governance structure.

A green light, but with commitments

On 24 September 2024, the Commission announced that it had approved the acquisition of PPF, headquartered in the Netherlands and active in a number of member states, by e&, which is controlled by a sovereign wealth fund controlled by the UAE, the Emirates Investments Authority (“EIA”). 

The transaction was notified to the Commission on 26 April 2024, with the Commission going into a phase II review on 10 June 2024.

At the time of going into phase II, the Commission announced that it had preliminary concerns that e& had received foreign subsidies distorting the EU internal market and that the alleged subsidies took the form of an unlimited guarantee from the UAE and a loan from UAE-controlled banks directly facilitating the transaction. The Commission also said that it would be assessing whether the foreign subsidies involved led to negative effects in the acquisition process, including whether the subsidies allowed e& to deter or outbid other parties and/or if it allowed e& to perform the acquisition in the first place. Also, the Commission would look at whether the foreign subsidies would lead to actual and potential negative effects in the internal market with respect to the merged entity’s (future) activities.

In its press release announcing that the transaction has been conditionally cleared, the Commission stated that following its in-depth review it found that e& and EIA had received foreign subsidies from the UAE (in the form of an unlimited State guarantee as well as other financial instruments), but that the foreign subsidies received did not have a negative effect on competition in the acquisition process. In fact, rather than deterring or outbidding other potential buyers, e& was actually the sole bidder and had sufficient funds to carry out the acquisition.

However, the Commission did consider that the foreign subsidies could have led to a distortion of competition in the EU internal market in the future. The Commission focused on the existence of the unlimited State guarantees (one of the “most likely to distort competition" under the FSR) and raised concerns that they would artificially increase the merged entity's ability to finance its activities in the EU. In its forward-looking assessment, the Commission referenced the possibility of the merged entity, being mostly indifferent to risk, engaging in investments, auctions, the deployment of infrastructure or acquisitions that would distort the level playing field. 

The commitments offered addressed the Commission’s concerns. In place for at least 10 years are:

1. a commitment relating to the governance of e&: that its articles of association would not deviate from ordinary UAE bankruptcy law (thus removing the unlimited State guarantee);

2. a commitment on future financing, specifically prohibiting financing from EIA and e& to PPF’s activities in the EU internal market (with limited carve-outs, such as for non-EU activities); and

3. a transparency obligation: a requirement for e& to inform the Commission of future acquisitions even if not notifiable concentrations under the FSR.

Our 5 takeaways

What can we learn from the first commitments case under the FSR? Here are our reactions to this key development.

1. Shape-shifting can happen. There was a significant shift between what the Commission said when it announced that the case was going into phase II, versus the press release announcing the conditional clearance just over 100 days later. In particular, while the Commission was initially concerned about foreign subsidies distorting the acquisition process and e&’s ability to perform the acquisition (i.e. a foreign subsidy directly facilitating the transaction), this was later dropped due to the simple fact that the e& was the sole bidder for the target and had sufficient resources to perform the acquisition. One questions whether this could have simply been dealt with during pre-notification discussions (see below) or at least in the preliminary review. On the upside, it should be welcomed that the Commission narrowed down the analysis of the potential distortions in the transaction process to checking whether e& was the sole bidder and whether it had sufficient own resources to perform the acquisition. The Commission’s guidance on FSR distortions – which proposed looking at whether the foreign subsidies discouraged potential competitors – had implied a broader approach.

2. Merger-specificity may be stretched. The Commission’s rationale for securing commitments for 10 years (which may be extended for a further 5 years by the Commission, or even beyond if the Commission and e& agree) is that the foreign subsidies could have led to a distortion of competition in the EU post-transaction. The scope of this analysis seems very broad and it will be necessary to analyze the criteria used by the Commission once the decision is published. One could argue that future acquisitions should be dealt with on their own facts when they arise, and future behavior may be caught in any event under the Commission’s ex officio investigation powers. Further, the question remains how to square the Commission’s approach – in particular a commitment on financing future activities – with Article 19 FSR which states “[w]hen assessing whether a foreign subsidy in a concentration distorts the internal market…, that assessment shall be limited to the concentration concerned. Only foreign subsidies granted in the three years prior to the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest shall be considered in the assessment.” While the Commission may argue that some distortions only manifest themselves through the passage of time, the future financing commitment suggests a focus on subsidies themselves, rather than actual distortive effects. Concern over the breadth and the scope of the commitments is further compounded by the fact that they are made binding by the Commission, will be monitored by a third party, and can attract fines in the event of non-compliance.

3. Behavioral remedies may be a compromise.  In this case, the Commission showed its willingness to accept behavioral remedies rather than to impose the harsher alternative of structural changes/ divestments. Without taking away from the fact that behavioral remedies may be more effective in this case than structural remedies - and an analysis of the decision when published will shed further light - one may query the logic behind locking in UAE bankruptcy law into e&’s Articles of Association rather than simply prohibiting e& from receiving unlimited State guarantees (or any similar financing tool). Further, the second commitment, i.e. the prohibition of financing from EIA and e& to PPF’s activities in the EU, should in any event prevent the cross-subsidization of any subsidies received outside the EU. Lastly, the transparency commitment to inform the Commission of future non-notifiable concentrations overlaps somewhat with the Commission’s existing powers under the FSR itself to call-in any below-threshold deal.

4. SOEs and SCEs (State-Owned Entities or State-Controlled Entities) may be distinguished. The Commission's press releases suggest a sensitivity on the part of the Commission in distinguishing between State-owned and State-controlled. Perhaps conscious of any potential allegations relating to discrimination against State-owned entities, the language of the press release suggested that an analysis of the acquirer’s control structure was made. This plays into the assessment of imputability of a financial contribution to a third country: funding received from a non-EU State-controlled entity (such as the EIA) looks closer to being a foreign financial contribution than funding received from a non-EU State-owned-but-not-controlled entity.  This could bring hope to other SOEs seeking to clarify their relationships with the State when dealing with the Commission.

5. Front-loading should be helpful. While the parties would no doubt be delighted that the transaction was cleared almost 3 months before the legal deadline (phase II was due to expire on 4 December 2024), this somewhat downplays the fact that the parties would have likely been in pre-notification discussions with the Commission for months before it was formally notified in April 2024. Being assigned case number 11 in the Commission’s registry puts the initial contact with the Commission on the earlier end of the timeline going back to when the FSR notification obligation came into force in October 2023. The message may be that active and extensive pre-notification discussions are crucial where subsidies may be involved. Assuming that pre-notification began in October 2023, the Commission has taken almost a year to clear the concentration.

Authored by May Lyn Yuen, Adrian Emch, Michel Struys, and Laetitia Burgaud.