European Commission flexes muscles under foreign subsidies regime with first-ever dawn raid

The Commission has wide investigatory powers under the EU’s foreign subsidies regime, which came fully into effect on 12 October 2023. The regulation enables it to investigate foreign subsidies that have been granted to businesses involved in certain M&A transactions or joint ventures, public procurement procedures and other market situations, if it suspects that these might have distorted competition in the EU.

The regime also allows the Commission to conduct dawn raids within and, in certain circumstances, outside the EU, similar to the powers that the Commission has in relation to competition law dawn raids.

Details of the dawn raids at Nutech premises, which were carried out 23 April 2024, were first published by the South China Morning Post. The Commission did not name Nutech as the target of its action in its official statement, but a statement issued by Nutech and reported by the Financial Times confirmed that it was “co-operating with the European Commission and is committed to defending its reputation as a fully independent and self-supporting economic operator”.

The Commission carried out the FSR dawn raids on the basis of “indications that the inspected company may have received foreign subsidies that could distort the internal market”.  It said it would open an in-depth investigation if it were to find “sufficient indications of the existence of distortive foreign subsidies” from the information it gathered from its unannounced inspections.

To-date the Commission has initiated four in-depth FSR investigations. All of these have involved Chinese companies. Three of these relate to concerns over the potential distortion of competition as a result of a bidder having obtained an advantage over other bidders in a procurement process as a result of foreign subsidies. The first of these investigations closed after the bidder under investigation withdrew from the Bulgarian procurement process for the supply of rolling stock, in which it was participating. 

The second and third in-depth investigations were initiated on 3 April 2024 and relate to bidders participating in a procurement process for the design, construction and operation of a solar farm in Romania.

The fourth in-depth investigation concerns Chinese suppliers of wind turbines in the context of the development of wind parks in Spain, Greece, France, Romania and Bulgaria. The launch of this investigation, which was announced on 9 April 2024, constitutes the first inquiry under the FSR that the Commission has opened on its own initiative. The Commission can launch this type of inquiry – also known as “ex officio” investigations – where it considers that a foreign subsidy may be distorting the internal market, even if the relevant thresholds that ordinarily apply to trigger a requirement to carry out an initial investigation are not met.

Under the foreign subsidies regime, companies are obliged to notify their public procurement tenders in the EU when the estimated value of the contract exceeds €250 million, and when the company was granted at least €4 million in foreign financial contributions from at least one third country in the three years prior to notification. A mandatory notification also has certain suspensory effects, prohibiting, for example, the award of contract to the bidder under investigation, whilst this is still ongoing.

Separate mandatory and suspensory prior notification requirements in the FSR also apply to qualifying M&A transactions linked to the EU, where specific turnover and value of foreign financial contribution thresholds are met. Here, too, the Commission is increasingly active with potential impact and increased complexity for businesses involved in corporate deals.

Tadeusz Gielas, competition law expert at Pinsent Masons, said: “These early FSR enforcement cases are revealing a focus on the renewable energy sector, with Chinese-linked companies coming under particular scrutiny.”

Dr Totis Kotsonis, subsidy control and trade expert at Pinsent Masons, added: “If, following an in-depth investigation, the Commission finds that foreign subsidies distort the internal market, it can impose certain redressive measures, including prohibiting the award of a contract to the supplier under investigation or rendering a transaction conditional on the parties under investigation committing to certain structural or behavioural measures. Ultimately, where the transaction has already been completed, the Commission may require that this is unwound if no other measure can address adequately the Commission’s concerns.”

“Although the Commission has been keen to stress that the FSR is country-neutral, there is no denying that the genesis of the FSR owes a lot to EU member state concerns over the years in relation to what is perceived as unfair competition from state-subsidised Chinese companies that can gain access to the single market not only by means of acquisitions but also through competitive public procurements for the operation of critical infrastructure or the award of other strategically important public contracts,” Kotsonis said.

“Although, it is still early days, it is possible that the Commission’s greater focus so far on public procurements and supplier arrangements is a direct consequence of the fact that there are other related tools available to address concerns that relate to M&A transactions that involve non-EU players, such as the national foreign direct investment regimes that are applicable in most EU member states. Arguably, these have already had a deterrent effect, making it less likely that controversial M&A transactions would be contemplated or ultimately occur,” he said.

The Commission’s recent enforcement actions have prompted a response by China Chamber of Commerce to the EU (CCCEU), which expressed serious concern over the EU conducting “unjustifiable” dawn raids to the Chinese enterprises’ establishments in the EU. The trade body said in a statement that the sudden unannounced inspection on 23 April “undermines the business environment for foreign companies within the EU in the disguise of foreign subsidies”. It also urged the European regulators to “effectively safeguard the legitimate rights and interests of foreign enterprises in the EU”.

In an attempt to provide businesses with greater certainty, the Commission has, prior to its latest enforcement actions, committed to “start clarifying” the concepts of “distortion” and “balancing test” under the FSR, no later than one year after the regime started to apply – by 12 July 2024. It will also publish formal guidelines on certain key concepts included in the FSR within three years after its the entry into force – by 12 July 2027.