Competition | UK Regulatory Outlook June 2023

EU Foreign Subsidies Regulation

The Foreign Subsidies Regulation (FSR) entered into force on 12 January 2023. It aims to prevent foreign subsidies distorting competition within the EU.

The FSR will apply from 12 July 2023 and it empowers the European Commission to determine the existence of distorting foreign subsidies. A very wide definition of "subsidy" has been adopted: encompassing capital injections, tax credits, preferential tax treatment, grants, unlimited guarantees and interest-free loans, among others.

The Commission can impose both structural or non-structural redressive measures (such as divestment of assets); accept commitments by the company; and/or prohibit the subsidised concentration or award of procurement to the subsidised bidder.

From the 12 October 2023, there will be a mandatory obligation to notify the Commission of concentrations and public procurements above the following thresholds:

In the case of concentrations:

• at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover in the EU of at least €500 million; and
• the undertakings were granted combined aggregate financial contributions of more than €50 million from third countries in the previous three financial years, preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.

In the case of public procurement:

• the value of the contract is equal to or greater than €250 million; and
• the bidding party (including subsidiaries) and main subcontractors received aggregated foreign financial contributions equal to or more than €4 million in the previous three financial years.

The Commission has stressed that deals signed after 12 July 2023 will also fall under the scope of the regulation if not closed by 12 October 2023 and therefore must also be notified to the Commission.

The Commission can also request notification even where these thresholds are not met and has extensive enforcement powers, for example, it can carry out dawn raids even in countries outside the EU, where approval is sought from the third country. It is currently unclear how actively they will use this power to conduct ex officio investigations and this creates uncertainty for businesses.

There have been a number of media reports indicating that the implementing regulation of the FSR will limit reporting obligations – especially in relation to sales of goods and services on market terms. Business coalitions have come out in support of this potential move. Previously, many had concerns about the very onerous reporting conditions that the FSR stood to introduce. It is expected that the finalised implementing regulation will be published soon. In any event, it must be published before 12 October 2023.

It is important for businesses currently operating or looking to operate in the EU to ensure that any state assistance and/or public funding they receive from third countries complies with the requirements of the FSR, to avoid facing sanctions from the Commission. Sanctions include fines of up to 10% of the parties' aggregate worldwide turnover in cases of failure to notify a notifiable transaction or public tender, the unwinding of a completed transaction or the prohibition of the award of a public contract.

It is also important for businesses to factor in the time and cost of maintaining compliance with the FSR into day-to-day business activities as well as into the due diligence process for M&A deals and public tenders.

Digital Markets Act

The EU's Digital Markets Act (DMA), which came into force on 1 November 2022, aims to prevent large online platforms from abusing their market power, by regulating companies designated as having gatekeeper status.

The DMA began to apply on 2 May 2023 and potential gatekeepers (those meeting the quantitative thresholds established by the DMA) will have to notify their core platform services to the European Commission by 3 July 2023. 

Once designated, gatekeepers will have six months to comply with the obligations set out in the DMA. This includes annual reporting requirements relating to the measures that the gatekeeper has implemented to ensure compliance with the obligations.

A company is presumed to be a gatekeeper where it has a size that impacts the internal market, it controls an important gateway for business users towards final consumers and it has an entrenched and durable market position. For more details on these criteria please see our Insight.

Once designated, although the Commission can specify measures gatekeepers must take to ensure effective compliance, the gatekeeper is nonetheless required to comply with a set of universal obligations. This includes prohibiting certain behaviours as well as positive obligations. Arguably, a downside of this one-size-fits all method is that accounting for differing strengths and weaknesses in a gatekeeper's digital activities may lead to lengthy "translation" processes, as rules are applied in practice.

The DMA also does not allow for any assessment of whether some companies' dominance produces net consumer benefits outweighing the actual or likely detrimental impact on competition by providing no exemptions. 

The increasing digitalisation of business means that it is vital for all companies to remain aware of changes in the regulation of the digital arena. The obligations the DMA places on large platforms presents will undoubtably affect businesses that use these platform services.

Horizontal agreements

The EU and UK's approach to agreements between competitors (horizontal agreements) has been subject to significant change. Part of this change is due to the impact of Brexit: EU competition rules are no longer applicable in the UK and the UK requires its own legislation to fill this gap. However, the EU Horizontal Block Exemption Regulations (HBERs) were up for renewal in any event. The updated HBERs and associated guidelines will take effect from 1 July 2023.

The UK has enacted the Horizontal Block Exemption Orders (HBEOs) replacing the EU HBERs and the Competition and Markets Authority (CMA) is currently reviewing the results of its consultation on the draft guidance which will accompany them. It is anticipated that this guidance will be published shortly. Both the EU and UK horizontal legislation is made up of one instrument addressing R&D agreements and another addressing specialisation agreements.

A key point of divergence between the UK and EU approaches can be seen in the R&D Block Exemption Order and Block Exemption Regulation. The UK order requires companies seeking to benefit from this block exemption to demonstrate that there are sufficient undertakings "competing in innovation".

In order to demonstrate this and take advantage of the block exemption in the UK, companies must demonstrate that there are at least three competing R&D efforts. However the EU dropped this condition on the basis of market feedback. Many felt that this condition would be very difficult or impossible to fulfil as most R&D efforts take place away from the public gaze – meaning it would be very difficult for companies to demonstrate competing poles of innovation.

The UK and EU approach to sustainability agreements is another point of material difference. In its draft guidance, the CMA considers a novel and substantially more permissive approach to sustainability agreements by allowing benefits to indirect consumers and wider society to be included in a competition law assessment. In contrast, the Commission's approach is more in line with traditional analysis whereby only benefits to consumers in the relevant market affected by the agreement can be included.

Businesses active in both the UK and EU should take note of these developments in the regulation of agreements with their competitors. Given the increasing pressure on business to pursue sustainable practices the opportunities presented by and limitations of the UK and EU approaches will be of interest.