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The European Union’s new Foreign Subsidies Regulation, enacted in July 2023, has significantly impacted Chinese companies, prompting them to seek strategies to manage the substantial regulatory challenges. It’s crucial for Chinese firms to precisely identify investment opportunities that are viable within this intricate regulatory landscape, according to a partner specializing in antitrust and foreign investment reviews at a joint venture office of a Shanghai-based law firm and a UK-based firm.
The FSR’s merger and acquisition review mechanisms have demonstrated a broader jurisdiction scope than initially anticipated. By mid-October, over 200 transactions had been submitted to the European Commission, far surpassing the estimated annual total of 30.
Chinese companies’ investment and operational activities in Europe have been notably affected. A spokesperson for China’s Commerce Ministry recently emphasized this impact and called on the EU to halt its restrictions on foreign-invested enterprises, including those from China. The goal is to leverage the FSR to foster a fair, transparent, and predictable business climate throughout Europe.
Amid widespread feedback expressing concerns over excessive compliance requirements, the European Commission initiated a review of the FSR last August. Industry feedback highlights that the current review system is overly complicated and paper-intensive, leading to delays in completing transactions.
Looking ahead, the enforcement of the FSR is expected to become more precise. Two primary directions are anticipated: streamlining review procedures for routine, low-risk deals and allowing the European Commission to proactively investigate specific transactions more frequently. The goal is to strike a balance—simplifying processes for standard deals to improve efficiency while maintaining strict oversight over significant or sensitive transactions, regardless of their size.
Draft guidelines concerning the application of the FSR began development last July and are scheduled for completion early this year. They aim to clarify assessment criteria, including how to evaluate market distortions, the balancing test, and the circumstances under which pre-approval or public procurement reviews are required.
However, the broad discretionary powers of the European Commission to investigate transactions below the threshold have caused concern within the market. The use of subjective criteria, such as “impact on the EU” and “strategic importance,” raises worries among investors. For companies considering expansion into Europe, this regulatory uncertainty means transactions deemed safe today might be scrutinized tomorrow, often leading to increased costs and delays.
From practical experience, early identification and systematic management of potential risks, along with well-prepared response plans, can help companies navigate these challenges effectively. Most deals, when approached proactively, can still be successfully completed despite the regulatory complexities.
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