EU/Competition – Legal Update
Status as of: 4 January 2023
Just before Christmas 2022, the EU has adopted and published a Regulation on Foreign Subsidies Distorting the Internal Market (Reg. 2022/2560, Link). The regulation will apply as of 12 July 2023. It aims at confronting subsidies, as granted by non-EU countries, which distort competition on the EU-internal market, in particular in relation to mergers and the public procurement of contracts and concessions. In that regard, the EU now imposes, inter alia, closing prohibitions and procurement award prohibitions.
To sum it up briefly:
Foreign (i.e. non-EU) subsidies include, inter alia, any transfer of funds, the foregoing of revenues due, and the provision or purchase of goods or services by the government of a non-EU country or by any of its public or private entities whose acts are attributable to that non-EU country.
A distortion in the internal market of the EU through such foreign subsidies is present already if those are capable of improving the competitive position of a company on the internal market and thus at least potentially distort competition on the internal market. Excepted are only those foreign subsidies which did not exceed a threshold of EUR 4 million (in 3 years) or are meant to make good for damages caused by natural disasters or exceptional occurrences. On the other hand, foreign subsidies are considered to particularly distort competition on the internal market to the extent they are granted to ailing undertakings, are granted in the form of unlimited guarantees, are not in line with the OECD export credit arrangement, are directly facilitating a merger or are enabling a bidder to submit an unduly advantageous offer.
The European Commission (“Commission”) may initiate an investigation ex officio with regard to such foreign subsidies, request in this context all kinds of information and even conduct a dawn raid (even outside the EU). The investigation consists of a preliminary review and an in-depth investigation. At the end of the latter, the Commission may impose redressive measures or commitments. Moreover, the Commission may adopt interim measures, in particular in order to secure a non-discriminatory access to infrastructure, the foregoing of investments, etc. Moreover, as is the case in EU cartel and State aid law, the Commission may impose administrative fines (of up to 10% of the consolidated group turnover) and periodic penalty payments (of up to 5% of the daily consolidated group turnover during a period in which a COM decision is being infringed).
All mergers which are being agreed on as of 12 July 2023 and of which an undertaking concerned generates a consolidated EU group turnover of at least EUR 500 million and (!) of which the purchaser or the target company have received foreign subsidies of more than EUR 50 million over the preceding 3 year period must be filed with the Commission prior to closing (the aforementioned turnover figures are net of sales rebates, VAT and other turnover-related taxes).
Such a merger must not be closed during the Commission review/investigation. This closing prohibition is protected by the above sanctions; moreover, the Commission may request any undertaking concerned to undo any unlawful closing. Also, the Commission may prohibit a merger or subject the merger to commitments to be fulfilled by the undertakings concerned.
In relation to public procurement proceedings to be initiated as of 12 July 2023, any foreign subsidies are to be notified upfront if the contract value is at least EUR 250 million (EUR 125 million if the award is for lots) and (!) the bidder (or his group companies, main subcontractors or main suppliers) have received, over the past 3 years, foreign subsidies of at least EUR 4 million per non-EU country.
No contract or concession must be awarded during the ongoing Commission review/investigation. Moreover, the Commission may prohibit the awarding or subject the awarding to commitments.
The Commission will adopt implementing acts until 12 June 2023 as well as guidelines until 12 January 2026.
The regulation does not only target Chinese companies but indeed any company rooted in any other (financially strong) non-EU country (such as Switzerland, UK, USA, Canada, Singapore, Taiwan, Australia, Brazil, South Africa, etc.) which grants financial benefits to its companies which are capable of producing anti-competitive effects on the internal market of the EU. Any mergers or public procurement bids which non-EU company groups are involved in will become subject to notification obligations and thus be made more complicated going forward. This is in addition to the general rules and regimes on merger control, cartels, State aid by EU Member States, public procurement rules, antidumping/anti-subsidy duties, etc. which will of course continue to be applicable in the EU.
► Green Deal: Agreements on strengthening and expanding emissions tradingand on new rules for the application of the EU Emissions Trading System in the aviation sector,agreement on new regulation on more sustainable and circular batteriesand agreement on the Carbon Border Adjustment Mechanism
As further part of the Green Deal, the European Parliament ("Parliament") and the European Council ("Council") reached a number of substantial agreements last month.
Parliament and Council reached a political agreement on the introduction of a Carbon Border Adjustment Mechanism ("CBAM") (link). The scheme is designed to promote cleaner industrial production in non-EU countries by setting fair prices for the so-called grey CO2 emissions generated by the production of CO2-intensive goods imported into the EU. This is to prevent carbon leakage to countries with less strict requirements and the replacement of EU products by imports of foreign products. The CBAM initially applies to imports of certain goods and precursors whose production is particularly CO2-intensive and where the risk of carbon leakage is the highest: cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Once fully implemented, it is planned to cover more than 50% of the emissions of the sectors covered by the EU Emissions Trading Scheme ("EU ETS"). The EU ETS puts a price on CO2 and reduces the maximum permissible emission levels in certain sectors on an annual basis. Initially, a transitional phase will come into force on 1 October 2023, during which the direct greenhouse gas emissions (“GHG”) contained in imports will only have to be reported. Once the final system takes effect, importers will have to report each year the quantity of goods imported into the EU in the previous year and the associated grey GHG emissions and surrender the corresponding CBAM certificates. The price of the certificates will be expressed in EUR/tonne of CO2 emitted, depending on the weekly average auction price of EU ETS allowances.
Complementary to the CBAM, the Commission reached a preliminary agreement on strengthening the EU ETS with the Parliament and the Council on 18 December 2022 (link). The current agreement aims to reduce emissions from the EU ETS sectors by a total of 62% by 2030 compared to 2005 levels, 19 percentage points more than the 43% envisaged in the previous legislation. It also aims to accelerate the speed of annual emissions reductions: from 2.2% per year to 4.3% from 2024 to 2027 and 4.4% from 2028. To this end, the allocation of free emission allowances to certain companies is to be gradually phased out and the CBAM for the sectors concerned is to be gradually introduced from 2026 to 2034. In addition, the EU ETS is to be extended to emissions from shipping and a new, separate emissions trading system for fuels used in buildings and road transport is to be introduced from 2027. This upstream system will provide rules for fuel suppliers but not for individual households and drivers. In addition, targeted financial assistance will be made available to vulnerable citizens and micro-businesses through the establishment of a Social Climate Fund to help them to invest in energy-saving measures. The fund is due to be launched in 2026 and is to be financed with EUR 65 billion from the EU budget plus 25% co-financing by the Member States.
Just before, on 9 December 2022, the Commission had already reached an agreement with Parliament and Council on the strengthening of the EU ETS rules for aviation (link). Under the new rules, the free allocation of certificates to the aviation sector will be phased out as follows: 25% in 2024, 50% in 2025 and 100% in 2026. This means that the certificates will be fully auctioned from 2026. From 2022 to 2027, the EU ETS will apply to intra-European flights (including the UK and Switzerland), while the CORSIA system will continue to apply to non-European flights to and from third countries. This system was set up by the International Civil Aviation Organization (ICAO) to offset and reduce carbon dioxide for international aviation, through which airlines must compensate their CO2 emissions with so-called offset certificates. From 2026, the scope of the EU ETS could be extended to non-European flights. In addition, support of around EUR 1.6 billion from revenues of the EU ETS is planned to ensure that the use of sustainable aviation fuels quickly gains momentum. For example, 20 million free certificates are to be made available in the short term to create incentives for the introduction of more climate-friendly fuels.
Also on 9 December 2022, a preliminary political agreement was reached between Parliament and Council to make all batteries placed on the EU market more sustainable, circular and safer (link). The agreement is based on a Commission proposal from December 2020 and aims to make batteries sustainable throughout their life cycle, from the sourcing of materials to their collection, recycling and repurposing. Once the law enters into force, sustainability requirements related to carbon footprint, recycled content, performance and durability will be phased in from 2024. The extended legal framework expands producer responsibility, so that in particular higher collection targets will be introduced from mid-2025. The collected batteries must be recycled, and high levels of recovery have to be achieved, especially for valuable materials. Companies placing batteries on the EU internal market will have to demonstrate that the materials used for their production have been responsibly sourced. This includes social and environmental factors related to the extraction, processing and trade of raw materials used for battery production.
In order to enter into force, the reached agreements have to be formally adopted by Parliament and Council and then published in the Official Journal.
The EU has imposed further sanctions against Russia. On 16 December 2022, the Council adopted what is now the ninth package of measures against Russia because of its “ongoing war of aggression against Ukraine and the gravity of the current escalation against civilians and civilian infrastructure” (link).
The latest sanctions package includes additional export controls, bans, and restrictions. For example, new export restrictions on sensitive dual-use items and advanced technology items such as camouflage equipment, additional chemical/biological substances and riot control agents are covered. The list of entities linked to Russia's military-industrial complex has been expanded by 168 entries. The strict restrictions on export licences for the mentioned goods and technologies now apply to a total of 410 listed organisations. In addition, the export ban on aviation and aerospace-related goods and technologies is extended to aircraft engines and their parts. The ban also applies to unmanned aircraft, therefore direct exports of drone engines to Russia, as well as third countries that might supply drones to Russia, are prohibited. New export bans also apply to other industrial goods and technologies, such as complex generators, laptops and computer components, cameras and lenses, printed circuits, radio navigation systems and radio control devices, and drones for private use.
In addition, sanctions were imposed on three more banks and four more Russian media channels as well as on nearly 140 individuals and 50 entities. In addition, a ban on the supply of services to Russia for advertising, market and opinion research as well as product testing and technical monitoring applies. New EU investments in the Russian mining sector now are generally prohibited. Finally, as of 16 January 2023, EU citizens are prohibited from holding positions on the governing bodies of Russian state-owned or state-controlled legal persons, entities or bodies established in Russia. The authorities may grant exceptions in certain circumstances, such as if the company in question is a joint venture of an EU company or if holding the position is necessary to secure a critical energy supply.
On 16 December 2022, the German Federal Government approved the draft of a law for better protection of whistleblowers in the professional environment (Entwurf eines Gesetzes für einen besseren Schutz hinweisgebender Personen im beruflichen Umfeld - "HinSchG") in the version proposed by the Legal Affairs Committee in October 2022 (link, available in German only). This draft is intended to simultaneously implement Directive (EU) 2019/1937 on the protection of persons who report breaches of Union law ("Whistleblower Directive") and the case law of the European Court of Human Rights. The deadline for implementing the Whistleblower Directive already expired in December 2021, which is why the Commission initiated formal infringement proceedings against Germany in January 2022, which are still pending.
The goal of the HinSchG is to provide full protection for whistleblowers in the professional environment in future. Organisations and companies with 50 or more employees as well as companies in certain industries and sectors (regardless of the number of employees) must install and operate secure internal whistleblowing systems for this purpose. It must be possible to provide reports orally, in writing or, if desired, in person; from 2025 onwards, anonymous reports must also be possible. In addition, there shall be so-called external reporting offices. If reprisals are imposed on whistleblowers, there will be claims for damages for material and immaterial damage. In addition, a reversal of the burden of proof in favour of whistleblowers is planned to protect against reprisals. Finally, the new draft stipulates that the EU's "Digital Markets Act" is to be included in the material scope of application of the law.
The draft still requires the approval of the German Federal Council (Bundesrat); the law will then enter into force three months after promulgation in the German Federal Law Gazette (Bundesgesetzblatt). Only companies that do not have more than 249 employees and that will not be obliged to set up an internal reporting office for other reasons will have an implementation deadline of 17 December 2023.
The implementation of acquisitions in violation of the standstill obligation under merger control law poses a great risk for the companies involved. In the event of a subsequent prohibition, there is also the threat of an unwinding of the takeover, including the associated difficulties.
This is highlighted by a recent case (M.10939): Although the Commission's in-depth investigation had not been completed at that time, Illumina and GRAIL finalised their merger in August 2021. The Commission proceedings had been initiated at that time not because of a notification of the parties involved but on the basis of referral requests by the Member States, although neither the turnover thresholds of the EU Merger Regulation (“ECMR”) had been reached nor the conditions for a notification in the requesting Member State had been met. In July 2022, the European General Court (“EGC”) ruled, however, that the Commission has in fact had the power to review the transaction on the basis of Member State referral requests under Art. 22 of the ECMR (we reported: link). In September 2022, the Commission then prohibited the relevant merger (we reported: link).
On 5 December 2022, the Commission now announced that it had sent a so-called Statement of Objections to Illumina and GRAIL, announcing that it intends to take action to restore the situation prior to the acquisition so that the ex-post prohibition could have its full effect (link). According to the Commission announcement, transitional measures will be taken to ensure separation of the parties until dissolution and to preserve GRAIL’s viability in addition to divestiture measures. The Commission further clarified that GRAIL must become independent from Illumina again and as viable and competitive as it was before the merger with the dissolution of the transaction.
With a Statement of Objections, the Commission formally informs the parties concerned of its competition concerns in writing. The parties now have the opportunity to inspect files and then to submit written and oral comments. After a hearing, the Commission may declare the measures binding. In case of non-compliance, the Commission can impose periodic penalty payments and impose fines of up to 10% of the annual worldwide group turnover of the undertakings concerned.
Under German law, a double control applies meaning that both the antitrust law and the merger control law requirements are relevant in the case of corporate cooperations between companies.
The formation of a joint purchasing company by Warsteiner Brauerei Haus Cramer KG (Warsteiner) and Karlsberg Holding GmbH (Karlsberg) was cleared by the German Federal Cartel Office (“FCO”) under merger control law on 14 December 2022 (link). The FCO stated that the achieved market positions of the parties as buyers and suppliers of the products were relevant for its assessment. For the ban of cartels, in turn, the scope of the purchase, the exclusive ties and the information exchanged were to be considered. However, according to the FCO, restrictive effects on competition were unlikely in the case of limited market positions. According to the FCO, the project withstood an in-depth examination with regard to both the sales and the procurement side. No serious competition concerns were found in the areas of beer or non-alcoholic cold drinks. According to the FCO, the joined market shares have not been in problematic levels and larger competitors were active on the markets in question.
On 14 December 2022, the European Commission approved a EUR 1.8 billion German aid scheme to support the development of high power charging (“HPC”) infrastructure for electric vehicles (SA.104749, link), which should help to achieve the objectives of the so-called Green Deal. The Green Deal is the EU's concept that maps out the path to implementing a carbon-neutral circular economy and aims to move the entire EU economy to carbon neutrality by 2050 - starting by cutting emissions by at least 55% by 2030 (see our Insights post on the “Fit for 55 Package”).
The approved aid scheme is intended to support the development of the so-called “Deutschlandnetz”, a fast-charging network for electric vehicles in urban, suburban and rural areas in Germany. The plan is to set up 85,000 fast-charging points at around 900 locations in Germany where there is currently no corresponding infrastructure. The aid is to be granted in form of direct grants and ongoing payments to cover part of the operating costs to companies that are selected through tenders and are active in the field of charging infrastructure.
The assessment was carried out in accordance with EU State aid rules, in particular the “Guidelines on State Aid for Climate, environmental protection and energy” ("CEEAG"), which have been in force since January 2022. These guidelines provide guidance to the Commission on its compatibility assessment of aid subject to the notification requirement under Article 107(3)(c) TFEU. They are intended to assist Member States in achieving the EU's energy and climate policy objectives without imposing an excessive burden on taxpayers and without distorting competition within the EU's internal market (see our Insights article on the CEEAG).
Applying EU state aid rules including the CEEAG, the European Commission approved notified amendments to two German schemes in the energy sector on 21 December 2022. The relevant schemes are intended to contribute to the realisation of Germany's energy and environmental policy objectives and the EU's strategic objectives enshrined in the Green Deal and are to be applicable until the end of 2026.
The first investigation procedure (SA.103069, link) now closed by the Commission concerned amendments to the support scheme for the offshore wind energy generation in Germany (German Offshore Wind Energy Act – “WindSeeG”) with a total volume of EUR 1.5 billion, which complements the German Renewable Energy Act ("EEG 2023"). A new tendering process for a different type of site in the German Exclusive Economic Zone (EEZ) will allow offshore wind electricity producers to bid for areas that have not been centrally pre-investigated by the government. In addition, a dynamic bidding procedure for tenders of non-pre-investigated sites is planned, in which Germany can differentiate and select between multiple bids with a bid value of zero. Individual aid is to be granted through a premium on top of the electricity market price, based on the lowest bids resulting from a duly conducted bidding process.
The second procedure (SA.102084, link) concerned the amendment of the German support scheme for the production of electricity from renewable sources ("EEG-2023 support scheme"). This scheme aims to increase the share of renewable electricity in Germany to 80% by 2030. The EEG 2023 support scheme has a total budget of EUR 28 billion for this purpose and largely replaces the support under the so-called EEG 2021 scheme. For this purpose, the EEG 2023 support scheme was aligned with changes made to the German EEG 2023. Aid recipients are to be selected through competitive, transparent and non-discriminatory tendering procedures. Individual aid is generally to be granted in the form of market premiums, which the network operator pays to the producer in addition to the market price for the electricity. Feed-in tariffs are to be granted for very small installations.
The Chatham Partners’ EU/COMP-team is specialized in complex issues in the areas of EU and German competition, State aid and public procurement law and has extensive practical experiences in these fields.
We would like to thank Sonja Maria Brücker for her valuable support in the compilation of this newsletter.