New Tools for Concentrations in the EU Commission’s Toolbox

Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (the “Regulation”), adopted on 28 November 2022 and in force since 12 January 2023 has become applicable on 12 July 2023.[1] Amongst other matters, its provisions grant further powers to the European Commission to scrutinize EU dimension concentrations, where one of the involved parties has received subsidies from non-EU countries, thus aiming to prevent the distortion of competition on the internal market.

Main provisions

The Regulation introduces three new tools to the toolbox of the EU Commission:

1. “A notification-based tool to investigate concentrations involving financial contributions granted by non-EU governments, where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and the transaction involves foreign financial contributions of more than €50 million;

2. A notification-based tool to investigate bids in public procurement procedures involving financial contributions by non-EU governments, where the estimated contract value is at least €250 million and the bid involves a foreign financial contribution of at least €4 million per third country; and

3. A general tool to investigate all other market situations, where the Commission can start a review on its own initiative (ex-officio).”[2]

Applicability in time

A noteworthy aspect is the fact that the Regulation needs to be considered for past events, which nevertheless have effect on the internal market in the present. According to the transitional provisions of the Regulation,[3] (i) it shall apply to foreign subsidies granted in the five years prior to 12 July 2023 where such foreign subsidies distort the internal market after 12 July 2023; (ii) by way of derogation to the foregoing, it shall apply to foreign financial contributions granted in the three years prior to 12 July 2023 where such foreign financial contributions were granted to an undertaking notifying a concentration or notifying financial contributions in the context of a public procurement procedure pursuant to the Regulation; and (iii) it shall not apply to concentrations for which the agreement was concluded, the public bid was announced, or a controlling interest was acquired before 12 July 2023.

Relevance for M&A deals and obligation to notify

The first tool in the box appears most relevant for mergers and acquisitions, as it imposes upon the relevant parties (detailed below) notification obligations similar to those applicable in merger clearance and FDI (foreign direct investment) related procedures.

As per the provisions of the Regulation, transactions meeting the following criteria[4] need to be notified in accordance with this new special regime:

• They involve (i) an acquisition of control over an undertaking, (ii) the creation of a joint venture (JV) performing on a lasting basis all the functions of an autonomous economic entity or (iii) a merger.

• They fulfil two thresholds: (i) at least one of the merging undertakings, the acquired target or the JV is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million; and (ii) the following undertakings were granted combined aggregate financial contributions of more than EUR 50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest: (A) in the case of an acquisition, the acquirer or acquirers and the acquired undertaking; (B) in the case of a merger, the merging undertakings; (C) in the case of a JV, the undertakings creating a JV and the JV.

Practical hassle

For concentrations of EU dimension (such as acquisitions of EU based companies meeting the relevant thresholds), the application of the Regulation means the need for further legal assessment prior to the signing of the deal and potentially carrying out the notification i.e. a further administrative burden as condition precedent to the implementation of the deal.[5]

Note that the draft regulation for implementing the provisions of the Regulation[6] suggests that companies who would be subject to the obligation to notify will need to disclose large amounts of information to the Commission, requiring in practice significant organisational work for the storing and making available of data on the part of the companies involved and their counsel.

In view of the Regulation, the legal assessment preliminary to the signing of a notifiable M&A deal needs also to cover the granting of foreign subsidies during the past three years prior to the relevant concentration, as well as the extent to which the internal market may have been distorted beyond 12 July of this year.

Some of the concepts used in the Regulation shall be further detailed by the Commission by way of guidelines to be adopted latest on 12 January 2026 (such as the application of the criteria for determining the existence of a distortion).[7]

[1] https://eur-lex.europa.eu/eli/reg/2022/2560/oj [2] https://competition-policy.ec.europa.eu/foreign-subsidies-regulation/about_en [3] Article 53 of the Regulation. [4] Article 20 of the Regulation contains the thresholds for notification. [5] Note the wording of Article 21 (1) (according to Article 54 (4), applicable starting on 12 October 2023): “Notifiable concentrations shall be notified to the Commission prior to their implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.” [6] The draft Commission Implementing Regulation (EU) …/... on detailed arrangements for the conduct of proceedings by the Commission pursuant to Regulation (EU) 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market is available here: https://eur-lex.europa.eu/legal-content/RO/TXT/?uri=pi_com%3AAres%282023%29842946 [7] As per Article 46 of the Regulation.

“Clean Team”. Concept. Use.

#mergersandacquisitions #competitionlaw #antitrust #cleanteam

In acquisitions or mergers where the turnover of the parties involved is such as to trigger the obligation to notify the concentration to the Competition Council, according to Competition Law 21/1996, there is a risk that sensitive information relating to the two (or more) businesses involved in the concentration may be exchanged between the parties to the transaction. Most of the time, such exchanges of information take place almost naturally, without the persons involved even being aware that such conduct is likely to constitute a breach of competition law, with the consequence that the competition authorities may impose heavy penalties and, potentially, with a detrimental impact on the transaction.

Avoiding this risk of course starts with awareness of it, and lawyers (in-house or external) or consultants involved in the transaction should be able to point it out to the business teams. The next step is to take concrete steps to avoid unauthorised sharing of sensitive information. One such measure - very effective, but also consistent with the need for cooperation between parties in the context of a transaction - is the establishment of a clean team, made up of individuals from each of the parties to the transaction and operating under a clean team agreement. The clean team activity effectively means that the members of this team receive confidential information from the other party to the transaction, but - being bound by strict confidentiality obligations - ensure that this information is filtered and aggregated so that it is useful to the transaction, without the people involved in the business getting to know it directly.

The "clean team" contract is concluded between the companies that are parties (or potential parties) to the intended transaction and is very similar to a confidentiality agreement. The main feature is probably that the clean team agreement specifies the list of names of individuals to be part of the clean team, with the provision that only they will receive sensitive information from their superiors/clients (the latter - if the clean team includes external consultants hired by the party) and that only they will use it for the agreed purposes.

M&A Concepts: Limitations of Liability

From the perspective of the seller of a company (or business), the section of the contract concerning the limitation of its liability should not be missing. Moreover, it must be sufficiently well drafted to ensure that liability is limited both in time and in value. In this respect, several concepts are regularly used in SPAs: de minimis amount, tipping/spilling liability basket, maximum liability cap, liability period, limitations given by the time of notification to the seller of an event which may give rise to liability under the contract (in fact, further conventional limitation periods – in Romanian “termene convenționale de decădere”). In this article, we will briefly address each of these concepts.

De minimis amount

An example of the de minimis amount could be this: "The Seller shall not be liable for a claim unless: [ ] the Seller's liability in respect of that claim (together with any related claim) exceeds the amount of [●] EUR."

The purpose of introducing such a clause is to set a minimum value that the buyer's claims under the sales contract must reach for the seller to be liable to pay damages. The effect is that the seller will only be held liable for defects in the assets sold or breaches of representations and warranties which give rise to damage which the parties consider to be sufficiently substantial, while the seller will not be held liable for minor damages.

Cumulative minimum values - tipping / spilling liability basket

The minimum value clause can be combined with a minimum cumulative values clause i.e. liability basket. An example of such a clause could be this: "The Seller shall not be liable for a claim in respect of its warranty obligation unless: [1] the Seller's liability in respect of that claim (together with any related claim) exceeds [●] EUR [and] [2] the amount of the Seller's liability in respect of such claim, either individually or when aggregated with the Seller's liability for all other claims exceeds [●] EUR, in which case the Seller shall be liable for the whole amount and not just for the excess."

Our example above considers a tipping basket, which means that once the thresholds have been reached, the seller will be liable for the full amount demanded by the buyer. By contrast, a spilling basket refers to the fact that, once the value thresholds have been reached, only the amount of the claim exceeding the threshold will be indemnified by the seller.

In practice, if the parties agree to a de minimis plus basket seller liability limitation mechanism, a tipping basket will usually be adopted, rather than a spilling basket, as the latter represents an even more aggressive limitation of the seller's liability - which buyers seem to find difficult to accept.

Liability cap

The contract for the sale of a company (shares/stock or goodwill) may provide for a maximum total value cap for the seller's liability. Such a liability cap is an extremely useful tool for the seller to manage the risk arising from the signing of the sale contract, as the maximum limit of his/her/its liability under it is known at the time the contract is concluded.

Conventional liability period

According to Art. 2517 of the Romanian Civil Code, the general limitation period (applicable also to claims that could arise from a SPA) is 3 years. Art. 2515 of the Civil Code allows for the parties to agree on contractual limitation periods, if they observe certain limits laid down by law.[1]

In the context of an SPA, the seller will want to set specific limitation periods shorter than the statutory period to limit the time up to which the buyer can make claims based on the sales contract.

Limitations created by the time of notification to the seller of an event which may give rise to liability under the contract – further conventional limitation periods (Romanian, “termene de decădere convenționale”)

The Romanian Civil Code provides in Art. 2545 the possibility for the parties to establish by their own will further limitation periods applicable to the legal relationship between them.[2] These limitations have a different legal regime than the concept of “limitation period” and are a different legal concept under Romanian law.

Typically, SPAs include clauses providing for the parties' agreed procedure for handling claims that the buyer may make against the seller for damages under the warranty for defects, but also under the contract for breach of the seller's representations and warranties. These clauses may work to the advantage of the seller if they set agreed limitation periods after which the buyer will no longer be able to exercise his/her/its right to claim under the contract.

For clarity, this is a simple example of such a contractual mechanism for handling the buyer's claims: "The Buyer shall notify Seller of the occurrence of circumstances relating to a Breach in the form of a substantiated notice (a "Notice") which shall list in detail the facts underlying the Notice, including (i) the basis of the claim (ii) the estimated amount of the loss and (iii) any other facts and circumstances relevant to the claim) ("Claim") within [●] business days of the date on which the Buyer became aware (or the date on which the Buyer ought reasonably to have become aware) of the occurrence of the circumstances relating to a breach of the representations and warranties."

The time limit agreed by the parties for sending the Notice therefore operates as a conventional limitation period (Romanian, “termen de decădere convențional”), failure to comply with which effectively renders the buyer unable to enforce his/her/its claims.

[1] Art. 2.515 Civil Code: (1) The statute of limitations is regulated by law. (2) Any clause by which either directly or indirectly an action would be declared not time-barred, even though, according to the law, it is time-barred, or conversely, an action declared by law not time-barred would be considered time-barred, is prohibited. (3) However, within the limits and under the conditions laid down by law, parties who have full capacity to exercise their rights may, by express agreement, alter the duration of limitation periods or change the course of the limitation period by fixing the commencement of the limitation period or by changing the legal grounds for suspending or interrupting it, as the case may be. (4) Limitation periods may be shortened or extended by express agreement of the parties, but the new limitation period shall not be less than one year nor more than 10 years, except that limitation periods of 10 years or more may be extended up to 20 years. (5) The provisions of paragraph (3) and (4) shall not apply to rights of action which are not available to the parties or to actions arising from contracts of adhesion, insurance and those subject to consumer protection law. (6) Any agreement or clause contrary to the provisions of this Article shall be null and void. [2] Art. 2.545 Civil Code: (1) By law or by the will of the parties, time limits for the exercise of a right or the performance of unilateral acts may be established. (2) Failure to exercise a subjective right within the established time limit entails its loss, and in the case of unilateral acts, the prevention, under the law, of their performance.