Learnings from the first FSR Phase II merger decision: The Commission publishes a provisional public version of the commitment decision in e&/PPF (part 2)
Lena Hornkohl, University of Vienna, & Pierfrancesco Mattiolo, University of Antwerp
On 24 September 2024, the European Commission (EC) issued the long-awaited first decision (under phase II of the concentration tool) of the new Foreign Subsidies Regulation (FSR). It took another long wait of seven months, but a provisional public version of the commitment decision in the e&/PPF transaction (Case FS.100011) was published on 4 April 2025. As a first of its kind and relating to the strategic area of telecoms, the decision does not fall short of its expectations and clarified crucial areas of the FSR relevant for future enforcement and counselling in FSR proceedings. In particular, Part 2 covers the two-pronged distortion test – (1) distortions during the acquisition process and (2) post-transaction –, (3) the balancing test, (4) the commitments, and (5) procedural aspects, were further clarified – and discussed in-depth in this blog.
Part 1 of the blogpost is available on CELIS Blog. The contribution is also available on Kluwer Competition Law Blog.
A deeper look into distortions of the acquisition process
In the e&/PPF case, the EC did not find a distortion of the acquisition process. Nevertheless, the decision highlights important aspects, which can be taken into account for future cases.
The EC discussed the concept of subsidies directly facilitating a concentration under Article 5(1)(d) FSR (next to the unlimited guarantees under Article 5(1)(b) FSR). Since the Commission ultimately decided that there is no distortion, it did not reach a definitive view on whether any subsidies fall in the Article 5(1)(d) FSR category (para 271). Consequently, it does not seem crystal clear just now, how ‘directly facilitating a concentration’ can be distinguished from later points in the assessment of distortion in the acquisition process, such as improving the competitive position in the acquisition process (para 272) or the necessity of the subsidy to financing the transaction (para 281). For Article 5(1)(d) FSR category, the decision seems to point to the fact that the subsidy must be ‘is liable to improve the conditions at which e& raised financing for the acquisition of the Target’ and if the foreign subsidy ‘will be used to finance the Transaction’ (para 269), which at least entails relevant considerations for future assessments.
Similarly, the decision did not reach a final position on step 3), whether the foreign subsidies improved the buyer’s competitive position in the acquisition process (para 276). The EC presents arguments of the parties relating to the necessity of foreign subsidies for the transaction to take place, including other financing options, but did not further elaborate on whether these are the relevant points to be examined at this stage (para 273). Still, the EC notes that the foreign subsidy needs to play a role in the acquisition process (para 274) or can improve ‘the conditions at which the acquirer is carrying out the acquisition’ (para 281), but does not go further again – see already above on the financial contributions received by the EIA.
The e&/PPF allows a deeper understanding of whether the foreign subsidy actually or potentially negatively affects competition in acquisition process (step 4)). The EC stresses the counterfactual nature of the test, i.e. the ‘outcome of that acquisition process’ must be ‘altered’ by the foreign subsidy (para 278). At this stage, it considers (1) if the foreign subsidy has allowed an acquirer to outbid competitors (para 279), (2) deter other potential competitors from submitting an offer, for instance by making an offer above market value (para 280), or (3) whether the foreign subsidy was necessary to finance the acquisition – either at all or at the same parameters (para 281). For the e&/PPT transaction, (1) no other parties were interested in the target (para 282), (2) the transaction was at market price (para 283), and (3) the buyer could have performed the transaction without the subsidy (para 284).
A deeper look into distortions in the activities of the combined entity post-concentration
In e&/PPF, the EC establishes a distortion in the activities of the combined entity post-concentration. Thus, the decision gives ample insights into this second prong of the test for future application.
On step 1), it highlights that need to in-depth examine which activities are likely to be affected by the identified foreign subsidy. The EC underscores ‘activities that were previously subject to competitive constraints’ (para 295). In this context, the Commission focuses on activities of the target prior to the concentration (para 295) but also those of ‘all parties to the concentration’ (para 296). Even though the Commission does not tackle it in the e&/PPF case, not only previous activities but also the expansion to new activities and markets through the concentration could lead to a situation where activities previously subject to competitive constraints, i.e. not undertaken at all, could benefit from foreign subsidies (para 295).
In the case at hand, the Commission concentrates its examination on the provision of retail mobile telecommunications services by the target due to its higher likelihood of distortions relating to that activity (para 298) and where the targets plans significant investments (paras 301, 302). In contrast, other telecommunications services where the target is only marginally active are not taken into account in the distortion assessment, since the distortive effects from the foreign subsidies are ‘less likely to materialise – or likely to be less significant –’ and there is no ‘indication that such distortion would be of a different nature’ compared to the retail telecommunications services (para 298). A classic case of priority setting by the EC.
On step 2), when assessing the rebuttal of the merging parties regarding the unlimited guarantee, the EC dismisses the arguments brought forward. In particular, there would need to be an agreement to ‘exclude’ debt or equity financing, not just ‘limiting’ it or the compulsion of financing pro rata and not just the possibility (para 318). The EC further finds ‘no restrictions whatsoever on the possibility’ of the buyer and to provide financing on the target (para 319).
On step 3), the Commission applies the above-mentioned test but only explores the access to subsidised financial capacity to find an improvement of the position of the combined entity’s economic activities post transaction (para 322 et seq.); access to subsidised assets and services are not relevant in this case (para 340 – 342). It finds that the unlimited guarantee ‘and its combination with the other identified foreign subsidies to the EIA will likely provide the combined entity with preferential financing conditions for its operations in the internal market and make it more indifferent to risks’, in particular re credit ratings of the target (para 326) or other financial capacities (para 331 et seq.). Regarding the latter, the Commission compares the amount of the foreign subsidies in terms of significance with the turnover of the target in the internal market and overall and takes into account business plans for the coming years (para 336). The EC also considers the nature, i.e. indefinite grants and temporary measures, i.e. loans or repayable advances (para 337) as well as the unconditionality of the subsidies (para 338).
On step 4), the actual or potential negative effects on competition, the Commission first generally zeros in on the importance of future investments and therefore financing for the provision of retail mobile telecommunications services (para 344 et seq.). It is worth noting that the EC relies on its own White Paper in that context (para 346) as well as a report from the European Telecommunications Network Operators' Association (para 347). Second, the EC takes these general findings and brings it into context to the case at hand. The Commission finds that, given the high investment needs of paramount importance in the provision of retail mobile telecommunications services, the transaction and access to foreign subsidies will ‘fundamentally alter the position of the Target in that respect’ (para 353). The target will have more access to financing (paras 354, 355) and the competitors are in a comparatively weaker financial position (para 356). The EC establishes further that the financial capacity of the merged entity could ‘distort the outcome of future spectrum auctions’, taking into account past activities of the target to already pay over market price, which will be further incentivised by foreign subsidies (para 361). Moreover, the EC assess possible aggressive business strategies, the merged parties could only venture on due to the financial backing of the subsidy (para 367).
In the future, it will be interesting to monitor the development of the notion of distortions in the activities of the combined entity post transaction. In particular, how it differs from the SIEC test in merger control. Specifically, Article 2(1)(b) EUMR allows the EC to take the ‘economic and financial power’ of the merging undertaking into account – the deep pockets theory of harm, which at least used to involve foreign subsidies. Still, the second prong of the FSR concentration tool distortion test focuses solely on how the foreign subsidies alone lead to a distortion in the activities of the merging parties post transaction – it is, thus, limited to the distortive effect of the foreign subsidies. In Article 2(1)(b) EUMR, the economic and financial power, through subsidies or other deep pockets, is just one consideration. It can lead to a significant impediment of effective competition together with other factors, but also alone. Yet, one might ask if foreign subsidies should continue to play a role in the SIEC test – as they did, e.g. in the famous German CRRC/Vossloh decision – now that we have the special FSR, including its ex officio tool useable to screen below-threshold mergers. Here might be another opportunity to streamline both procedures in the future.
Learnings on the balancing test
While the learnings on distortions from the e&/PPF case are substantial, the learnings on the balancing test under Article 6 FSR are more limited but still important. In the decision, the Commission conducts a balancing test but does not find ‘positive effects that should be balanced against the distortion identified, nor taken into account when deciding to accept commitments and the nature and level of commitments’ (para 377).
The Commission pays attention to the seemingly non-mandatory nature of the balancing test (‘may’ in Article 6(1) FSR, para 370). It largely reiterates recital 21 FSR (paras 371, 372): positive effects on the development of the relevant subsidised economic activity or broader policy objectives and negative effects can be weighed against each other. Most likely distortive subsidies are unlikely to be outweigh. This is further stressed in the case at hand, given the most likely distortive unlimited guarantee (para 374).
The decision stresses, in line with the first sentence of recital 21 FSR, that ‘Member States, as well as any natural or legal persons are able to submit information on the positive effects of a foreign subsidy, of which the Commission should take due account when carrying out the balancing test’ (para 371). Together with Article 6(1) FSR (‘on the basis of information received’) and the second sentence of recital 21 FSR (‘The Commission should consider the positive effects of the foreign subsidy on the basis of the evidence about such positive effects submitted during the investigation.‘) that the undertakings under investigations but also other natural and legal persons and Member States should bring forward the positive effects – the Commission will not look for it on its own. This approach is further highlighted by the fact that in the assessment of the balancing test itself, the Commission states that ‘the notifying party did not bring forward any elements demonstrating that the foreign subsidies played a role in the occurrence of the positive effects’ (para 375) and ‘that the Commission has not received any other information pertaining to the existence of positive effects of the foreign subsidies’ (para 376).
Furthermore, the decision centres on the relationship between the positive effects and the foreign subsidies. The wording of Article 6(1) FSR is a bit ambiguous on that relationship. On the one hand the ‘positive effects’ need to be on the development of the relevant subsidised ‘economic activity’ on the internal market’. This part of the sentence in Article 6(1) FSR pinpoints to a relationship between the economic activity (here, both the transaction and the activities of the combined entity post-Transaction) and the positive effects. On the other hand, Article 6(1) FSR also mentions the ‘positive effects of the foreign subsidy.’ The latter is emphasised in this case: the positive effects need to relate to the ‘foreign subsidies’ in the transaction (para 375), so there must be a causal link between the positive effects and the foreign subsidies. In fact, the foreign subsidies must not only ‘contribute’ to the positive effects ‘in any way’, there must be ‘necessary for the positive effects to occur’ (para 375).
In the e&/PPF decision, neither is the case. The parties have brought forward ‘certain positive effects in the internal market, notably as a result of the synergies that e& intends to realise through the concentration, and which may improve the Target’s services, in particular in respect of (i) customer value management and improve customer service, (ii) network optimisation, (iii) fraud detection, and (iv) improved roaming services’ (para 373). The Commission establishes that ‘those positive effects, if substantiated, are to be brought about by the Transaction itself, and the subsequent commercial integration‘ of the merging parties, not the foreign subsidies (para 375).
Therefore, the EC found no positive effects ‘that should be balanced against the distortion identified […] nor taken into account when deciding’ on the commitments (para 377). This confirms that the balancing test is necessarily conducted ‘on the basis of information received’: if the parties do not submit positive effects produced by the foreign subsidies, the Commission has no obligation to look for them on its own. We may wonder whether the EC could go beyond the information received when considering ‘relevant policy objectives […] of the Union’. Additionally, the Commission found that the commitments proposed by e& are appropriate to address the distortions produced by the foreign subsidies and ‘do not prevent, nor have any influence on, the occurrence of the positive effects alleged by the Notifying Party’ (para 378) – the EC means here the positive effects of the concentration, since, as mentioned, no positive effect of the foreign subsidies was demonstrated. In conclusion, the Commission did not conduct a full balancing test since no positive effects were identified and the proposed commitments are already adequate.
Learnings on commitments
The final step for the EC before adopting the decision is to assess whether the commitments ‘fully and effectively remedy the distortion in the internal market’ (Article 7(2) FSR) and are ‘proportionate’ (Article 7(3) FSR). If no commitments had been offered, the Commission would have elaborated on which redressive measures to take. e& first offered commitments in July 2024 (the decision refers to them as the ‘Initial Commitments’) to ensure that ‘the Transaction does not create a conduit that would permit foreign subsidies to be channelled into the internal market’ in a distortive way (para 386). In other words, that distortive financing would not flow from the EIA or e& to PPF after the transaction – as mentioned, no distortion was found in the transaction process.
e& committed to align its articles of association with the EIA with the UAE Bankruptcy Law and provide financing to or engage in commercial transactions with the acquired entities on market terms, for the business conducted in the EU (para 387). Additionally, the implementation of these commitments was to be monitored and supervised by a trustee and, ultimately, by the Commission (para 388). Based on these Initial Commitments, the EC conducted a ‘market test’, i.e. it sent requests for information to third parties active in the telecom sector on the basis of Article 13(3) FSR – a procedure quite well-known from merger control. Competitors generally agreed that these commitments were sufficient to address the distortions.
Relying on the market test and its own considerations, the Commission provided feedback to e&, identifying some unclear and improvable provisions. In response, the parties submitted their ‘Final Commitments’ in August 2024 – around one month after the initial ones. The EC assessed these commitments favourably, as they ‘(i) ensure that e& does not benefit from an unlimited guarantee, (ii) prohibit e& to finance the EU businesses of the Target […] and (iii) require that transactions between the EU businesses of the Target and e& and its affiliates can only take place on market terms’ (para 412). The distortions produced by each distortive subsidy are neutralised and, where some residual risk remains, the Commission retains its supervisory powers. The commitments are valid for a (renewable) period of ten years (para 419).
Learnings on procedure
Lastly, the e&/PPF decision contains a lot of important insights on how the EC handles the FSR merger proceedings.
Many times, the Commission in-depth explores the different legal conditions under its burden of proof and takes recourse to evidentiary measures obtained through the wide enforcement toolbox of the FSR. In multiple stages of the assessment, for example, it cites answers to RFIs (e.g. paras 282, 301, 350, 355, 362) or the market test (e.g. paras 391, 397, 398, 401, 402) to establish the findings. Here we are still very much reminded of merger control (phase II) proceedings. Actually, the wide involvement of competitors, banks, special regulators insights as third parties and also industry association reports is noticeable. The EC seems to make sure to understand the market, the subsidisation process and degree of subsidisation, the competitors and other affected parties concerned. Here, the FSR serves its purpose as a primary procedural tool: receive information on foreign subsidies and its distortions.
However, most striking is the evidence standard, which at times differs considerably from traditional competition and state aid assessment when it comes to the application of the best evidence available rule in Article 16 FSR. As a traditional trade law tool, it allows decisions based on the basis of the best facts available in cases of non-cooperation. The Commission takes recourse to that tool on multiple occasions.
First, on finding a foreign subsidy. As mentioned above, the EC concludes, based on the best evidence available and without sufficient information on the amount and conditions of the contributions, that the EIA obtained a benefit (para 192). Here the Commission uses the specific Article 16(3) FSR according to which, ‘where an undertaking, including a public undertaking which is directly or indirectly controlled by the State, fails to provide the necessary information to determine whether a financial contribution confers a benefit on it, that undertaking may be deemed to have received such benefit.’ The EC tried to engage with the parties on the matter via a back-and-forth of RFIs, even warning that it was going to ‘take a decision on the basis of the facts available’ otherwise (paras 190, 191).
Later, the Commission also uses the general best evidence available rule under Article 16(1) FSR to find a distortion (see paras 333, 338, 356). For example, when establishing that the identified foreign subsidies to the EIA will likely provide the combined entity with preferential financing conditions so that post-merger, the competitive position of the merged entity is improved, the EC uses the best evidence available rule (paras 333 et seq.). Noticeable, it still argues why it thinks – based on the characteristics of the foreign subsidy to its understanding – the competitive position will be improved. There is no simple presumption at this stage. Furthermore, the Commission makes sure to refer that it had send (multiple) RFIs that remained unanswered, so relying on Article 16 FSR does not come out of nowhere. Still, the quite vast application multiple times shows that with Article 16 FSR the FSR does not remain a toothless tiger. Parties and third states are reminded that, according to Article 16(4) FSR ‘when applying facts available, the result of the procedure may be less favourable to the undertaking than if it had cooperated.’ Cooperation is key!
Conclusion
The e&/PPF decision provided a deep and insightful look into how DG COMP enforces the concentrations procedure under the FSR. On the one hand, some theoretical aspects of the Regulation were finally seen ‘in action’ and in detail – such as the notions of foreign subsidy and the two-pronged distortion test. Companies (and their lawyers) can now gain a clearer understanding of how an FSR procedure unfolds step by step: between the notification in April and the final decision in September 2024, it took five months (and several exchanges of documents and RFIs) to clear the transaction.
On the other hand, some aspects of the FSR procedure remain to be further explored – in particular, the balancing test and how the assessment might differ in ex officio or public procurement procedures. The next decisions, and the Guidelines to be published in 2026, will surely provide more food for thought.
