ANTITRUST AND COMPETITION

EU Foreign Subsidies Regulation Expected to Enter into Force by Mid-2023

On 28 November 2022, the Council of the European Union adopted the Foreign Subsidies Regulation (FSR), which granted the European Commission (Commission) the power to investigate foreign subsidies that distort the EU internal market and to remedy any possible distortion that they would create. Under the FSR, the Commission will be the sole regulator but cooperation with EU member states is strongly encouraged on the basis of an alert system enabling EU member states to voluntarily send information to the Commission on suspected distortive foreign subsidies.

The FSR will apply to all sectors and will impact companies engaging in acquisitions and forming joint ventures in the European Union or participating in EU public procurement procedures that have received “financial contributions” from non-EU governments or non-EU state-owned entities. The “financial contributions” that fall within the scope of the FSR can take a broad range of forms, including public grants and loans, tax incentives, and government contracts, regardless of size, or whether these qualify as “subsidies” or have any nexus to the European Union.

Transactions that exceed the following thresholds will need to be notified to the Commission:

• One of the merging companies, the target or the joint venture is established in the European Union and generates an EU turnover of at least €500 million; and

• All companies involved have received a total of more than the equivalent of €50 million in financial contributions from non-EU countries in the three years prior to the notification.

The Commission may also request prior notification of any transaction that does not meet the above-referenced thresholds if it suspects there has been a distortive foreign subsidy.

The procedural rules governing the FSR review are similar to those of the EU merger control review, namely Phase I of 25 working days and Phase II of 90 working days for in-depth review. The Commission will be able to impose fines of up to 10% of the infringing parties’ worldwide turnover for: (i) failing to notify a reportable transaction or bid; (ii) breaching the standstill obligation; or (iii) failing to comply with the Commission’s decision. There is also the risk of additional fines for procedural breaches.

The FSR creates a new standstill obligation next to the existing merger control and foreign direct investment reviews, which companies will need to factor in their transaction timeline. During a transitional period, the FSR will have a retroactive effect and apply to financial contributions received in the past five years prior to its entry into force for ex officio investigations and three years for notifiable mergers, acquisitions, and public tenders. This means that companies should already start carrying out risk assessments of their exposure and be ready to comply with the FSR’s regulatory requirements.

DIGITAL AFFAIRS

Council of the European Union Has Adopted its Common Position on the Artificial Intelligence Act

On 6 December 2022, the Council of the European Union has adopted its common position on the Artificial Intelligence Act (AI Act).

In comparison with the Commission’s original proposal, the Council of the European Union’s text notably narrowed down the definition of an artificial intelligence (AI) system, to distinguish AI from simpler software systems, and extended the prohibition on using AI for social scoring to private actors. The Council of the European Union’s text also clarified that ‘real-time’ remote biometric identification systems in publicly accessible spaces might be employed by law enforcement authorities where strictly necessary for law enforcement purposes.

With respect to responsibilities, the Council of the European Union clarified their allocation among the various actors in the value chains and the relationship between responsibilities under the AI Act and responsibilities stemming from other legislation.

Finally, the Council of the European Union’s position excludes AI systems used for the sole purpose of research and development, as well as national security, defence, and military purposes, from the scope of the AI Act and allows unsupervised real-world testing of AI systems (i.e., outside AI regulatory sandboxes), under specific conditions and safeguards.

The Council of the European Union will be able to enter into inter-institutional negotiations on the final text with the European Parliament once the latter adopts its own negotiating position (currently expected around March 2023).

The Digital Services Act Enters into Force 

On 16 November 2022, the Digital Services Act (DSA) entered into force. The DSA provides a set of rules for various digital services that connect consumers to goods, services, or content. The DSA’s purpose is to create mechanisms for the removal of illegal content and protection of users’ rights online. At the same time, the DSA increases public oversight of online platforms. For the entities falling under the regulation’s scope, all DSA obligations will be applicable as of 17 February 2024.

Under the new rules, public oversight and the protection of users’ rights manifest in several ways. For example: 

• Mechanisms that permit users to flag potentially non-compliant content must be in place, and platforms must cooperate with so-called “trusted flaggers”. 

• There are also new obligations on the traceability of business users in online market places so that sellers of illegal goods are identifiable. 

• The new rules provide obligations whereby very large platforms and very large online search engines must prevent the misuse of their systems by taking risk-based approaches by, for example, adapting the design of services (i.e., interfaces) provided as well as adjusting content moderation processes, and through independent audits of their risk management systems. 

• The DSA also includes obligations in relation to transparency reporting, terms of service requirements, cooperation with national authorities, bans on targeted adverts to children, transparency of recommender systems, user-facing transparency of online advertising, and an option for users not to have recommendations based on profiling. 

The DSA provides the Commission with new supervisory powers that include the authority to directly supervise very large online platforms and very large online search engines and to address systemic infringements committed by those entities. Pursuant to the new rules, companies are designated very large online platforms and very large online search engines when they reach more than 10% of the EU population. Insofar as oversight on the national level goes, all 27 member states must appoint a Digital Services Coordinator (DSC) by 17 February 2024. In addition to very large online platforms and very large online search engines, the DSC will survey other entities that fall within the DSA’s scope for individual infringements that do not involve systemic issues.

Online platforms must report the number of end users active on their websites by 17 February 2023. The Commission will assess whether it is appropriate to designate a platform as a very large online platform or very large online search engine following the receipt of the platforms’ user numbers. Entities that are designated as very large online platforms or very large online search engines must comply with DSA obligations within four months of their designation.

ECONOMIC AND FINANCIAL AFFAIRS

European Commission Adopts New Capital Markets Union Package 

On 7 December 2022, the Commission presented new proposals to further develop the Capital Markets Union (CMU). The package focuses on three key areas within the CMU: (i) EU clearing services; (ii) insolvency rules; and (iii) alleviation of administrative burden to better access public funding by listing on stock exchanges.

Clearing services. The Commission put forward amendments to the current European Market Infrastructure Regulation as well as targeted amendments to the Capital Requirements Regulation, the Capital Requirements Directive, the Investment Firms Directive, the Undertakings for Collective Investment in Transferable Securities Directive and the Money Market Funds Regulation.

The Commission’s objective is to simplify the procedures for Central Counterparties (CCPs) and encourage clearing in the European Union by making EU CCPs more attractive. Importantly, this new package requires clearing members and clients to have, directly or indirectly, an active account at EU CCPs in order to strengthen the European Union’s strategic autonomy and ensure financial stability. 

Insolvency. The Commission presented a proposal for a new Insolvency Directive harmonising aspects of substantive law on insolvency proceedings. The proposed directive aims to connect three features of corporate non-banking insolvency law: (i) ensuring the recovery value of the liquidated company; (ii) enhancing efficiency of insolvency procedures; and (iii) setting a fair distribution of recovered value amongst creditors.

Stock Exchange Listing. The Commission also proposed several new legislative texts related to listing, which all together are referred to as the Listing Act. These include amendments to the Prospectus Regulation, the Market Abuse Regulation, as well as targeted changes to the Markets in Financial Instruments Directive and Regulation. The objective of the Listing Act is to simplify and provide more proportionate requirements for companies that access public markets, that will apply both at the moment of listing and when listed. Furthermore, it aims to reinforce investor protection and market integrity by ensuring transparency and address the issue of fragmentation in national laws that restrict the flexibility of companies to issue multiple-vote shares.

SUSTAINABILITY

The Commission’s Proposal for a New Packaging and Packaging Waste Regulation 

On 30 November 2022, the Commission published a proposal for a new regulation on packaging and packaging waste (Proposal). The Proposal is an integral part of the European Green Deal and the new EU circular economy action plan, as well as the European Union’s growth strategy for a modern, resource-efficient, clean, and competitive economy with no net emissions of greenhouse gases by 2050, and with economic growth decoupled from resource use.

The Proposal, which covers all packaging regardless of the material used and all packaging waste, establishes requirements for the entire life cycle of packaging as regards environmental sustainability and labelling, to allow its placing on the market, as well as for the extended producer responsibility, collection, treatment, and recycling of packaging waste. The Proposal aims at harmonising EU member states measures on packaging and packaging waste in order to avoid obstacles to trade, distortion, and restriction of competition within the European Union, while preventing or reducing the adverse impacts of packaging and packaging waste on the environment and human health. 

The three main objectives of this Proposal are: 

• To prevent the generation of packaging waste, reducing it in quantity, restricting unnecessary packaging, and promoting reusable and refillable packaging solutions.

• To boost high quality (‘closed loop’) recycling, making all packaging on the EU market recyclable in an economically viable way by 2030.

• To reduce the need for primary natural resources and create a well-functioning market for secondary raw materials, increasing the use of recycled plastics in packaging through mandatory targets.

The target is to reduce packaging waste 15% by 2040 per member state per capita, compared to 2018, which would lead to an overall waste reduction in the European Union of some 37% compared to a scenario without changing the legislation. To achieve this target, which will be reached progressively (5% reduction compared to 2018 figures by 2030 and 10% by 2035), the Proposal proposes measures on the EU level such as more reuse and refill, packaging minimisation, and banning avoidable packaging for certain uses, such a shampoo bottles and other miniature packaging in hotels, or single-use packaging when consumers eat within the premises of a restaurant or cafe. It also provides some standardisation of packaging formats and clear labelling of reusable packaging. In order to make packaging fully recyclable by 2030, the Proposal also includes setting design criteria for packaging, creating mandatory deposit return systems for plastic bottles and aluminium cans, and making it clear which very limited types of packaging must be compostable so that consumers can throw these into biowaste.

The Proposal, which is open for public feedback until 1 February 2023, will now be considered by the European Parliament and the Council of the European Union, in the ordinary legislative procedure.

Council of the European Union Gives Final Green light to the Corporate Sustainability Reporting Directive

On 28 November 2022, the Council of the European Union formally adopted the Corporate Sustainability Reporting Directive (CSRD), following adoption by the European Parliament on 10 November 2022. The new sustainability reporting rules address shortcomings in existing legislation on the disclosure of non-financial information introduced by the Non-Financial Reporting Directive (NFRD) perceived as largely insufficient and incompatible with the European Union’s transition to a sustainable economy. 

The CSRD introduces detailed reporting requirements and ensures that all large companies and all companies listed on regulated markets (except for listed micro undertakings) are required to report on sustainability matters such as environmental rights, human rights, social standards and governance factors. These companies will also be responsible for assessing the information applicable to their subsidiaries. In practical terms, companies will have to report on how their business model affects their sustainability, and on how external sustainability factors, such as climate change or human right issues, influence their activities.

The rules will also apply to listed small and medium enterprises (SMEs), considering that these companies will benefit from an opt-out during a transitional period, exempting them from the application of the directive until 2028. For non-EU companies, the requirement to provide a sustainability report will apply to all companies with substantial activity in the European Union (i.e., with a net turnover of €150 million in the European Union), and which have at least one subsidiary or branch in the European Union exceeding certain thresholds. These companies must provide a report on their environmental, social, and governance impacts, as defined in the CSRD. 

The application of the new sustainability reporting rules will take place in four stages:

• Reporting in 2025 on the financial year 2024 for companies already subject to the NFRD (i.e., companies with over 500 employees);

• Reporting in 2026 on the financial year 2025 for large companies that are not currently Subject to the NFRD (companies with more than 250 employees or €40 million in turnover or €20 million in total assets);

• Reporting in 2027 on the financial year 2026 for listed SMEs (except for micro undertakings), small and non-complex credit institutions and captive insurance undertakings; and

• Reporting in 2029 on the financial year 2028 for non-EU undertakings with net turnover above €150 million in the European Union if they have at least one subsidiary or branch in the European Union exceeding certain thresholds, as defined in the CSRD. 

Stefano Prinzivalli Castelli,  Petr Bartoš, Vittoriana Todisco, Joanna Kulewska, Matilde Manzi, and Mélanie Bruneau also contributed to this article.