This is a guest post from trade lawyer Victor Crochet and law professor Bin Ye
- Comes the Foreign Subsidies Regulation
The European Union’s Foreign Subsidies Regulation entered into force a year ago. It grants the European Commission far reaching power to screen mergers and acquisitions as well as companies engaging in economic activities in the internal market to assess whether they have received foreign subsidies which distort that market. If it finds such subsidies, it can impose remedies ranging from blocking the transaction to divestment of assets and disclosure of R&D. The Commission has thus far used its new powers carefully. Although it raided the EU facilities of Nuctech, a Chinese X-ray scanner manufacturer, it has so far refrained from imposing any remedy. It has also scanned many mergers and acquisitions but has only taken action once. It recently agreed with the investors on conditions on the acquisition of PPF Telecom Group B.V. by Emirates Telecommunications Group Company PJSC, a telecom operator controlled by the United Arab Emirates’ sovereign wealth fund. These conditions took the form of commitments to not rely on certain beneficial bankruptcy laws available to Emirates Telecommunications and to not finance EU operations through the UAE entities.
The new powers granted to the Commission are so far relatively unchecked. EU law is unlikely to constrain them much (Nuctech Warsaw Company Limited and Nuctech Netherlands v Commission, Case T-284/24) and so are the rules of the World Trade Organization given the institution’s paralysis. In this post, we suggest that international investment law might fill in this gap. Indeed, remedies imposed by the Commission under the Foreign Subsidies Regulation will affect ongoing investments as well as established investments in the EU, which might result in violations of investment agreements. More broadly, as the EU continues to legislate, enacting new tools giving it executive powers in EU Member States such as the Foreign Subsidies Regulation, questions of responsibility and attribution under international law for the EU’s actions might become increasingly relevant.
- substantive issues
For those investment agreements which cover the pre-establishment phase, the Foreign Subsidies Regulation’s merger and acquisition instrument is likely to lead to violations of the national treatment obligation. This is so because the merger and acquisition instrument under that regulation requires investors to notify the Commission of foreign financial contributions received before the transaction takes place and allows the Commission to block, or impose conditions, thereon. In such cases, action taken might constitute de facto discrimination. While this screening of merger and acquisition applies to all companies regardless of their nationality, foreign investors are much more likely to have received subsidies by non-EU governments than domestic ones. Subsidies by EU governments are covered under the EU State aid framework but there are salient differences between the EU State aid framework and the Foreign Subsidies Regulation which might lead to de facto discrimination: (i) the EU State aid framework applies to EU Member States directly (Article 108(3) of the Treaty on the Functioning of the European Union) and not to companies and (ii) there is a growing number of exceptions to the EU State aid framework (for example under Commission Regulation (EU) No 651/2014, known as the General Block Exemption Regulation) which are not available under the Foreign Subsidies Regulation.
Concerning investment agreements which only cover the post-establishment phase, actions taken by the Commission against established investment under the ex officio instrument are likely to also lead to violations of the national treatment obligation for the same reasons as explained above. They may also constitute unlawful expropriation. According to the Article 7 of the Foreign Subsidies Regulation, the Commission can impose on entities established in the EU commitments and redressive measures such as reducing capacity or market presence and divestment of certain assets. These measures can significantly deprive investors of their property rights and diminish the value of the investment. They might thus constitute expropriation which must be compensated under investment agreements.
- no applicable agreements with the EU itself
The main issue however is that investors likely to be impacted do not come from countries which have investment agreements with the EU directly such as Canada. They come mostly from State-led economies such as Middle East countries and China. This is logical given that these countries’ economic model implies much greater government interventions and, hence, the likely provision of foreign subsidies. But these countries do not have investment agreements with the EU itself, they have such agreements solely with EU Members States.
In our view, this should not prevent affected from thinking redress under international investment law. They could do so by going after the EU Member State where the affected investment is located.
The first argument that could be developed in that sense is that the actions taken by the EU against the investment is attributable to the host EU Member State. In its award, the tribunal in Micula, S.C. European Food S.A v Romania stated that obligations undertaken under EU law cannot be used to depart from investment agreements. In the same vein, the delegation of power to the EU to regulate investment by EU Member States cannot absolve them from responsibility. This is particularly so if the investment agreement dates back to before the delegation of power regarding investment by EU Member States to the EU which took place mostly under the Treaty of Lisbon in 2009. Arguing otherwise would mean that a State can walk back protection it agreed to grant to investors by delegating enforcement powers to an international organization such as the EU (Dissenting opinion of Thomas Johnson, Sapec SA v Spain). Even in case the investment agreement dates back to after the delegation of power, it would mean an imbalance in the scope of coverage of the agreement between the parties. If the other party to the agreement was to take measures similar to those under the Foreign Subsidies Regulation by the Commission, these measures would fall within the scope of the agreement.
In that regard, Article 58 of the Articles on the Responsibility of International Organizations is useful given that the EU is technically an international organization. It provides that a State which aids or assists an international organization in the commission of an internationally wrongful act is internationally responsible for doing so if two conditions are met, namely that the State does so with knowledge of the circumstances of the internationally wrongful act and that the act would be internationally wrongful if committed by that State. In that sense, it could be argued that the actions of the Commission could be attributed to the host EU Member State if that Member State assists the Commission during the investigation, for example by conducting dawn raids and collecting evidence.
Similarly, Article 61 could be relied on if the host EU Member State pushes the Commission to act against an investor. It provides that State member of an international organization incurs international responsibility if, by taking advantage of the fact that the organization has competence for the relevant matter, it circumvents that obligation by causing the organization to commit an act that would have constituted a breach of the obligation for that State.
- EU Member States’ obligations
But the standards to establish responsibility under these provisions are high. They might not provide an appropriate avenue in each and every instance.
Another solution is to use the standard of full protection and security enshrined in most investment agreements. While initially interpreted as covering the physical security of the investor, it has now been expanded to ensure regulatory security (CME v Czech Republic ). In that sense, EU Member States must guarantee the security of investors vis-à-vis EU actions to the best of their abilities (AAPL v Sri Lanka). This might not be an obligation of result, but it might mean that the host EU Member State must take all necessary actions to protect the investment. Indeed, as explained in Micula, S.C. European Food S.A v Romania, respecting obligations under EU law is no justification for not respecting commitments made under an investment agreement. This might imply refusing to cooperate with the Commission in conducting dawn raids and collecting information. It might also imply opposing any remedy imposed on the investor during the committee vote by EU Member States under Article 48 of the Foreign Subsidies Regulation and taking all possible actions to ensure that no remedy is imposed.
Similarly, arguments regarding the frustration of legitimate expectations under the fair and equitable treatment obligation (Tecmed v Mexico) could also be developed against a host State. This could be used where the host EU Member State makes specific representation that the investment will not be targeted under the Foreign Subsidies Regulation. However, the value of promises in this regard by the government of a host State which does not have the power to enforce the Foreign Subsidies Regulation remains unclear and so is the availability of this legal avenue as a result.
The Foreign Subsidies Regulation has proven to be a useful, and potentially needed, instrument in the EU’s toolbox given its own internal constraints on State aid. As it currently stands without much judicial oversight, it is however a pandora’s box, prone to abuse and likely to add fuel to the fire of ongoing geoeconomic tensions. International investment law might not be the ideal legal tool to curtail it. But it might be one of the only ones at hand.
