This means that investors in Spain must still plan carefully to what extent takeover activities require authorisation and to what extent such prior authorisation will need to be obtained. Stricter regulations for foreign investments in Spain passed against the backdrop of the health crisis have been adapted again; this article focuses on the details of the new decree-law in comparison to the legal situation since March of this year (which we explained in this article), as well as possible effects in practice.
Overview of the Reform since November 2020
In summary, the Spanish legislature has expanded the subjective definition of the figure of the investor, including investors with residency in Europe, as long as the investment is targeted in listed companies or the transaction’s value exceeds EUR 500 million. However, this regulation is supposed only to be in effect temporarily until 30 June 2021.
Quite notably, there is no exception or temporary regulation for investments which have already been initiated or signed but not closed yet. Consequently it could be assumed that transactions of this type would be considered as transactions requiring prior authorisation and that for the successful closure of that deal such authorisation actually might become necessary now, regardless of whether the agreement on which the investment transaction is based has already been signed. Importantly, the legislature not only penalizes the lack of required authorization but has declared the underlining transaction as invalid.
Finally, in the most recent Royal Decree-Law 34/2020, the legislature introduced changes to the classification of a transaction as foreign investments, to the concept of investor and to the definition of investments which objectively always require authorisation as well as to the description of sensitive industries and sectors, to be explained below.
Transitional Regulation Implies the Necessity of Authorisation for Certain European Investments
The text of the royal decree-law introduces a transitional regulation in effect until 30 June 2021, according to which EU nationals are required to obtain prior authorisation for investments in Spanish companies if certain requirements are met simultaneously. In contrast with the definition existing until this moment, the new subjective criterion to define the person of investor now includes individual and legal persons residing in the European Union or the European Economic Area as well as Spanish companies whose ultimate beneficial owner is resident in these areas, if the respective investment meets the following requirements. The ultimate beneficial owner is still defined as the individual holding at least 25% ownership of capital, voting rights or other means of direct or indirect control.
Investments made by an investor resident in the EU require prior authorisation during the transitional period if the following three requirements are met:
- The investments are made no later than 30 June 2021 and, since no transitional regulation is established, regardless of whether a binding agreement between the parties already existed before 19 November 2020.
- The target company is active in one of the sectors subject to the control mechanism without applying the subjective criteria in accordance with Article 7 bis 3 of Law 19/2003 and the investment:
- is made in a listed company in Spain, where a listed company is defined as a company whose shares, in whole or in part, are admitted for trading on an official Spanish secondary market and where the company is resident in Spain; or
- is made in a non-listed company where the value of the investments exceeds EUR 500 million.
- The investment activity falls within the definition of “direct foreign investments,” i.e. investments “as a consequence of which the investor acquires a share of at least 10% of the capital in a Spanish company or acquires control over the company in accordance with Article 7.2 of Law 15/2007 of 3 July against Unfair Competition as a result of the corporate or legal transaction.”
New Definition of the Term “Foreign Direct Investment”
The changes in effect since November also result in a (not only transitional) modification of the definition of the objective criterion of the term “foreign direct investment.” Not only is the subjective element of the foreign nationality of the investor extended to temporarily include EU nationals, but also the objective element of the definition of the “foreign direct investment” set forth in Article 7 bis 1 of Law 19/2003 for investors residing outside the European Union or the European Economic Area is adapted.
While the quantitative limit for the share in the capital of the Spanish company remains unchanged at 10%, the alternative criterion according to which a transaction is considered an investment if the investor could participate in the management or control of the target company is replaced by the criterion that the investor, “as a consequence of the corporate or legal transaction, acquires a share of at least 10% of the capital in the Spanish company or acquires control over the company in accordance with the criteria laid out in Article 7.2 of Law 15/2007 of 3 July against Unfair Competition.”
Thus, the qualitative criterion is defined more strictly since the effective participation in the management on its own is no longer enough for the transaction to be considered an investment requiring authorisation. In fact, in accordance with the currently valid text of the law, such authorisation is only necessary if control is acquired; this contradicts maintaining the quantitative limit of 10% acquisition of capital, which usually does not result in the control of the respective company.
At the same time, the reference to Article 7.2 of the Law against Unfair Competition appears to imply broader assumptions or mechanisms which could lead to the acquisition of control. Differently from what was established since March of this year, Article 7.2 of the Law against Unfair Competition contains a more extensive definition of the term “control” by indirectly referring to the criteria of Article 42 of the Code of Commerce as well as the definition of control which results from “contracts, rights or other means, which, taking into consideration the current and legal circumstances, lead to the possibility of decisive influence over the company.”
Mandatory Authorisation for Certain Redefined Sectors
The existence in and of its own of a foreign direct investment in Spain does not make an authorisation necessary, rather this investment must be made in a company with activities in one of the explicitly listed sectors. Three sectors of those explicitly listed since the legislative change in March 2020, in which foreign investments require prior authorisation, were newly defined by the decree-law of November 2020 as follows:
- Critical technologies and dual-use products, artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies: the scope of this norm is extended in such a way that now “key technologies for industrial leadership and capacitation as well as technologies developed in programs and projects of particular interest to Spain, which include telecommunications, artificial intelligence, robotics, semiconductors, cyber security, aerospace and defence technologies, storage technologies for quantum and nuclear energy, as well as nanotechnologies and biotechnologies, advanced materials and production systems” are included while the reference to Council Regulation (EC) No. 428/2009 is eliminated.
- Supply of essential resources, in particular energy and food: this sector is expanded to include “such companies which are dedicated to strategic connectivity and connection services.”
- Media: here a new paragraph is included according to which audio-visual services, as defined by Law 7/2010 of 31 March, the General Law on Audio-visual Communication, fall under the provisions of this Law.
Finally, the Spanish government is authorised, by means of regulations, to “determine the sectors and amounts below which foreign direct investment transactions are exempt from the obligation of prior authorisation due to their minimal effect on protected legal assets” and to limit the definition of the sectors to which the control mechanism applies.
The Ministry for Industry, Trade and Tourism is also authorised to define the necessary standards for due implementation and passing of the orders to be drafted by the government in this context.
Mandatory Authorisation for Certain Investors
As we explained in our Article in July 2020, the third paragraph of the newly included Article 7 bis provides that foreign direct investments in Spain made by certain investors always require prior authorisation, regardless of whether or not the investment is in one of the aforementioned sectors. By virtue of the legislative situation in force before 19 November 2020, this applied to investors:
- who are under the direct or indirect control of the government of a third country, including their governmental entities or armed forces;
- who, in another member state, have made investments or participated in activities in sectors that affect public security and order as well as public health in another member state, in particular in the aforementioned sectors; or
- against whom there are administrative or judicial proceedings due to criminal or illegal activities in another member state, their country of origin or a third country.
Two of these three criteria have been redefined so that now, in the first and third case, prior authorisation is mandatory from 19 November 2020 if the following conditions are met:
- In the first group of investors, the criterion of control defined before in accordance with Article 42 of the Code of Commerce is substituted by the requirements of Article 7.2 of the Law against Unfair Competition. This results in an expansion of the scope of this norm, since, as explained above, the control of the investor stems from “contracts, rights or other means, which, taking into consideration the current and legal circumstances, lead to the possibility of decisive influence over the company.”
- The reference to investors is equally expanded, since the new definition not only covers those against whom there are administrative or judicial proceedings due to criminal or illegal activities in another member state, their country of origin or a third country, but also such investors for whom there is a serious risk of such criminal or illegal activities.
Authorisation Procedures in Practice
Summarizing, prior authorisation is necessary for the complete and valid execution of the transaction in the aforementioned respective cases. The competent administrative body is legally obliged to issue or decline authorisation within a maximum period of six months. In practice, it can be assumed that the authorisation will be issued faster, however the interplay of the EU control mechanisms is neither regulated nor foreseeable.
Until the corresponding regulations have been passed, a simplified authorisation procedure is temporarily in place, according to which the applications presented for transactions concluded before 19 March 2020 for the purposes of their completion as well as transactions with a value of up to EUR 5 million must be decided by the authority within 30 days.
In both procedures, lack of response from the public administration is to be considered as a negative decision.
Conclusions and Outlook
The legal changes which entered into force in November do not provide improvements for certain critical norms despite existing doubts regarding the interpretation of the regulations passed in March. Similarly, there were no modification clause to the sensitive sectors-definition, whose scope had caused doubts regarding a correct interpretation, such as “sectors with access to sensitive information, especially personal data”: at this point, these regulations may only be limited by means of ministerial decrees.
The changes do not include a transitory regulation regarding Brexit and the exit of Great Britain from the European Union, which means that British investors will likely be considered investors residing outside the European Union from 31 December 2020 onwards.
The authorisation procedure according to which the Spanish authorities are obliged to issue or deny authorisation within six months has not been corrected. The legislature neither took into consideration nor regulated that since 11 October 2020 the European regulation “establishing a framework for the screening of foreign direct investments into the Union” applies (EU Regulation 2019/452 of 19 March 2019), which creates a mechanism for shared control by member states and in accordance with which the European Commission and the other member states during the procedure must be given the opportunity to make comments regarding the respective investment.
Against the backdrop of these ongoing uncertainties and contradictions as well as the current health crisis, consequently anticipated economic crisis and restructuration in certain sectors, additional legal changes in the upcoming months should be expected. Therefore, we continue to recommend to investors in Spain to duly plan any investment and to apply for a prior authorisation ad cautelam in case of doubt.