Foreign direct investments in Spain. Restrictive measures

Seeing the rapid and deep loss of value of Spanish economy for to the COVID-19 crisis, particularly, of listed companies, as a protectionist measure against possible actions by foreign players who may see an opportunity Royal Decree Law 8/2020 of March 17, subsequently amended by Transitional Provision no. 2 of Royal Decree-Law 11/2020 of March 31, has just amended Law 19/2003 of June 4 of the legal regime of foreign capital movements and investments, introducing a new article 7bis whereby the general liberalization regime is suspended with a wide scope:

(1) Investments affected:

Foreign investments in Spanish companies giving 10% or more of capital or management control in certain strategic sectors on public safety, health or order, mainly: Critical, physical or virtualized infrastructure (energy, transport, water, health, communications, data processing and storage, aerospace, defense, electoral or financial, and key land and buildings for the foregoing; Critical technologies and dual-use products, AI, robotics, cybersecurity, aerospace, energy storage, quantum and nuclear, nano- and bio-technologies; Essential basic supplies; Sectors with access or control of sensitive information, especially personal data, media.

(2) Parties subject to this suspension regime:

Investors: a) being residents outside the EU or EFTA, or whose ultimate beneficial owners are residents from outside the EU or EFTA, b) controlled directly or indirectly by the Government, public bodies or armed forces of a third country according to definition of participation of art. 42 of Spanish Commercial Code, c) who have made investments or participated in activities in sectors affecting security, public order or public health in another EU / EFTA state or related to the aforementioned strategic sectors, or are under governmental inquiry proceedings or court proceedings for criminal or illegal activities in another EU / EFTA state, in their State of Origin or in any third State.

(3) Competence:

The Government is empowered to extend the suspension of investment liberalization to other sectors when they may affect public safety, health or order. However, to lift or make the suspension more flexible, although Royal Decree -Law 8/2020 allowed the Spanish Government (Council of Ministers) temporary suspension to be lifted to the Council of Ministers, this power has been abolished by Royal Decree Law 11/2020, which implies that a regulation of the same or higher range to proceed with the lifting, flexibilization, suppression of this suspension.

(4) Process in the new framework:

In this suspension regime, as the new provisions set forth all foreign direct investment projects must be subject to prior authorization. To remedy the blockade this measure will cause in a significant part of economic activity, shortly after Government enacted Royal Decree-Law 11/2020 to moderate this measure though temporarily, so that in the operations subject to suspension we must now distinguish:

  • Investments below 1 million euros: remain free, exempt from authorization.
  • Investments from 1 million euros and below 5 million euros that fulfil certain requisites: subject to a simplified approval procedure.
    • Requisites: Prove the existence of a binding offer with consideration already fixed, determined or is determinable, before March 18, 2020 (date of entry into force of RD-Law 8 / 2020),
    • The simplified procedure will follow the general regulations of the simplified common administrative procedure (art. 96.6 of Law 39/2015) resolving in 30 days, ex officio (it seems, without the need for communication to the interested party to process this way, although, in the event that no resolution is issued, the request is understood to be rejected.
  • Investments projects from 5 million euros and above: are subject to prior authorization according to the general procedure.

(5) Comments:

Foreign investments subject to authorization -whether under general or simplified procedure– affect a number of sectors, and different questions arise:

The always thorny issue is how it affects companies or business undertakings whose activities are indirectly part of the production or supply chain process, including auxiliaries, components, etc. and determine how to apply this restriction if activities may fall under any of the protected sectors, especially when that activity is only part of a company’s activities.

The wording of these provisions lacks clarity in certain respects, thus when using the “ultimate beneficial owner” concept -that is specifically regulated in the anti-money laundering and combat of terrorism legislation- in such a generic way, that it leads to understand that said concept includes both companies controlled by foreign / non-resident natural person (s) ) or also  includes here a legal entity (s) residing or domiciled abroad not having natural person(s) of control because they are listed. And this is very relevant.

Some investment projects that are in progress may have difficulties in “proving” that there was a binding offer (it is not frequent, it would be the case of an agreement already signed pending “closing”) and note that in the previous general framework of almost full liberalization  liberalization, contractual provisions not always included clauses to cover the possible need for authorization, a possibility that has become a reality now

In addition to the inflows of new investors, we would have a possible “freeze” with respect to investors and sectors that fall within this suspension and have plans to expand their investment (e.g. capital increases, participative or convertible loans, etc.) and, of course, at the level of listed companies.

Authorization procedure, where applicable, involves uncertainty, time delays and higher costs.

In any case, it must be noted that effecting a foreign investment without the required prior authorization may constitute a very serious infringement and imply a fine of at least € 30,000.00 and up to the total amount of the projected investment.

We expect that Spanish Government is not intending to maintain this suspension indefinitely a for such a potentially wide scope of economic activity. We will follow-up closely subsequent developments as investment projects are resumed as economy activity recovers progressively as regards the sectors included in the suspension, and those more or less closely related to them, and other players, suppliers, and in general commercial and all kind of transactions that may be directly and indirectly affected, etc.

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