New reform of the Foreign Direct Investment regime in Spain

The Fourth Final Provision of Royal Decree-Law 8/2020 of 17 March regarding extraordinary urgent measures to deal with the economic and social impact caused by the COVID-19 crisis amended the Spanish Act 19/2003 of 4 July on the legal regime of capital movements and economic transactions abroad (the "Act 19/2003"). This was achieved by introducing a new Article 7 bis in order to suspend the liberalisation regime for certain FDIs carried out by foreign investors in strategic sectors (the "Screening Mechanism").

Subsequently said Article 7 bis of Act 19/2003 was amended and supplemented by the Third Final Provision of Royal Decree Law 11/2020 of 31 March regarding additional urgent measures in the social and economic field to address the COVID-19 crisis  which, among other aspects, clarified that the Screening Mechanism has a permanent character.

FDIs subject to the Screening Mechanism will require prior administrative clearance by the Spanish Council of Ministers before their implementation. The maximum legal deadline for adopting a decision is six months  (the absence of a favourable decision on the request for authorisation within six months will result in its refusal – i.e. negative administrative silence).

The main changes that the Reform introduces into the Screening Mechanism are set out below, as well as their possible immediate and future implications.

Extension of the Screening Mechanism to cover certain FDIs by EU and EFTA residents

The Reform extends the subjective scope of application of the Screening Mechanism to cover FDIs in strategic sectors made by residents based in member countries of the European Union (“EU”) (other than Spain) and the European Free Trade Association ("EFTA") in relation to the following two alternative scenarios:

1. Where the target of the investment is a publicly listed company in Spain; or
2. In the case of unlisted companies, where the value of the investment exceeds 500 million euros.

The Reform specifies that the Screening Mechanism should also cover FDIs carried out by residents in Spain whose “beneficial ownership” corresponds to residents from other EU countries and the EFTA. Such beneficial ownership shall be deemed to exist where these foreign residents (a) possess or ultimately control - directly or indirectly - more than 25% of the share capital or of the investor's voting rights; or (b) where they otherwise exercise control - directly or indirectly - over the investor.

This implies a significant change in the concept of "foreign investor" within the meaning of the Screening Mechanism. Until the entry into force of the Reform, only investors from countries (a) outside the EU and the EFTA, or (b) in the EU or the EFTA whose “beneficial ownership” is ultimately in hands of residents from countries outside the EU and the EFTA qualified as “foreign investors” (the notion of “beneficial ownership” being the same as indicated in the previous paragraph). Investors from the EU and the EFTA should now be added in the cases set out above.

It is envisaged that such an extension of the Screening Mechanism affecting investors from the EU and the EFTA is of a temporary nature and should, in principle, remain in force until 30 June 2021 only (unless the Government decides otherwise by means of another superseding measure).

Reference to the concept of control in Competition Law

Another feature of great interest in the Reform is the explicit reference to competition law - and, in particular, to Article 7.2 of the Spanish Competition Act (Ley 15/2007, de 3 de julio, de Defensa de la Competencia - the "LDC") – providing an interpretation of the concept of "control" included in the Screening Mechanism.

It should be noted that the concept of control under competition law is different and independent from the same term used in other legal areas (e.g. in accounting legislation as defined in Article 42 of the Spanish Commercial Code, or air transport regulations). Article 7.2 of the LDC defines the concept of control for the purposes of establishing the jurisdiction of the Spanish Competition Authority (Comisión Nacional de los Mercados y la Competencia - the "CNMC") to review certain "economic concentrations".

Competition law interprets the concept of “control” in an extremely broad manner. Thus, according to Article 7.2 of the LDC, "control shall result from the contracts, rights or any other means which, taking into account the factual and legal circumstances, confer the possibility of exercising decisive influence over an undertaking”. This means that control can be acquired either by a single company (sole control) or by several companies in relation to joint-ventures (joint control). Such control can in turn be positive (e.g. the possibility of adopting unilateral decisions on the strategic behaviour of the target company) or negative (usually through the ability to block or exercise veto rights on strategic decisions).

It is very important that the Reform clarifies that FDIs must comply with the following two alternative requirements to be subject to the Screening Mechanism:

1. As a result of the FDI, the investor holds an interest equal to or higher than 10% of the share capital of the Spanish company; or
2. When, as a result of the transaction, control over the Spanish company is acquired in accordance with the criteria set out in Article 7.2 of the LDC.

The Reform eliminates any previous reference to the concept of control foreseen by Article 42 of the Spanish Commercial Code or any other piece of legislation (besides the LDC). In our opinion, the fact that the Reform clarifies that the concept of control in the Screening Mechanism corresponds to the one existing under competition law provisions, represents a positive development insofar as it provides greater legal certainty for operators intending to carry out FDIs in Spain.

That said, the application of the concept of control under the LDC to the Screening Mechanism also raises the following theoretical queries:

1. Firstly, we understand that FDIs subject to the Screening Mechanism could take place as a result of transactions involving the acquisition of a small number of shares (less than 10% of the share capital) or even not involving the acquisition of shares in a Spanish company.
   By way of illustration, an acquisition of control could take place, in respect of a company whose shares have been pledged, on the basis of loan agreements that confer strategic veto rights to the lenders (even if they are not present in the shareholding). It should be noted that such atypical transactions could occur more often in times of economic crisis and for companies in an insolvency situation.
   Furthermore, the concept of control under Article 7.2 of the LDC may arise not only from the acquisition of shares or shareholders' agreements, but also by other contractual means relating to intangible assets with access to the market (such as industrial property rights, know-how or goodwill) which could raise serious doubts as to whether they are also covered by the Screening Mechanism.
2. Secondly, we understand that FDIs subject to the Screening Mechanism could also take place when, as a result of a new investment, a foreign investor acquires control over a Spanish company in which it already holds a pre-existing shareholding of more than 10% of its share capital, but without conferring this type of control under the LDC.

Since the interpretation of the legal concept of “control” can sometimes be quite complex under Spanish competition law provisions, it is expected that the CNMC's precedents will play an important orientate role in resolving possible doubts in the enforcement of the Screening Mechanism.

Finally, the Reform also refers to the concept of “control” under Article 7.2 of the LDC in the context of FDIs made by investors controlled - either directly or indirectly - by foreign governments which will be subject to a FDI filing irrespective of the affected sector (see below).

Clarification of some aspects regarding the list of strategic sectors

Not all FDIs are subject to the Screening Mechanism. This will depend on whether the target company is active in "strategic sectors" related to national security, public order and public health.

The Screening Mechanism contains a list strategic sectors in which activities may have implications for national security, public order and public health. In turn, the Reform has introduced some clarifications in relation to the following strategic sectors:

1. Critical dual-use technologies: the reference to “dual-use items” and to Regulation (EC) No 428/2009, which is the previous wording that was used in order to define the concept of reference, has been deleted. Furthermore, those key technologies for industrial leadership and capacity building, and technologies developed under programmes and projects of particular interest to Spain (including telecommunications, advanced materials and advanced manufacturing systems) have been added to the list of technologies listed so far;
2. Supply of essential inputs: strategic connectivity services are expressly mentioned; and
3. Media: without prejudice to the fact that audio-visual services as defined in  Law 7/2010 of 31 March regarding Audio-visual Communication shall be governed by the provisions of said Law.

The wording for the remaining strategic sectors has not been altered by the Reform, namely:

1. Critical infrastructures: whether physical or virtual (including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructures, and sensitive facilities), as well as land and real estate key to the use of such infrastructures, in accordance with the provisions of Spanish Act 8/2011 of 28 April establishing measures for the protection of critical infrastructures; and
2. Sectors with access or control to sensitive information: in particular, personal data, in accordance with the Spanish Organic Act 3/2018 of 5 December regarding the Protection of Personal Data and Guarantee of Digital Rights.

Notwithstanding the above, certain relevant questions still remain unclear such as the exact scope of the sectors with access to sensitive information (as indicated in point (b) above), since according to the wording of the Screening Mechanism - and in the absence of developing regulation so far - most companies could potentially meet this requirement.

In addition to the above, the following FDIs are also subject to the Screening Mechanism on the basis of the subjective characteristics of the foreign investor, regardless of the sector in which they take place in Spain:

1. If the foreign investor is directly or indirectly controlled by the government, including public bodies or the armed forces, of a third country, (control defined in accordance with the criteria set out in article 7.2 of the LDC);
2. Whether the foreign investor has made investments or participated in activities in the sectors affecting security, public order and public health in another Member State and, in particular, the sectors subject to the Screening Regime referred to in this paragraph; and
3. If there is a serious risk that the foreign investor will carry out criminal or illegal activities affecting public security, public order or public health in Spain.

Entry into force and future developments

The Reform entered into force on 19 November 2020. These last modifications are of a permanent nature, except for the extension of the Screening Mechanism to cover certain FDIs made by EU/EFTA investors which will, in principle, be applicable until 30 June 2021 (see section 1 above).

The Reform announces the upcoming approval of the regulation developing the Screening Mechanism. This developing regulation will enable the Spanish government to clarify further the definition of “strategic sectors”, as well as to specify the categories of transactions and the value thresholds to be exempted from the application of the Screening Mechanism.

In the meantime, until the developing regulation is approved, the Screening Mechanism currently distinguishes the following scenarios according to the amount of the FDI: (a) for FDIs of EUR 5 million or more, the ordinary regime applies; (b) those FDIs of 1 million euros or more and less than 5 million euros will be treated under the simplified procedure; and (c) FDIs of less than 1 million euros are exempted from the application of the Screening Mechanism.

Authored by Casto González-Páramo, David Antón and Alfredo Gómez