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Christian Hoedl
Uria Menéndez, Madrid
christian.hoedl@uria.com

María Rein Valgañó
Uria Menéndez, Madrid
maria.rein@uria.com

 

The outbreak of the Covid-19 pandemic has accelerated the global trend towards increased national protectionism and stricter screening of foreign direct investments.

Even before the pandemic, many countries had started taking a broader view of what industries should be considered as strategic (in addition to national defence). In 2019, the European Parliament and Council approved Regulation (EU) 2019/452, establishing a framework for the screening of foreign direct investments into the European Union that enabled Member States to establish an ex-ante control system over investments from outside the EU that may affect public order and public security.^[1] The Regulation will enter into force in September 2020.

As a result of the global health crisis, many jurisdictions have strengthened their focus on the fact that critical assets are finite and their belief that there is an increased need for domestic control over them. As a consequence, on 25 March 2020, the European Commission issued certain guidelines to protect European assets and technology during the health crisis and ensure a strong EU-wide approach to foreign investment screening.

This has resulted in a number of European countries (including France, Germany, Italy and the Netherlands) tightening their foreign investment rules in recent months. The respective regulations are not harmonised and differ on several aspects such as monetary and control thresholds, and investment structure considerations.

Spain

As part of this general approach taken by European countries, on 17 March 2020 Spain enacted a Royal Decree Law^[2] (RDL) that, amongst other matters, introduced a new screening mechanism for certain investments made by non-EU and non-European Free Trade Association (EFTA)^[3] residents, for public order, public health and public security reasons. The new regime (the 'Screening Mechanism') was subsequently updated on 2 April 2020.

The Screening Mechanism is justified in the preamble of the RDL by the fact that the stock market crash triggered by Covid-19 poses a real threat to Spanish listed companies. The Screening Mechanism has been conceived to protect these public companies as they have now become targets for foreign investors. However, the scope of the Screening Mechanism is much broader, and has been introduced with a clear intention to remain in force after the health crisis-related state of emergency has been lifted.

The Screening Mechanism closely follows Regulation (EU) 2019/452 but might need to be adapted to the EU legal framework once it enters into force in September 2020. Further implementing regulations are currently being discussed and shall be implemented in the near future.

Key elements of the regulation

The new Screening Mechanism applies to

• direct investments;

• by foreign investors;

• in certain strategic sectors; or

• when the foreign investor meets certain subjective conditions.

Direct investment

The RDL defines direct investments as those investments:

• that entail a shareholding equal to or greater than ten per cent of the capital of the Spanish company; or

• as a consequence of which the investor effectively participates in the management or control of a Spanish company.

Although the RDL specifically refers to investments in the share capital of Spanish companies, its application to certain asset deals may not be ruled out. It makes reference to certain assets that fall under the scope of the Screening Mechanism, such as real estate that is key for critical infrastructures.

Additionally, the RDL is not clear as to what ‘effectively participates in the management of a Spanish company’ means. This criterion could be met if the investor appoints (or is able to nominate) one or more of the directors of the Spanish company but would also apply if the investor has the right to appoint the members of senior management (chief executive officer, chief financial officer) of the target.

The RDL also fails to clarify if screening is required for any additional investments when the investor already holds ten per cent or more of the share capital, or already participates in the management of the Spanish company. In our view, prior authorisation should only be required if, as a consequence of the additional investment, the investor exceeds any of the three ‘thresholds’ set out in the RDL, ie, a ten per cent shareholding, participation in the management or control over a Spanish company.

Foreign investor

The RDL defines foreign investors as:

• investors resident outside the EU or EFTA; and

• investors resident in the EU or EFTA countries, when a legal or natural person resident outside that area:

– owns or ultimately controls, directly or indirectly, more than 25 per cent of the share capital or the voting rights of the investor; or

– directly or indirectly controls the investor by other means.

The country of residence of an investor will be determined by its corporate domicile (or home address).

Beneficial ownership (ie, determining the ultimate controlling party) is a concept closely associated with money laundering. In our view it would have been preferable to extend the Screening Mechanism to EU/EFTA investors only when these are ultimately controlled by a non-EU/non-EFTA person (indeed, a 25 per cent shareholding or voting rights might not grant the non-EU/non-EFTA person with effective control over the investor and thus indirectly over the Spanish company).

As regards the specific case of financial investors (private equities or other investment funds), since the regulation refers to control over the Spanish company the country of residence should be that of the fund manager or general partner, not of the fund itself or its limited partners.

Strategic sectors

Not every investment by a foreign investor is subject to the Screening Mechanism as this will depend on:

• the sector in which the target carries out its business; and

• the personal circumstances of the foreign investor, regardless of the business of the target.

Regarding the first requirement, the RDL defines the following strategic sectors as falling under the scope of the Screening Mechanism:

• critical infrastructure, whether physical or virtual (including energy, transportation, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructures, and sensitive facilities), as well as land and real estate that are key to the use of such infrastructures;

• critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies;

• supply of fundamental inputs, in particular energy, commodities and food safety;

• sectors with access to sensitive information, in particular personal data, or with the capacity to control such information; and

• media.

Additionally, the Spanish government may restrict foreign direct investments in other sectors when they may affect public security, public order and public health.

The criteria established by the regulation considers that the investment in any of the above activities is subject to the Screening Mechanism. This rule contrasts with the EU Regulation that limits screening to investments that affect public security or public order (with no reference to public health), and includes the Strategic Sectors listed above only as an indicator or presumption of industries that might meet this test. Moreover, certain sectors such as media are more broadly defined in the RDL than in the European regulation. 

Subjective criteria

The following investors will need to comply with the Screening Mechanism due to their nature or circumstances, irrespective of the target company’s activities:

• Foreign investors controlled directly or indirectly by a ‘third country’ government (including public bodies, sovereign wealth funds or the armed forces).

• Foreign investors who have invested or participated in activities in sectors affecting security, public order and public health in another EU Member State. This criteria covers a wide number of foreign investors and broadens considerably the description of the EU Regulation that only refers to foreign investors that ‘have already been involved in activities affecting security or public order in an EU Member State’ requiring previous incidents in these sectors to fall under the scope of application. The Spanish FDI authorities, however, seem to follow the interpretation of the EU Regulation and restrict the Screening Mechanism to investors that have negatively impacted security or public order in another EU Member State.

• Foreign investors involved in proceedings in another EU Member State for criminal or illegal activities.

The RDL does not clarify if the second and third situations refer to the actual investor that controls the investment, to the ultimate beneficial owner (or ultimate controlling party) or to any company within their respective groups.

Screening procedure and failure to obtain authorisation

Foreign direct investments that meet the above criteria will require prior authorisation from the Spanish Council of Ministers. The Spanish Council of Ministers has a legal term of six months to issue its decision, although this term might be suspended in certain cases, such as if further information on the transaction is required.

However, the RDL also provides for a simplified procedure according to which the FDI authorities have 30 days to issue their response for investments:

• for which there was a binding agreement or a binding offer prior to 17 March 2020; and

• with a value between €1m and €5m. Investments that fall below €1m are exempt from the Screening Mechanism.

In the event that the foreign investor receives no response within the mentioned terms, the investment will be deemed denied. ‘Gun-jumping’ will result in the foreign direct investment being deemed ‘without legal effects’ until the authorisation is obtained. This is considered a serious administrative infringement that may entail fines for up to the value of the investment.