On November 17, 2020, Spain issued Royal Decree-Law 34/2020, which extends extraordinary measures that provide protection for Spanish companies at risk of takeover or acquisition by foreign investors due to the economic impact of COVID-19. The legislation is aimed especially at protecting Spanish companies operating in sectors the government deems strategic, e.g. critical technologies, “essential resources” such as energy and food supply, and media.
Royal Decree-Law 34/2020 expands “temporarily” (until June 30, 2021) the definition of a foreign investor to include residents of other countries of the European Union and the European Economic Area and requires even of these investors – previously not considered “foreign” – government authorization for investment in 1) Spain-listed companies and/or 2) unlisted Spanish companies if the value of the investment exceeds €500 million. Importantly, there is no exception for investments that have already been initiated or signed but not closed. Also included are Spanish companies whose ultimate beneficial owner is resident in these areas, defining the ultimate beneficial owner as the individual holding at least 25% ownership of capital, voting rights or other means of direct or indirect control.
“Direct foreign investments” have been more strictly defined as 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.”
Previously, “participation in management or control” was included in the definition; this phrasing has been removed, yet the newly legislated 10% capital ownership threshold suggests government authorization will be required in many more instances than was previously mandated.
As above, the prior authorization stipulated by Royal Decree-Law 34/2020 applies only to foreign direct investments in sectors the government deems critical to Spain’s national interest. These include (and were newly defined in November 2020):
- Critical 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 defense technologies, storage technologies for quantum and nuclear energy, as well as nanotechnologies and biotechnologies, advanced materials and production systems.
- Supply of essential resources, in particular energy and food. This sector has been expanded to include specific mention of “such companies which are dedicated to strategic connectivity and connection services”.
- Media. A new development is that audio-visual services, as defined by Law 7/2010 of 31 March, the General Law on Audio-visual Communication, now fall under the provisions of this Law.
The law authorizes the Spanish government to “determine the sectors and amounts below which foreign direct investment transactions are exempt from the obligation of prior authorization 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 authorized to define standards in this context.
As we explained 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 authorization, regardless of whether or not the investment is in one of the aforementioned sectors. These investor categories include 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.
These definitions have been slightly amended to expand the circumstances under which government authorization would be required prior to investment.
Royal Decree-Law 34/2020 obliges the relevant government agency to issue or decline authorization within six months, and although it can be assumed the authorization will be issued sooner, this cannot be guaranteed, not least because the issuance of Royal Decree-Law 34/2020 in some respects contravenes European Union regulations establishing a framework for the screening of foreign direct investments into the Union.
The issuance of Royal Decree-Law 34/2020, with its jurisdictional uncertainties and contradictions, as well as the likely continuation of the current health and economic crises well into 2021, make foreign direct investment in Spain a venture that requires careful planning and thorough consideration of legal and regulatory implications.