Restrictions on Foreign Direct Investments in Spain

1. INTRODUCTION: FOREIGN DIRECT INVESTMENTS

Two Royal Decree Laws published last Spring, RDL 8/2020 and RDL 11/2020 modified the existing legislation on foreign investments in order to "protect" Spanish companies, the market value of which was at an all-time low due to the COVID crisis, from opportunistic purchases.

This followed a Recommendation from the European Commission which encouraged Member States to advance the application of Regulation (EU) 2019/452, of the European Parliament and of the Council, of 19 March 2019, for the control of foreign direct investment in the Union, which was to come into force on 11 October 2020 (Regulation EU 2019/452).

Regulation EU 2019/452 is based on the notion of FDI, as opposed to portfolio investment in foreign stocks, and revolves around the possibility of Member States adopting screening mechanisms and screening decisions on foreign investors for reasons of security or public order, while also taking the necessary measures to identify and prevent the circumvention of such mechanisms and decisions (articles 3.1 and 3.6).

The current regime's framework of understanding refers to the international trade standards outlined by the WTO and the OECD and, as stated above is harmonized at the European level.

Internally, the two Royal Decree laws published in Spring and a third one, RDL 34/2020, published on Wednesday 17 November, have modified Law 19/2003 of July 4, 2003, on the legal regime of capital movements and economic transactions abroad (Law 19/2003) by adding a new article 7 bis and modifying articles 8.2 and 12.2, all of which are related to the suspension of the liberalisation of the so-called Foreign Direct Investment in Spain (FDI).

2. THE CURRENT REGIME

2.1 The investment

• There is a need for authorisation for those investments made by certain investors (see 2.3 below) or made in companies operating in certain sectors considered strategic (see 2.2 below) when as a result of such investment (i) the investor holds a stake equal to or greater than 10 per cent of the share capital of a Spanish company, or (ii) the investor acquires control of the company (the "Investment"), provided that one of these circumstances occurs:

• that they are carried out by residents of countries outside the EU and the European Free Trade Association (EFTA);

• when they are carried out by residents of EU/EFTA countries whose real ownership (i.e. who owns or controls 25% of the investor's share capital or voting rights or who otherwise controls, directly or indirectly, the investor) corresponds to residents of countries outside the EU or EFTA.

• In addition, until 30 June 2021, Investments made by residents of EU/EFTA countries other than Spain; or residents in Spain the ultimate ownership of which corresponds to residents of other EU/EFTA countries are also subject to authorisation, if made in

• companies listed in Spain (defined as those whose shares are wholly or partly admitted to trading on a Spanish secondary market and which have their registered office in Spain); or

• unlisted companies if the value of the investment exceeds EUR 500 million

are also subject to authorisation further to RDL 34/2020 of November 17. Ultimate ownership or beneficial ownership is determined by who owns or controls 25% of the investor's share capital or voting rights or who otherwise controls, directly or indirectly, the investor.

For all the above purposes, control is defined in accordance with the criteria established in Article 7. 2 of Spanish Antitrust Act. This definition is based on the idea of capturing any "de facto" control. Control may result from agreements, rights or any other means which bearing in mind any existing legal or "de facto" circumstances, confer the possibility of exercising decisive influence on an undertaking, in particular by

• rights of ownership or use of all or part of the assets of an undertaking; or

• contracts, rights or any other means of exercising decisive influence on the composition, deliberations or decisions of the organs of the undertaking.

However, a more formal definition of control is also encompassed by cross reference to the definition of a group of companies included in the Spanish Commercial Code (majority of the voting rights through holdings or agreements or power to appoint or dismiss the majority of the members of the managing body).

2.2 Strategic sectors concerned

The regime of liberalisation of FDI in Spain in the following strategic sectors is suspended (as it affects public order, public security and public health):

• 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 that are key to the use of such infrastructures, understood as those referred to in Law 8/2011 of 28 April, which establishes measures for the protection of critical infrastructures.

• Critical technologies and dual-use, key technologies for industrial leadership and training, and technologies developed under programmes and projects of particular interest to Spain, including telecommunications, artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies, advanced materials and advanced manufacturing systems.

• Supply of fundamental inputs, in particular energy, understood as those regulated by Law 24/2013, of 26 December, on the Electricity Sector, and Law 34/1998, of 7 October, on the Hydrocarbons sector, or those referring to strategic connectivity services, to raw materials, as well as food safety.

• Sectors with access to sensitive information, in particular personal data, or with the capacity to control such information, in accordance with Organic Law 3/2018 of 5 December on the Protection of Personal Data and the guarantee of digital rights.

• Media, without prejudice to the fact that audiovisual communication services under the terms defined in Law 7/2010, of 31 March, General of Audiovisual Communication, shall be governed by the provisions of said law.

The Government reserves the right to add to this list other sectors that may affect public order, public security and public health.

2.3 Investors which need authorisation regardless of the sector

The regime of liberalization of foreign direct investment in Spain is also suspended in the following cases, regardless of the sector:

• If the foreign investor is directly or indirectly controlled by the government, including public bodies or the armed forces, of a third country, (according to the criteria set out in Article 7.2 of the Spanish Antitrust Act being applied for the purpose of determining the existence of control we set out above).

• If the foreign investor has made investments or participated in activities in sectors affecting security, public order and public health in another Member State, and in particular those listed in section ‎2.2 above.

• If there is a serious risk that the foreign carries out criminal or illegal activities affecting public security, public order or public health in Spain.

2.4 What does the suspension of the liberalisation imply?

The suspension implies the need for authorisation for all such Investments except those of less than EUR 1 million. As regards their effectiveness, investment operations carried out without the required prior authorisation will have no validity or legal effect until they are legalised. The carrying out of acts, business, transactions or operations without requesting authorisation when it is required (or prior to granting it or in breach of the established conditions) will constitute a very serious infringement and will be punishable in accordance with the regime provided for in Law 19/2003.

Finally, a transitional simplified procedural regime was set out for operations (i) which were already under way on 18 March 2020 when the RDL came into force and (ii) for investments of between 1 and 5 million euros.