New developments in Spain´s foreign direct investment regime

On 4 July, the Council of Ministers approved Royal Decree 571/2023 of 4 July on foreign investments (the "RD"), which implements Law 19/2003 of 4 July on the legal regime for capital movements and economic transactions abroad (the "Law") and repeals Royal Decree 664/1999 of 23 April on foreign investments.

This RD modifies the system for declaring foreign investments in Spain and Spanish investments abroad to the Investment Register (though the approval of new models and procedural development orders is pending); and sets out the circumstances in which a foreign investment may require prior authorisation (whether it is ad hoc, that of article 7 bis of the Law or an investment directly related to National Defence, material for use by the State Security Forces and Corps, or real estate for diplomatic use). It also creates the Foreign Investment Board.

In this note we focus on amendments to the prior authorisation procedure of Article 7 bis of the Law. These have the biggest impact on the development of M&A transactions.

The suspension of the liberalisation regime of Article 7 bis of the Law

EU Regulation 2019/452 of 19 March 2019 on the control of foreign direct investment in the European Union established a framework for the control of foreign direct investment for reasons of national security or public order, in line with the control regimen in place in most OECD countries. In Spain, this control of foreign investment was introduced in 2020 in Article 7 bis of the Law.

Since then, prior administrative authorisation has been required for certain transactions ultimately carried out by investors from outside the European Union (EU) and the European Free Trade Association (EFTA) either:

• the investment is carried out in certain sectors or in certain real estate assets (objective restriction); or
• the investor is considered "of risk" (subjective restriction).

Article 7 bis of the Law has generated many interpretative doubts since its approval. Many of these doubts are resolved by the RD, which provides greater legal certainty for foreign investors.

We explain the relevant aspects of the RD below.

Concept of direct investment

The RD indicates that the following operations are not considered direct investment for the purposes of the foreign investment control regime:

• an internal restructuring within a group of companies; and
• an increase in the business holdings of a shareholder who already holds more than 10%which is not accompanied by a change in control.

Therefore, such transactions, even if carried out by foreign investors, do not require authorisation.

On the other hand, according to the RD, the ultimate beneficial ownership of direct investments will be deemed foreign when the foreign owners, individually or jointly, own or ultimately control, directly or indirectly, more than 25% of the capital or voting rights of the investor, or when they exercise control by other means, directly or indirectly, over the investor. The reference to jointly acting was not in the Law.

Also, in the case of investments made by investment funds or similar, the management companies are considered to be the owners of the investment, provided that the shareholders or beneficiaries do not legally exercise political rights or have privileged access to the company's information.

Finally, the RD does not expressly refer to the transition control regime for certain transactions carried out by EU and EFTA investors until 31 December 2024 (the regime set out by the single transitional provision of Royal Decree-Law 34/2020), although in practice these transactions will probably also be subject to the new rules.

Objective restriction: the RD clarifies the activities covered by the critical sectors

One of the major criticisms of the investment control regime from the objective restriction perspective is the ambiguity with which critical sectors were defined. As a reminder, these sectors are: (i) critical infrastructure; (ii) critical and dual-use technologies, key technologies for industrial leadership and capacity building, and technologies developed under programmes and projects of particular interest to Spain; (iii) the supply of critical inputs; (iv) sectors with access to sensitive information; and (v) the media.

Article 16 of the RD clarifies on the scope of each sector with reference to specific activities.

For example, in relation to the provision of critical inputs, the detailed reference to software developers in the operation of critical infrastructure is striking.

In addition, according to the RD, companies with access to sensitive information are those that: (i) have access to data on strategic infrastructure; (ii) have access to databases relating to the provision of essential services; (iii) have access to official databases that are not accessible to the public; or (iv) carry out activities that are subject to a personal data impact assessment in accordance with Article 35.3 of the GDPR. This reference already appears in the current Form for the Foreign Investment Screening Procedure approved by the Ministry of Industry, Trade and Tourism.

Subjective restriction: developments in relation to investors "of risk"

As mentioned above, certain foreign investors require authorisation irrespective of the sector in which they invest.

These investors "of risk" include those controlled directly or indirectly by governments of non-EU and non-EFTA countries. For the purposes of determining whether there is actual ultimate control by such investor, Article 16 of the RD clarifies that:

• it is necessary to establish whether the direct or indirect control of the investor is articulated through significant funding, including subsidies, by the government of a third country; and
• investments made by vehicles investing in public funds or pension funds of public employees are deemed not to be under government control when the fund manager invests independently, on the basis of profitability, and without political influence by a third country.

Alternatively, the information received within the framework of the cooperation mechanisms provided for in EU Regulation 2019/452 may be used to determine whether the investments made or the activities participated in by the foreign investor may have affected security, public order or public health in another Member State.

Finally, in order to assess whether there is a serious risk of the foreign investor engaging in criminal or illegal activities that affect security, public order or public health in Spain, final administrative or judicial sanctions imposed on the investor in the last three years will likely be taken into account, particularly in areas such as money laundering, the environment, taxation or the protection of sensitive information.

Exemptions

The RD includes a number of exemptions from the notification and review regime for numerous investments in cases where the Administration has already determined, based on past experience, that an intervention is not necessary.Article 17 of the RD establishes a de minimis threshold whereby foreign investments will be exempted when the turnover of the acquired companies does not exceed €5 million in the latest set of financial accounts. However, this exemption does not apply in the following cases:

• Investments in technologies developed under programmes and projects of particular interest to Spain.
• Investments in operators holding concessions for the use of the public radio-electric domains in harmonised frequency bands, or those holding licences for the use of the orbit-spectrum resource within the scope of Spanish sovereignty; or which have been classified as operators of significant weight in a relevant market in the electronic communications sector.
• Business related to research and exploitation of mineral deposits of strategic raw materials.

The same article also provides exemptions for the energy sector, regardless of the value of the investment, provided that the subjective restriction does not apply (i.e. the investors are not considered "of risk") and the following conditions are met:

• The company or assets acquired do not carry out regulated activities (namely, the operation of the electricity system and market, the transmission and distribution of electricity, electricity supply in non-mainland territories, the technical management of the gas system, and the regasification, basic storage, transmission and distribution of natural gas).
• The company does not acquire, as a result of the transaction, the status of dominant operator under the terms regulated in Royal Decree-Law 6/2000.
• That:
  • In the case of the acquisition of electricity production assets, the share of installed capacity by resulting technology must be less than 5% (the RD includes criteria for this calculation); and
  • In the case of the acquisition of companies engaged in the commercialisation of electricity, the number of customers of the acquired company is less than 20,000.
    

  Finally, Article 17 of the RD also declares that the following are exempt:

• investments in real estate which is not assigned to any critical infrastructure and which is neither indispensable nor substitutable for the provision of essential services; and
• temporary investments (of hours or days) by underwriters of share issuances and public offerings that do not have the capacity to influence management and without prejudice to the requirement for final inverstors to seek authorisation.

In this way, the RD repeals the previous de minimis exemption in the second transitional provision of Royal Decree-Law 11/2020, which applied to all investments with a value of less than €1 million, without distinguishing between sectors or activities.

Procedural aspects

The RD also includes important procedural developments.

In particular, it highlights the confidential voluntary consultation procedure with the Directorate General of International Trade and Investment, which allows a period of 30 working days to respond and which suspends any request for authorisation until the resolution is notified, or the period elapses without an express resolution, which resolution will be binding on the Administration. This procedure is set out in Article 9 of the RD.

It also adresses other important procedural issues. Thus, the decision on applications for authorisation will be taken on the basis of a report by the Foreign Investment Board to:

• the head of the Directorate General of International Trade and Investment when the amount of the investment is equal to or less than €5 million (the benchmark is the amount of the investment, not the turnover of the acquired company, as in the exemption or de minimis threshold); and
• the Council of Ministers in all other cases.

In any case, the resolution period will be three months and the RD clarifies that requests for information will suspend the resolution period.

In addition, and as already recognised in practice, the RD expressly refers to the possible content of the resolutions: (i) authorisation of the investment without conditions; (ii) authorisation with conditions; (iii) refusal of authorisation; or (iv) closure of the case due to the investor's withdrawal or because the investment is not subject to the regime. Authorisations under Article 11.1 of the RD must be explicit.

Authorised investments must be made within the period specifically indicated in the authorisation or, failing that, within six months. A single six months extension may be requested.

Any alteration to the terms of the authorised investment must be notified to the administrative body that processed the application. In addition, if the alteration substantially modifies the terms of the investment, it will be subject to the authorisation procedure again.

Further clarifications in the the RD are as follows:

• In line with Article 7 bis of the Law, the RD states that investment operations carried out without the required prior authorisation will lack validity and legal effect, as long as they are not legalised, and states that the exercise of the foreign investor's economic and political rights in the Spanish company that is the object of the investment will not be possible until the necessary authorisation is obtained.
• Where two or more investment transactions take place within a period of two years between the same buyer and the same seller, they shall be treated as a single transaction carried out on the date of the latest transaction.
• In the case of investments carried out with the agreement of two or more investors, in order for investors to exercise joint control over the investment object, a single application for authorisation from all of the investors will be required.
• The procedure must be conducted electronically.
• Any refusal of authorisation and authorisations given subject to conditions or commitments may be challenged by an appeal for reconsideration or directly by means of an administrative appeal.

Entry into force

This development of the foreign investment control regime of Article 7 bis of the Law incorporated by the new RD enters into force on 1 September 2023. However, a transitional regime has been established:

• Procedures initiated before 1 September 2023 will continue to be governed by Royal Decree 664/1999; and

• Simplified procedures initiated prior to 1 September 2023 will be resolved in accordance with the regulations in force at the time they were initiated. This simplified procedure is the one regulated under section 2 of the second transitional provision of Royal Decree-Law 11/2020, of 31 March, for transactions for amounts equal to or greater than €1 million and less than €5 million, which are subject to a maximum resolution period of 30 working days.