Since the outbreak of COVID-19 in 2020, foreign direct investments (FDIs) have been subject to increasing scrutiny. The policies enacted during the past two years specifically focus on investments that operate in critical sectors or are made by certain purchasers, subject to certain thresholds.

Recent updates

• There have not been major changes to the legislation regarding FDIs during 2022. Initially, it was thought that a developing regulation would be enacted during the year to bring more clarity to how the review mechanism would work. However, this has not happened
• The most relevant change is that the temporary restriction imposed on EU and EFTA residents investing in Spain has been extended until the end of 2024. Consequently, investors resident in the EU or EFTA will remain subject to the screening mechanism if they were to invest in listed companies, or in unlisted companies if the value of their investment exceeds €500 million

Who files

The FDI filing must be filed by the investor, specifically, by the legal entity that will be investing into the Spanish target.

The filing must be made to the electronic office of the Ministry of Industry, Commerce and Tourism. There is no standard form for the filing, but it should include the following information:

• Identification of the investor and the target
• Shareholding structure of the investor
• Method by which the investment is being made
• Amount of the investment and
• Effective participation of the investor in the target after the transaction, among other information
• There is no filing fee.

Types of deals reviewed

A review will be required if the FDI concerns the acquisition of share capital equal to or greater than 10 percent of a Spanish company, or the acquisition of control over the decisions of a Spanish company by a non-EU or non-EFTA resident (or by an EU or EFTA resident if the transaction is in a listed company or over €500 million in a non-listed company), falling within the following domains:

• The company conducts its activity in a strategic sector or in relation to critical infrastructure as expressly provided by law
• The entity is directly or indirectly controlled by a government
• The company's activities are related to national defense or
• The entity is likely to be carrying out illegal or criminal activities that affect public security, public order or public health in Spain

Notwithstanding the above, investments of less than €1 million are not subject to the investment control mechanism.

In practice, it is not always clear when a transaction should be reviewed. To remedy this situation, the regulator has provided a questionnaire, through which they advise whether or not the transaction is subject to scrutiny.

Scope of the review

The review by the regulator focuses on several aspects, but specifically these are the most relevant ones:

• The investor: The regulator focuses primarily on the nationality of the investor, its shareholding structure, its ultimate beneficiaries, and what other investments it has made
• The target: The regulator is interested in who the target is controlled by prior to the transaction and what its main activity is, in case the acquisition could affect public order, safety or health in any way
• Means to carry out and amount of the investment: The regulator focuses on how the transaction will be carried out, whether it will result in a change of the target's activity and what the amount of the investment will be. In practice, it is usually sufficient to include this information in the filing, and it is not usually necessary to provide the sale purchase agreement or any other documentation related to the transaction
• Management of target after the transaction: The regulator is interested in how the company will be managed after the transaction, who will be part of its governing body, if it intends to change its activity, or if it intends to make substantial changes with its employees, among other aspects. In practice, at the time of filing, there is usually not much information on these issues, so the regulator focuses less on them than on the above-mentioned aspects.

Review process timeline

The applicable legislation establishes that the authority must authorize or deny the transactions within a maximum period of six months. Once this period has elapsed without a response from the authority, it will be understood that the authorization has been denied.

In practice, the period within which the authority takes to respond to an authorization request filing is shorter, approximately two to three months.

For foreign investors who submit the questionnaire seeking a preliminary opinion as to whether the authorization mechanism applies, the authority has no legal deadline to respond to the questionnaire and the investor should assume that the foreign direct investment proposal is rejected if there is no response from the regulator. In practice, the average time taken by the authority to respond to questionnaires is approximately one-and-a-half months.

In any case, the response time, both for the authorization and for the questionnaire, will depend on the volume of requests that the authority has at the time.

How foreign investors can protect themselves

A good form of protection for investors is to receive specific advice on each transaction, as the application of the mechanism is still quite uncertain given its recent introduction.

It is useful to consider similar transactions that have been made previously, as this may be an indicator of whether or not it will be necessary to seek approval.

It is also useful to provide the necessary information to the authority in advance, as this may avoid additional questions from the authority and speed up the response process.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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