New measures enacted for the purpose of protecting the Spanish economy amid the COVID-19 crisis may persist longer than expected
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The exceptional circumstances in the first and second quarters of 2020 brought about by the COVID-19 outbreak led the Spanish government to enact a number of urgent regulations establishing a new screening mechanism for certain foreign investments by virtue of Royal Decree Laws 8/2020 and 11/2020 (Real Decreto-ley 8/2020, de 17 de marzo, de medidas urgentes extraordinarias para hacer frente al impacto económico y social del COVID-19 and Real Decreto-ley 11/2020, de 31 de marzo, por el que se adoptan medidas urgentes complementarias en el ámbito social y económico para hacer frente al COVID-19).
The amended Law 19/2003 (Ley 19/2003, de 4 de julio, sobre régimen jurídico de los movimientos de capitales y de las transacciones económicas con el exterior y sobre determinadas medidas de prevención del blanqueo de capitales) incorporated—by virtue of these urgent regulations—new Article 7bis, suspending the liberal regime of foreign direct investments in Spain, particularly in relation to a number of critical industries.
FORMER REGIME AND THE 2020 NOVELTIES
Spanish foreign direct investment measures before the COVID-19 outbreak included a post-investment notification for any foreign investment, and pre-authorization for a number of limited investments, such as investments from countries considered tax havens, activities related to national defense and security and (for non-EEA investors only) investments in gambling, airlines and audiovisual media, among other sectors. Regardless of such authorizations, former Spanish regulations proclaimed a liberal ethos for foreign direct investment in Spain.
In response to COVID-19, and in order to avoid opportunistic investments in critical sectors for the national public security and health, the Spanish government enacted a number of amendments to Law 19/2003, anticipating the yet-to-be transposed rules of Regulation (EU) 2019/452, of March 2019. The amendments created a new screening mechanism for foreign investments, one that requires prior approval for investments in excess of €1 million.
Under the new regime, prior approval is now required for investments that result in a non-EU/EEA investor owning at least 10 percent of the share capital of a Spanish company (listed or unlisted), or which otherwise enable a non-EU/EEA investor to have effective participation in the management or control of a Spanish company—or if carried out by an EU/EEA resident, its beneficial owner is a non-EU/EEA resident—provided that the non-EU/EEA investor is a certain type of investor: one controlled by the government of a third party; an investor already invested or involved in security, public health or public policy in another EU Member State; or investors subject to judicial or administrative proceedings for engaging in illegal or criminal activities.
Prior approval is also required where the investment is made in a strategic sector, such as critical infrastructure, critical technologies, supply of critical inputs, food security, sectors with access to sensitive information, media and any other sector that may impact public health, safety or public order as determined by the Spanish government.
As confirmed by public officials from the relevant cabinet on foreign investment, the Royal Decrees Laws adopting the new regime are undergoing enacting legislative processes. The precise content of the future legislation is still uncertain, although once enacted in the form of law, further developments and details regarding the screening mechanism may follow.
FILING OBLIGATION AND CONSEQUENCES IN THE EVENT OF BREACH
For tax haven approval applications, a standard form must be filed electronically at least six months prior to the transaction. For the purposes of the 2020 regime and the new screening mechanism, filing for an authorization prior to conducting the investment is required in two cases:
- The investment exceeds €1 million but does not surpass €5 million. In this case, the transaction shall be dealt with through the interim simplified process provided for in the 2º Transitory Provision (Disposición Transitoria 2ª) of the Royal Decree Law 11/2020. This provision specifies that requests shall address the public official in charge from the relevant directorate of the Spanish Government; i.e., the Dirección General de Comercio Internacional e Inversiones
- The investment exceeds €5 million. The general regime set forth in Article 7bis of the Law 19/2003 applies. This proceeding involves similar steps as in the case of the interim simplified process. The investor is required to file an authorization request with the directorate of the Spanish government, subject to final approval from the Spanish Council of Ministers
Investments less than €1 million are thus exempt from the filing obligation of the new screening mechanism, although the relevant Spanish regulations mention that this point may be subject to adjustment once further legislation is enacted. Investments that can be proved to have been agreed or for which a valid binding offer was put in place before the state of alarm in Spain may also be permitted to take advantage of the simplified process.
Negative administrative silence (silencio administrativo negativo) will apply under any of the aforementioned authorization processes. The absence of a response from the government six months after filing of the approval request will be interpreted as a denial.
Failure to file the required authorization requests when required will render the transaction null and void, and may also involve the imposition of significant fines, up to the value of the intended investment.
TYPES OF DEALS REVIEWED
The types of deals reviewed is directly related to the conditions and criteria already set forth. The review process varies from case to case, depending on the amounts, the investor and the key strategic sector where the investments are intended to be made.
SCOPE OF THE REVIEW
The precise scope of the review that will be conducted by the public authorities in accordance with the new screening mechanism is not yet known. As a general rule, the relevant administrative authority will examine any concerns of security, public health or public policy that the investment may pose, and grant or deny authorization. More information will be available about the scope of review when new legislative regulations have been enacted.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Foreign investors should be cautious when entering into a transaction involving a Spanish company operating in any of the key strategic sectors. The operational strategy of the investment must be reconsidered in light of the current review process of the Spanish authorities, bearing in mind that a number of hurdles may restrict the investment.
Anticipating any regulatory amendments and obtaining the correct legal counsel is key, as well as liaising in due time and form with the relevant governmental authority. Managing the expectations of investors, sponsors and stakeholders and keeping them all aligned with FDI restrictions is also crucial in this time of uncertainty.
REVIEW PROCESS TIMELINE
The legally established timeline for the review of investments and for granting the required authorization, pursuant to the interim simplified process, is 30 days. The ordinary process of Article 7bis provides a generic estimated timeline of six months.
According to conversations with public officials from the relevant government's office, the review under the ordinary process may take up to three months, but generally, the review should not take more than two months.
Although limitations have been imposed on FDI and these limitations may persist, it is uncertain whether the Spanish government may impose a hard-rule approach to these restrictions. Governmental authorities are likely to maintain a business-friendly approach to the review process, to the extent that investments do not significantly pose a threat to the national security, public health or public order in Spain.
Given that these rules were imposed in a time of crisis and have not yet been properly developed and enacted, restricting foreign investments that can bring prosperity and economic growth to the country during a downturn period may seem counterintuitive. Further developments may bring more legal certainty to this scarcely regulated regime.
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