*Originally distributed on April 3, 2020

On 19 March 2020 Spain re-introduced foreign investment screenings by executive order. In doing so, the Government confessed aim is to protect Spanish companies in their time of financial weakness as a result of the COVID-19 pandemic. However, the measures are not time-limited and are intended to survive the COVID-19 pandemic. 

In a snapshot, the new regime requires non-EU, non-EFTA investors to seek prior governmental approval to acquire a “10% or more” equity stake in, or “effectively participate in the management or the control of”, Spanish companies engaged in certain strategic sectors, or in any sector whatsoever, if the investor is “controlled by a foreign government” or has ever engaged in “illicit activities”.

The new regulations enacted in Decree Law 8/2020 (the “Decree Law”) are framed and follow closely those enacted at an EU level by Regulation 2019/442 establishing a framework for the screening of direct foreign investments into the Union (the “EU Regulation”),  perhaps too closely. The EU Regulation was meant to be just an enabling framework for Member States to screen foreign investments (which is generally prohibited under European law other than on the grounds of public order and security) pointing out factors (and not particular investments) that may be taken into consideration by Member States in assessing whether such investments are likely to affect public security or public order. The Decree Law basically enacts such factors into law without, in many instances, indicating the particular investment that should be subject to screening (for example, whereas the EU Regulation states that processing personal data is a factor to be used to assess whether a foreign investment is likely to affect security and public order, the Decree Law  states that investments in any company processing personal data will be screened without factoring the importance, sensitivity and other factors of such activity that are conducive to raise national security concerns). It is recognized that such an approach may bring into the Decree Law’s purview most non-European foreign investments into Spanish companies (in the example, data centers and virtually all Spanish companies that process data of their clients or suppliers to conduct their business in the ordinary course). The Decree Law will therefore require a thorough self-assessment paired with constructive interpretation and risk taking or, most likely, an urgent amendment to provide a narrower but more sensible basis for investment screening.

Investments concerned

The Decree Law subjects an investment in excess of €1M to screening if it results in:

• the acquisition of an equity stake of 10% or more in a Spanish company; or
• effective participation in the management or the control of a Spanish company through any corporate or business transaction.

Arguably, the subject matter of the investment is a Spanish company – and not its business or assets. It is also unclear whether screening is applicable to the acquisition of foreign companies operating strategic assets in Spain (through a branch, for example).

Investors concerned

Investors that are:

• resident in countries other than Member States of the European Union (EU) or the European Free Trade Association (EFTA) (e.g., European Union members plus Norway, Iceland, Liechtenstein and Switzerland);
• residents in Member States of the EU or EFTA where 25% or more of its share capital or voting rights are ultimately held by non-EU/EFTA entities or that are otherwise directly or indirectly controlled by non-EU/EFTA entities.

The United Kingdom, whilst no longer an EU member, retains the status of Member State of the European Union during a transition period that ends on 31 December 2020 (which may be extended by one or two years) and meanwhile should be afforded the same treatment as EU Member States.

The critical question in this area will be to establish what an investor resident in the EU/EFTA is for the purposes of the Decree Law — particularly in complex private equity structures where the fund manager might qualify as such but not the (direct or indirect) investment vehicles or the ultimate investors (e.g. the limited partners). Also, it remains to be determined whether any non-EU/EFTA investment already higher than 10% will be subject to screening for any increase in its equity stake or enhanced involvement in the management or control of the Spanish business.

Sectors concerned

• Investments by non-EU/EFTA investors in entities engaged in certain sectors that are designated by the Decree Law as strategic, namely:
  • Physical and virtual critical infrastructure and any real estate associated with the use of such infrastructure. The new regulation purportedly intends to capture investments in operators of infrastructure designated by the Ministry of Interior as “critical” pursuant to Spanish Law 8/2011. The Catalogue of Critical Infrastructure is a classified state secret, but as of 2016 the CNPIC – a public office in charge of managing critical Spanish infrastructure – recognized that there were 106 operators of critical infrastructure in Spain and “many hundreds” of types of critical infrastructure were in the energy sector (oil, gas and power), nuclear power, financial markets, transport (air, sea, road and rail), water, chemical and aerospace.
  • Critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cyber security, aerospace, defense, energy storage, quantum and nuclear, as well as nanotechnologies and biotechnologies.
  • Supply of critical inputs, including the generation, transportation, distribution and marketing of electrical power, fossil fuels or raw materials, as well as food safety. It is unclear what specific activities are meant to be encompassed by the generality of the foregoing, particularly when it comes to what specific business of “supplying raw materials” is considered to potentially affect security and public order, or what investment generally is deemed capable of affecting “food safety”.
  • Access to sensitive information, including personal data, or the ability to control such information. Potentially any business may provide access to personal data and the Decree Law fails to establish which particular activity presents systemic risks in terms of security and public order.
  • Means of communication. While this particular provision clearly includes TV and newspapers, the Decree Law is again sparing with words and may potentially result in a wide range of activities related to media being subject to screening.
  • Other sectors designated by the Government from time to time that may affect public security, order or health.
• Investments by certain specific non-EU/EFTA investors irrespective of the sector in which the investment is made:
  • Investors that had made any investment in the above-mentioned sectors in another EU Member State as well as in any other sector affecting its public security, order or health. Any past investment in another EU country in a critical sector may trigger investment screening in Spain irrespective of the sector and when such investment outside of Spain was made. If interpreted narrowly, this provision will undermine private equity’s competitive position in the marketplaces as they will more often be required to condition their offers to authorizations that other bidders are less likely to require in connection with non-strategic assets.Note that the provision will require the parties to the investment to make a judgment call on whether any other unrelated investment may affect public security, order or health – in accordance with the standards of the relevant host jurisdiction.
  • Investors directly or indirectly controlled by the government, including state bodies or armed forces, of a non-EU/EFTA country. The Decree Law specifically includes sovereign wealth funds as government controlled entities. However, the concept of “control” of the Decree Law is that which is established generally under corporate law without any reference, as there is in the EU Regulation, to “control through significant funding” by the foreign government.