COVID-19 Foreign Direct Investment (FDI) – An Overview of legislation enacted by Spanish Government during 2020

COVID-19 pandemic led Spanish Government to enact three Royal Decree-Laws during 2020, imposing restrictive measures on Spanish FDI regime.

Before the COVID-19 outbreak, the Spanish foreign direct investment ("FDI") regime established by Law 19/2003 only included a post-investment notification, and a pre-authorization for some limited specific transactions. Apart from this, no further limitations were imposed on foreign investment.

In response to the COVID-19 pandemic, and in order to prevent opportunistic foreign investments in critical sectors, such as national security and public health, the Spanish government enacted in 2020 three Royal Decree-Laws, introducing amendments to Law 19/2003 and anticipating the yet-to-be transposed rules of Regulation (EU) 2019/452, of March 2019.

1.    Royal Decree-Law 8/2020 of March 17. 

Royal Decree-Law 8/2020 introduced new article 7 bis on Law 19/2003, suspending the liberal FDI regime in Spain, particularly in relation to a number of critical industries.

The new article 7 bis defined FDI as all those investments as a result of which the investor acquires a shareholding equal to or greater than 10% of a Spanish company (listed or unlisted), or where it acquires effective control¹ over the company, provided that one of the following circumstances occur:

• the investment is carried out by residents of countries outside the European Union (EU) and the European Free Trade Association (“EFTA”); or
• the investment is carried out by a EU or EFTA resident whose beneficial owner²  is a non-EU or EFTA resident. 

Under the new regime introduced by Royal Decree-Law 8/2020, FDI will be subject to prior approval by the Spanish Council of Ministers, insofar as any of the following conditions are met:

• that the foreign direct investment is carried out on a company that operates in one of the strategic sectors set by Law 19/2003 (critical Infrastructures, critical and dual-use technologies, key inputs supply, sensitive information, media, defense, food security, health care, data protection, electricity production and hydrocarbons among others); or
• that the foreign direct investment is carried out by a foreign State-controlled investor, by an investor who has yet carried out an investment affecting public order or health in a third Member State, or by an investor that poses  a high risk of conducting illegal activities affecting public health or public order.

Despite the fact that the scrutiny mechanism introduced by Royal Decree-Law 8/2020 specifically refers to foreign direct investments, the reality is that the Spanish FDI authority has admitted that indirect investments are also subject to authorization. 

Consequently, any foreign investment in a non-Spanish company that meets the above conditions and affects its Spanish subsidiaries will also require FDI approval in Spain.

2.    Royal Decree-Law 11/2020 of March 31.

Royal Decree-Law 11/2020 introduced two non fixed-term temporary measures: 

Firstly, it introduced a EUR 1,000,000 threshold below which FDI is not subject to scrutiny, irrespective of the investor and sector of activity.

Secondly, it introduced a fast-track scrutiny mechanism for FDI between EUR 1,000,000 and EUR 5,000,000. According to this provision, clearance for those investments must be obtained within 30 days following the request for approval.

3.    Royal Decree-Law 34/2020 of November 17.

Royal Decree-Law 34/2020 introduced the last amendment to the Spanish FDI regime. 

According to it, during the period between November 19th 2020 and June 30th 2021, investments made by UE and EFTA residents—and investments made by Spanish residents whose real ownership belonged to non-UE or non-EFTA residents—are considered to be Foreign Direct Investments (provided that they meet the conditions set by Royal Decree 8/2020 previously mentioned in this document).

Consequently, if residents in the EU or EFTA carry out FDI in listed companies in Spain—or in unlisted companies if the value of the investment exceeds EUR 500,000,000—the investment will be subject to approval by the Spanish Council of Ministers.

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.

Despite the restrictive regime imposed by the three Royal Decree-Laws, in practice, 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.

_{1 Effective control: According to article 7.2 of Law 15/2007, on Antitrust, to acquire control over the Company means  to become part to contracts or acquire rights that allow the investor to influence decisions regarding the target Company, particularly those contracts or ownership rights in relation with the entirety or part of the Company assets.
2 Beneficial ownership: beneficial ownership shall be understood to exist when someone possesses or ultimately  controls, directly or indirectly, a percentage of more than 25% of the capital or of the voting rights of the investor, or when by other means  exercises control, directly or indirectly, over the investor.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{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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