Over the past years and particularly in 2019 the debate regarding the need for the member states of the European Union to place a limit upon or to establish formulas of control over the purchase of so-called strategic companies, by non-community companies, especially Chinese companies has gained momentum, with cases which acquired considerable public relevance such as the acquisition of the German robotic company Kuka.

The EU Regulation 2019/452 for the control of foreign investment established a series of rules for allowing the control of non-community investment in certain sectors. Furthermore, given the Covid-19 Pandemic, pursuant to a Communication dated 13thMarch 2020, the Commission indicated that the Member States must be alert and use instruments to prevent the crisis from causing a loss of essential assets and technology. And on 26th April 2020 the European Commission issued guidelines directed at the Member States for the protection of strategic assets in Europe, requesting them to fully use their control mechanisms for foreign investment. The root of this deployment of indications is the fear that companies from vital sectors may come under the control of third countries, causing an effect of technological desertification in Europe. It must be taken into account that the monetary volume of the operations is not always the most relevant to merit investment control, instead the object of the acquisition is of greater importance, that is to say, it is common for this to be technology or business or industrial know-how in the hands of medium-sized or small companies, whose acquisition represents a modest amount of money, although they have great growth potential and significant technological know-how.

In Spain, the Royal-Decree-law 8/2020 of 18th March 2020 passed some provisions which suspended the liberalised foreign investment regime existing up until then (a simple communication except in rare cases), in order to implement a system of control prior to the direct foreign investment. The regulations were slightly modified, and the definitive version entered into force on 2ndApril 2020. The following is a summary of the main aspects thereof:

  • Direct Foreign Investment is considered to be that which implies the acquisition of at least 10% of the share capital of a foreign company, or when as a result of legal investment business or a company operation, the investor comes to manage or effectively participate in the management of the company. Furthermore, at least one of the following circumstances must concur:

a) that the investor is a resident from outside the EU and the European Free Trade Association (EFTA) (Lichtenstein, Switzerland, Norway and Iceland; and perhaps soon the United Kingdom shall be added).

b) that the investor is an entity which is resident in the EU or EFTA, and its beneficial owner is resident outside these territories. It is deemed that beneficial ownership exists when the beneficial owner possesses or controls – whether directly or indirectly – at least 25% of capital or voting rights of the investor or exercises direct or indirect control thereover.

  • Because of the sector in which they operate, the regime of liberalisation of business acquisitions affecting public order, public security and public health is suspended. Basically, these are the following sectors:

a) Critical infrastructure, covering energy, transport, water, health, media, including land and properties which are key for the use of such infrastructure.

b) Critical technology and dual-use products. In practice, and despite the description of EU Regulation 428/2009, it is difficult to put a limit on this concept given that, for example, there are a considerable amount of products which have an inoffensive use and at the same time a military use.

c) Energy supplies, hydrocarbons or raw materials.

d) Sectors with access to sensitive information, in particular, personal data.

e) Media.

Furthermore, on an optional basis, the Government may suspend the regime of liberalisation of foreign investment in sectors other than those mentioned above, when they may affect public security, public order and public health.

  • Likewise, the liberalisation regime is suspended in the following cases:

a) When the foreign investor is controlled directly or indirectly by the Government or public organisms of a country.

b) If the foreign investor has carried out investments or participated in activities in those sectors which affect security, public order and public health of another EU State, including those mentioned in the aforementioned point.

c) If an administrative or court proceeding is initiated against the foreign investor in another EU State or in another State due to criminal or illegal activities.

¿What does this supervised regime imply?

1) The operations must be previously analysed and authorisation must be obtained. This procedure is regulated in article 6 of law 19/2003, which in turn refers diffusely to Royal Decree 664/1999 of 23rd April. The procedure is the following:

    • The investor must file an application for authorisation before the Directorate General of Commercial Policy and Foreign Investment.
    • The resolution corresponds to the Cabinet, upon the proposal of the Minister of Economic Affairs and Finance.
    • The term for answering the application is six months as from the date of filing the application.
    • If the application is not answered within said term, the application shall be deemed dismissed.
    • The investments must be carried out within the 6 months following their authorisation.

2) Operations that are not subject to this regime or which do not receive authorisation, shall lack validity and legal effect.

Exceptions to the regime of prior authorisation:

  • Investment operations amounting to less than Euro 1 million.
  • Operations agreed before 17th March 2020.

Simplified regime:

  • Operations of a volume in excess of Euro 1 million and lower than Euro 5 million. In these cases, a simplified regime is established: applications shall be answered by the Directorate General of Commercial Policy and Foreign Investment, within a term of 30 days. Once the deadline for the resolution regarding the application for the authorisation has passed and it has not been answered by the competent Administration, the application shall be deemed dismissed.

Issues to be taken into account:

The investment may be subject to authorisation even if the Spanish company object of the acquisition is not included in the aforementioned sectors. Let us think of an investor who has previously made acquisitions or investments in sensitive sectors in other European Union countries. We must ask what happens if the operations in two or more member countries are carried out simultaneously, because the text of the article makes one think of operations performed in the past. We may also ask what must be understood by “operations performed in the past”. How far back in time must we go in order to check such past operations, 1, 2, 5 years? The law says nothing in this regard.

Likewise, investments to be carried out by investors under investigation for alleged illegal actions are also subject to authorisation. Obviously, the mere initiation of a file does not imply the guilt of the investigated party, but the mere fact of having a file opened certainly determines a delay of at least 6 months for the operation.

The term of 6 months for resolving the application is excessively long and may make the offer lose its attraction and competitivity for those investors who must submit their project to authorisation, when the latter competes with other bidders who are not affected by the obligation to apply for authorisation. The resolution by negative administrative silence is also to be criticised, insofar as it means leaving an operation in limbo for half a year and in the end not knowing the reasons why the investment is being refused.

The suspension of the liberalisation regime is a measure which responds to an extraordinary situation and to the will to avoid acquisition of European companies at low cost and particularly Spanish companies, due to the effects of the Covid-19 pandemic: the fall of stock values, the difficult financial situation caused by the restrictions on movement, the slump in sales and the temporary suspension of activities. It appears that the lawmakers would like this to be a temporary measure in order to attend to a pressing albeit one-off event, so that logically this should be reversed once the market has regained a more or less normal rhythm. Nevertheless, in view of the attitude of the European Unión and the orientations recently emitted by the Commission for the protection of companies from acquisitions from non-community countries, we are inclined to think that the period of validity may be prolonged for more time than that strictly necessary, for political reasons.

Finally, we would like to point out that the restriction which is being analysed affects the purchase of companies, that is to say, shares or membership interests of Spanish capital, without the law allowing us to think that this may affect other operations with a comparable effect. The law only refers to classic merger and acquisition operations. However, the investor operation may be orientated towards the purchase of business assets or business units, where share capital is not acquired, but instead the essence of the business activity of the company, whereby it is possible to agree not to assume certain liabilities of such business.

 

 

Eduardo Vilá

Vilá Abogados

 

For more information, please contact:

va@vila.es

 

9th October 2020