On this past 18^th of November, Royal Decree-Law 34/2020 of the 17^th of November on urgent measures to support business solvency and the energy sector, and on tax matters (hereinafter “RDL 34/2020”) was published in the Official State Gazette.

Among its most important features, the Single Transitional Provision, relative to the “Transitional regime for the suspension of the liberalization of certain foreign direct investments made by residents of other European Union and European Free Trade Association countries“, modifies the mechanism for controlling foreign direct investments in Spain, as well as there being various amendments to Law 19/2003 of 4 July (hereinafter “Law 19/2003”).

DEFINITIONS

• RDL 34/2020 amends several definitions relating to foreign investment. The definitions amended are those explained below.

• Direct foreign investments

In accordance with the new RDL 34/2020, the term “direct foreign investment” shall mean:

• Those investments as a result of which the investor holds a participation equal to or greater than 10% of the share capital of a Spanish company; or
• When, as a result of the corporate operation, legal act or business, control of said company is acquired in accordance with the criteria established in Article 7.2 of Law 15/2007, of the 3^rd of July, on the Defense of Competition, whether they are made by residents of countries of the European Union (hereinafter the “EU”) and of the European Free Trade Association (hereinafter the “EFTA”) other than Spain, or by residents in Spain whose real ownership corresponds to residents of other countries of the EU and of the EFTA.

This supposes a relevant modification to Article 7 bis, in its section 1 of Law 19/2003, regarding the alternative criterion to the owning a shareholding equal or greater than 10% of the share capital in a Spanish company. This alternative criterion now consists of the investor taking an effective part in the management or control “as a consequence of the corporate operation, act or legal business, control of said company is acquired in accordance with the criteria established in Article 7.2 of Law 15/2007, of the 3^rd of July, on the Defense of Competition“. This modification translates to a more demanding criterion, since the acquisition of control is necessary, whilst the previous wording of Article 7 bis.1 of Law 19/2003 simply required “effective participation in the management or control is required“.

Likewise, the mention of Article 7.2 of Law 15/2007, of the 3^rd of July, on the Defense of Competition is also important, since it implies an extension of the cases or mechanisms that can be considered as giving rise to the acquisition of control, since Article 7.2 of the Law on the Defense of Competition includes the control resulting from “contracts, rights or any other means which, taking into account the circumstances of fact and law, confer the possibility of exercising a decisive influence on a company“, as well as the criteria established in Article 42 of the Commercial Code.

• Foreign Investor

Additionally, in accordance with the new RDL 34/2020, a “foreign investor” is understood to be residents of EU and EFTA countries other than Spain, as well as residents outside the EU and EFTA, residents in Spain whose beneficial owners are residents of EU and EFTA countries other than Spain and, finally, residents of EU or EFTA countries whose beneficial owners are residents outside the EU and EFTA.

On the other hand, with the purpose of easing the understanding this present note, please find below two definitions that, although they have not been modified by RDL 34/2020, they must be taken into account:

• Companies listed in Spain

Companies whose shares are wholly or partly admitted to trading on an official Spanish secondary market and which have their registered office in Spain are considered to be “companies listed in Spain“.

• Beneficial owner

“Beneficial owner” for the purposes of the previous paragraph shall be understood to exist when foreign investors ultimately own or control, directly or indirectly, a percentage of more than 25% of the shares or voting rights of the investor, or when by other means they exercise control, directly or indirectly, over the investor.

MENTION TO LAW 19/2003, OF THE 4TH OF JULY

RDL 34/2020, in its Single Transitional Provision, establishes that, until the 30^th of June, 2021, the regime of suspension of the liberalization of certain foreign direct investments in Spain, regulated in paragraphs 2 and 5 of Article 7 bis of Law 19/2003, applies.

For these purposes, it should be recapped that Article 7 bis of Law 19/2003. This Article 7bbis concerns the suspension of the regime of liberalization of certain foreign investments in Spain. In particular, paragraph 2 of said article establishes that the regime of liberalization of foreign direct investment in Spain, which is carried out in sectors affecting public order, public security and public health, is suspended, and in particular, certain sectors,of which three (3) are modified by RDL 34/2020:

1. Critical infrastructures, whether physical or virtual (including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructures, and sensitive facilities), as well as land and real estate that are key to the use of such infrastructures, understanding as such those referred to in Law 8/2011, of the 28^th of April, which establishes measures for the protection of critical infrastructures.
2. Critical and dual-use technologies, key technologies for industrial leadership and capability, and technologies developed under programmes and projects of particular interest to Spain, including telecommunications, artificial intelligence, robotics, semiconductors, cyber security, aerospace, defense, energy storage, quantum and nuclear technologies, nanotechnologies, biotechnologies, advanced materials and advanced manufacturing systems.[1]
3. Supply of essential inputs, in particular energy, understood as those regulated by Law 24/2013, of the 26^th of December, on the Electricity Sector, and Law 34/1998, of the 7^th of October, on the Hydrocarbons Sector or those referring to strategic connectivity services or raw materials, as well as food security.[2]
4. Sectors with access to sensitive information, in particular personal data, or with the capacity to control such information, in accordance with Organic Law 3/2018, of the 5^th of December, on the Protection of Personal Data and the Guarantee of Digital Rights.
5. Communication media, without prejudice to the fact that the audiovisual communication services under the terms defined in Law 7/2010, of 31^st March, General of Audiovisual Communication, shall be governed by the provisions of said Law.[3]

In this sense, paragraph 5 of the aforementioned Article 7bis establishes that the suspension of the liberalization regime established in accordance with paragraphs 2, 3 and 4 of Article 7bis will determine the submission of the aforementioned investment operations to the obtention of the pertinent authorization, in accordance with the provisions of Article 6 of Law 19/2003.

Investment operations carried out without the required prior authorization shall be null and void, and without legal effect until they are legalized in accordance with the provisions of Article 6 of the Law.

AMENDMENTS TO LAW 19/2003

As mentioned in the previous section, the fourth final provision of RDL 34/2020 modifies three (3) paragraphs of Article 7bis of Law 19/2003, relating to the sectors for which the regime of liberalization of foreign direct investment in Spain is suspended.

• Article 7 bis 2(b), relative to the sector related to critical and dual-use technologies is extended to add “key technologies for industrial leadership and training, and technologies developed under programmes and projects of particular interest to Spain, including telecommunications, artificial intelligence, robotics, semiconductors, cyber-security, aerospace, defense, energy storage, quantum and nuclear technologies, nanotechnologies, biotechnologies, advanced materials and advanced manufacturing systems“, as well as deleting the reference to Council Regulation (EC) No 428/2009.
• Article 7bis(2)(c), relative to the sector relating to the supply of critical inputs, is extended to include “those relating to strategic connectivity services“.
• A section is added to paragraph e) of Article 7 bis 2, on the sector relating to the communications media, establishing that they shall be “without prejudice to the fact that audiovisual communication services under the terms defined in Law 7/2010, of the 31^st of March, General of Audiovisual Communication, shall be governed by the provisions of said Law”.

On the other hand, paragraph a) of article 7 bis 3 is also modified, broadening the definition of control of a foreign investor by a government, so that it does not only include what is set forth in article 42 of the Commercial Code, but also establishes that in order to know if there is control, the criteria established in article 7.2 of the Law for the Defense of Competition, explained above, must be followed.

Article 7bis(3)(c) is also amended to provide that the regime of liberalization of foreign direct investment in Spain will be suspended if “there is a serious risk that the foreign investor will carry out criminal or illegal activities affecting public security, public order or public health in Spain“. This is as opposed to the previous wording of this paragraph, whereas after the amendment, the requirement of an administrative or judicial procedure to be opened is NO LONGER APPLICABLE, as “a serious risk” would suffice.

Lastly, a paragraph 6 is introduced in Article 7bis, which enables the Government to “establish by regulation the categories of operation and the amounts below which foreign direct investment operations will be exempted from the system of prior authorization due to having no or little effect on protected legal assets“, and also enables the Government to limit the definition of “sectors subject to control”. Likewise, the Minister of Industry, Trade and Tourism is empowered to dictate the regulations that may be necessary for the development and execution of that set forth in this paragraph.

TEMPORARY AMENDMENTS

In an additional manner to the amendments explained above, RDL 34/2020 applies, from the 19^th of November until the 30^th of June 2021, the need to obtain the authorization established in article 6 of Law 19/2003, to foreign direct investments if:

1. they are made on companies listed in Spain; or
2. they are made on unlisted companies if the value of the investment exceeds five hundred million euros:

In both cases, as long as these are investments relative to the sectors described in section (II) of this note.

To this effect, please be reminded that, as explained in section (I)(i) of this note, the expression “foreign direct investments” would over not only investments carried out by residents of countries other than the EU or EFTA, but also an investment carried out by Spanish companies whose beneficial ownership corresponds to residents in these territories.

It should be highlighted that there is no exception for transactions already agreed upon, but not closed prior to November 19^th, so such transactions will also be subject to the need to obtain prior administrative authorization in order to continue with their closure.

To this end, it is essential to consider that foreign direct investments in Spain subject to the control mechanism established in this note, if carried out without the required prior authorization, will lack validity and legal effects until they are legalized. This may also involve a fine, which may be up to the economic amount of the transaction.

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Corporate and M&A Area

+ 34 91 781 61 60

info@ecija.com

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[1] This sector is modified by RDL 34/2020, as established in the following section (III).

[2] This sector is modified by RDL 34/2020, as established in the following section (III).

[3] This sector is modified by RDL 34/2020, as established in the following section (III).