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  • Pablo Figueroa

SPAIN LIMITS TAKEOVERS IN STRATEGIC INDUSTRIES

THE MEASURE MIGHT BE INAPPLICABLE AS CONTRARY TO EU LAW



I. Executive Summary


On March 18, 2020, the Royal Decree-Law 8/2020, of March 17, on urgent and extraordinary measures to deal with the economic and social impact of COVID-19 was published in the Spanish Official State Gazette (the “RDL”). As a part of a € 200 billion program of support to mitigate the effects in the Spanish economy of COVID-19, the Spanish Government has just announced it will limit non-European takeovers against Spanish corporations in strategic industries including utilities, healthcare, media and IT.


The RDL confers wide discretion to the Spanish authorities to authorise acquisitions of stakes of 10% in corporations in these industries.


The practical application of this measures by the Spanish Government remains to be seen. To the extent that the measures are not necessary to address public health concerns related to coronavirus, they are likely to be incompatible with EU law and risk not being applied and/or being challenged in the Spanish Courts and/or being challenged by the European Commission.


II. Provisions on Foreign Investments in Royal Decree-Law 8/2020 of 17 March on urgent extraordinary measures to deal with the economic and social impact of COVID-19


As a result of the RDL, acquisitions of control or acquisitions, by non-European Economic Area (EU, Norway, Iceland and Liechtenstein) investors, of stakes larger than 10% of corporations active in the following industries are hereafter subject to authorisation from the Spanish authorities:

  • Critical infrastructures, whether physical or virtual (including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructures, and sensitive facilities.

  • Critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies

  • Supply of fundamental inputs, in particular energy or those referring to raw materials, as well as food safety.

  • Sectors with access to sensitive information, in particular personal data, or with the capacity to control such information and the guarantee of “digital rights”.

  • Media.

In addition, the regime of liberalization of foreign direct investment in Spain is also suspended in the following cases:

  • if the foreign investor is directly or indirectly controlled by the government, including public bodies or the armed forces, of a third country.

  • whether the foreign investor has made investments or participated in activities in sectors affecting security, public order and public health in another Member State.

  • whether administrative or judicial proceedings have been instituted against the foreign investor in another Member State or in the home State or in a third State for criminal or illegal activities.

Finally, the Government may suspend the regime of liberalisation of foreign direct investment in Spain in those other sectors not referred to above, when they may affect public security.


The rule enter into force the same day of its publication and apply for one month. However, the RDL foresees the possibility of an extension and is already widely rumoured to be extended for a longer period.


III. Compatibility of the measure with EU law


Some or all of the provisions in the RDL are likely to breach EU guaranteed free movement of capital.


This will be the case despite the fact that the measures are not applicable to EU investors. Indeed EU protected free movement of capital encompasses also the capital flows from non EU Member States. Pursuant to Article 63 of the Treaty on the Functioning of the European Union:


“Article 63 (ex Article 56 TEC) 1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. 2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited”.


We are in uncharted territory as regards the applicability of the public health exemptions under EU law to a crisis such as that of COVID-19. However, EU protected free movement is usually interpreted very widely by the EU courts. Only measures which are strictly necessary to the attainment of a public health objective are likely to be compatible with the TFEU. It is not easy to see the link, let alone a link of necessity, between such measure and any public health objective (you can impose as effective obligations of supply to corporations irrespective of whether the owner is Spanish or, say, Japanese). As a result, and absent a waiver from Brussels, of which we are unaware of, some or all of these provisions are likely to be partially or totally in breach of EU guaranteed free movement of capital.


In addition to which, it is debatable whether these measures are compatible with the monopoly which the EU law confers on the European Commission to authorise transactions from an antitrust perspective. Pursuant to Article 21(4) of the EU Merger Regulation.[1]


“[…] Member States may take appropriate measures to protect legitimate interests other than those taken into consideration by this Regulation and compatible with the general principles and other provisions of Community law.

Public security, plurality of the media and prudential rules shall be regarded as legitimate interests within the meaning of the first subparagraph.

Any other public interest must be communicated to the Commission by the Member State concerned and shall be recognised by the Commission after an assessment of its compatibility with the general principles and other provisions of Community law before the measures referred to above may be taken. The Commission shall inform the Member State concerned of its decision within 25 working days of that communication”.


Were the provisions contrary to EU law, investors would have two available remedies, which can be exercised simultaneously:

  1. Filing a complaint before the relevant department(s) of the European Commission. The Commission can bring the Kingdom of Spain before the EU Courts.[2] In order to do so, the Commission would first informally contact the Spanish authorities and get them to adapt the measure to EU law. The Commission has a wide discretion as to whether to act on such complaints and, if necessary, keeping the identity of the complainant anonymous.

  2. Invoking Article 63 before the Spanish authorities and, if necessary, Courts. EU law forces the Spanish authorities to leave unapplied any Spanish provisions contrary to directly applicable EU law.[3] If the Spanish authorities ignore these provisions, EU law further mandates the Spanish courts to grant interim measures to ensure the effectiveness of EU protected rights.[4]


III. Conclusion


Spain’s ruling coalition of the socialist party and populist left Podemos appears to have used the COVID-19 crisis as an excuse to enact wide protective measures insulating large sectors of the Spanish economy from non EU takeovers. To the extent that the measures are not necessary to address public health concerns related to coronavirus, they are likely to be incompatible with EU law and risk not being applied and/or being successfully challenged before the Spanish Courts and/or being challenged by the European Commission before the EU Courts.

[1] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L 24, 29.1.2004, p. 1–22. [2] Article 258 TFEU. [3] Judgment of the Court of 22 June 1989, Case 103/88 Fratelli Costanzo SpA v Comune di Milano, ECLI:EU:C:1989:256. [4] Judgment of the Court of 19 June 1990, Case C-213/89, The Queen v Secretary of State for Transport, ex parte: Factortame Ltd and others, ECLI:EU:C:1990:257.

Garrido Abogados continues helping its friends and clients throughout this crisis. If you are faced with any of these issues, contact us or your regular lawyer at Garrido Abogados. Pablo Figueroa: (+34 91 210 67 86, Pablo.Figueroa@garrido.es) Rubén Gil Puente: (+34 91 319 60 62, Ruben.Gil@garrido.es)

APPENDIX. WORKING TRANSLATION OF THE RELEVANT SPANISH PROVISIONS

"Article 7 bis. Suspension of the regime of liberalisation of certain foreign direct investments in Spain.

1.  For the purposes of the terms of this article, foreign direct investments in Spain are considered to be all those investments made by residents of countries outside the European Union and the European Free Trade Association when the investor holds a stake equal to or greater than 10 percent of the share capital of the Spanish company, or when as a result of the corporate operation, legal act or business, the investor effectively participates in the management or control of the said company.

2. The regime for the liberalization of foreign direct investments in Spain, which are made in the sectors mentioned below and which affect public order, public safety and public health, is suspended.

Specifically, the sectors are as follows:

a)  Critical infrastructures, whether physical or virtual (including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, 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 28 April, which establishes measures for the protection of critical infrastructures.

b)  Critical technologies and dual-use items as defined in Article 2(1) of Council Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies.

c)  Supply of fundamental inputs, in particular energy, understanding as such those that are subject to regulation in Law 24/2013, of 26 December, on the Electrical Sector, and Law 34/1998, of 7 October, on the Hydrocarbon sector, or those referring to raw materials, as well as food safety.

d)  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 5 December on the Protection of Personal Data and the guarantee of digital rights.

e)  Media.

3. The regime of liberalization of foreign direct investment in Spain is also suspended in the following cases:

a)  if the foreign investor is directly or indirectly controlled by the government, including public bodies or the armed forces, of a third country, the criteria established in Article 42 of the Commercial Code being applied for the purpose of determining the existence of such control.

b)  whether the foreign investor has made investments or participated in activities in sectors affecting security, public order and public health in another Member State, and in particular those listed in paragraph 2 of this Article.

c)  whether administrative or judicial proceedings have been instituted against the foreign investor in another Member State or in the home State or in a third State for criminal or illegal activities.

4. The Government may suspend the regime of liberalisation of foreign direct investment in Spain in those other sectors not covered by paragraph 2 of this Article, when they may affect public security, public order and public health, in accordance with the procedure laid down in Article 7 of this Law.

5. The suspension of the liberalisation regime established in accordance with paragraphs 2, 3 and 4 of this article shall determine the submission of the said investment operations to the obtaining of authorisation, in accordance with the provisions of Article 6 of this Law.

Investment operations carried out without the required prior authorisation shall be invalid and without legal effect until they are legalised in accordance with the provisions of Article 6 of the Law.

6. The suspension provided for in this article shall be in force until the Council of Ministers issues a resolution determining that it be lifted".


Two. Article 8(2) is amended to read as follows

"2. They shall constitute very serious infringements:

a)  The performance of acts, business, transactions or operations prohibited by virtue of the adoption of the measures referred to in Articles 4 and 5.

b)  Engaging in any act, business, transaction or operation without seeking authorisation where authorisation is required under Articles 6, 7 and 7a, or before granting such authorisation, or in breach of the conditions set out in the authorisation.

c)  The untruthfulness of applications for authorisation submitted to the competent bodies, where this can be considered particularly relevant”.


Three. Article 12(2) is amended to read as follows

"2. The power to initiate and investigate sanctioning procedures resulting from the application of the system provided for in the Law and to impose the corresponding penalties shall be governed by the following rules:

a)  The competence for the initiation and instruction of sanctioning procedures shall correspond to the Secretariat of the Commission for the Prevention of Money Laundering and Monetary Infractions, except in matters of direct foreign investment in Spain, which shall correspond to the body designated by the holder of the Directorate General for International Trade and Investment.

b)  The imposition of sanctions for very serious infringements will correspond to the Council of Ministers, on the proposal of the Minister of Economic Affairs and Digital Transformation. 
However, in the case of very serious infringements in the area of foreign direct investment in Spain, the imposition of sanctions will correspond to the Council of Ministers, on the proposal of the Minister of Industry, Trade and Tourism.

c)  The imposition of sanctions for serious infringements will correspond to the Minister of Economic Affairs and Digital Transformation, at the proposal of the Minister of the State Secretariat for the Economy. 
In the case of serious infringements in the area of foreign direct investment in Spain, the imposition of sanctions will correspond to the holder of the Ministry of Industry, Trade and Tourism, at the proposal of the holder of the Secretariat of State for Trade.

d)The imposition of sanctions for minor infringements will correspond to the head of the Directorate General of the Treasury and Financial Policy, at the proposal of the investigating body. In the case of minor infringements in the area of foreign direct investment in Spain, the imposition of sanctions shall be the responsibility of the head of the Directorate General for International Trade and Investment, at the proposal of the investigative body".






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