Investment Regulation in Spain during the COVID-19 Pandemic

Author: Francisco Marcos, Professor of Law at IE Law School

On Thursday, March 12, the IBEX 35 suffered the biggest crash in its history, falling 14.06%. It had been dropping in value since February 18—the date on which the index reached its highest value in two years—and two months later it had lost almost one-third of its value. During the past quarter, the stock prices of two IBEX 35 companies were cut by more than half. Banco Sabadell fell 59.33% while IAG dropped 65.92%. Meanwhile, eight additional companies dropped by more than 40% (Amadeus, Bankia, Bankinter, BBVA, Meliá Hotels, Merlín Prop., Repsol, and Santander). The stock prices of almost half of the companies listed in the index have dropped by more than 30% from their previous value.

Given that the “impact of the global crisis triggered by COVID-19 threatens listed Spanish companies […] including the possibility that foreign investors will initiate transactions to purchase them,” (according to Statement of Purpose IV of Decree-Law 8/20 dated March 17) the Spanish government has modified the foreign (non-EU) investment screening framework in order to implement prior screening requirements for the above-mentioned investments. The purpose of the reform seems clear: To prevent foreign investors from purchasing large shares in Spanish companies at today’s low stock prices.

Before Decree-Law 8/20 came into effect, Spanish law allowed foreign investors to freely invest in Spanish companies except when provisions to the contrary were established in regulated sectors (Law 19/2003). Decree-Law 8/20 and Decree-Law 11/20 dated March 31 have brought about significant changes to this framework. Foreign direct or indirect investments (made by investors that are residents of countries outside the EU and EFTA) will be subject to prior authorization when, as a result of the investment, the investor acquires a share of greater than or equal to 10% of the Spanish company’s share capital; or when, as a result of the corporate or legal transaction or act, the investor assumes control of the Spanish company’s governance structure. These are considered foreign direct investments (FDIs). Naturally, the requirement for prior authorization makes it impossible for these acquisitions to take place until it is obtained, with noncompliance being punished by a fine of less than or equal to the total transaction value.

The new legal framework is starting off on a bad foot, as its first page alludes to the “uncertain threat” to listed Spanish companies caused by the drop in their stock prices as a result of the crisis.

Even though the new foreign investment screening framework approved by Decree-Laws 8/20 and 11/20 is clearly inspired by some sections of the Regulation (EU) 2019/452 of 19 March establishing a framework for the screening of foreign direct investments into the Union, it goes far beyond its provisions and is filled with imprecise and ambiguous expressions that raise uncertainty in its application. The most serious of these is the fact that the goal of the new measures introduced by Decree-Law 8/20 and Decree-Law 11/20 clearly contradicts Regulation (EU) 2019/452 and the very recent European Commission Guidance to the Member States regarding foreign direct investment and free movement of capital from third-party countries, as well as the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452. Concretely speaking, just as the above-mentioned regulation consolidates the CJEU’s extensive jurisprudence regarding t free movement of capital, the Commission states the specific motives related to safety and public order that can be used as grounds for intervention when seeking to safeguard and protect public policies and strategic industries. However, the Commission’s text focuses on public health and alludes to it on multiple occasions—and for good reason. We are, after all, facing a health crisis. While these motives can adopt multiple forms and affect the health, pharmaceutical, energy, and financial sectors, under no circumstances are they permitted to have an exclusively economic purpose.

As if the above were not enough, the obligation to report in Spain is being extended to investments in a very large number of sectors. Theoretically speaking, according to the current framework, it could affect any FDI in any listed Spanish company, as they will likely fit into one of the sectors broadly described in the regulation.

Along with including additional sectors to be covered by foreign investment screening, questions arise about the interpretation of which transactions must be reported. Investments made by non-EU or non-EFTA residents will be subject to screening if, as a result of the investment, the investor acquires a share of greater than or equal to 10% of the share capital of a Spanish company; or when, as a result of the transaction, the investor effectively participates in the management or control of the company—even if they do not attain 10% of the company’s share capital. The above includes the incorporation of companies, the total or partial subscription and acquisition of their shares or the acceptance of company shares, and the purchase of securities such as preemption rights, convertible bonds, or other similar securities which, due to their nature, grant rights to obtain shares of capital, including also the participation in any legal transaction by virtue of which political rights are acknowledged.

On the other hand, transactions that have already begun and would have come to an end prior to Decree-Law 8/20 wnt into effect (that is to say, before March 18, 2020) as well as those for an amount of less than €1 million are not subject to the new rules. Nor does this obligation apply to purchasing share capital in Spanish companies if the investor already owned 10% of said capital, so long as the increase in the share does not imply gaining control of the company or effective participation in its management. While taking over control is relatively easy to define, determining the transactions that involve “effective participation in company management” raises significant questions, extending the reporting obligation to a multitude of corporate contracts and operations including treasury stock and structural modifications. The result is subjecting a large number of operations to screening.

In short, what is presented as a special measure to screen foreign investments to ensure safety and public order in reality imposes a generalized control of purchases of significant shares by non-EU foreigners in Spanish companies operating in almost any economic sector. What’s more, the only goal here is preventing the acquisition of relevant packages of shares at low prices. It is hard to think of a measure that could be more contrary to the repeated jurisprudence of the CJEU on the free circulation of capital and to the framework established in Regulation (EU) 2019/452. Furthermore, its effects begin immediately as of the entry into force of Decree-Law 8/20, producing the harmful effect—which is also difficult to measure—of creating a legal environment that discourages foreign investment. The best thing would be to repeal it as soon as possible.

Francisco Marcos is Professor of Law in IE Law School, he can be reached at francisco.marcos@ie.edu, he is the editor with Barry Rodger and Miguel S. Ferro, The Antitrust Damages Directive: Transposition in the Member States, which has just been published by Oxford University Press. The comparative analysis of the implementation in chapters 19 and 20 of the book as been nominated by Concurrences for the Antitrust Writing Awards 2019. 

Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.