How do you ascertain whether transactions trigger FDI controls in Spain? By using the “informal query” process
Like many other European countries, Spain introduced further FDI controls in the wake of the Covid-19 pandemic.
The Spanish government approved two new screening regimes, one for investors from outside the European Union / EFTA and another for investors from other EU or EFTA members. Note that screening of FDI in the defence sector was already in place and remains unaffected.
Both are “prior approval” systems, i.e., sensitive transactions require FDI authorisation prior to completion; non-sensitive ones don’t and there is no “fall back” voluntary regime or call-in rights for non-sensitive transactions. This is unlike other regimes, such as Germany, the US and the UK which all feature a voluntary fall-back regime, and also (in the case of Germany and the US) call-in rights for non-sensitive transactions.
There is no intermediate “notification” system. Closing a transaction without the required approval entails potentially heavy fines and the transaction being legally void – although this can be cured by applying for authorisation afterwards.
The requirements for whether a transaction triggers FDI controls are ill-defined in the law (as a result of the Spanish law merely having “copy/pasted” the very broad and vague classifications of the EU’s Screening Regulation), making it difficult for legal advisors to be 100% sure whether approval should be sought in any given case. The key factor is whether the investment concerns a sensitive sector. However, the definitions of the sectors are vague and open-ended. For instance, the “supply of critical inputs”, such as those affecting “food safety”, is deemed strategic – so, does an investor acquiring a supermarket chain need FDI approval?
The FDI regime for investors from outside the EU or EFTA can also potentially be triggered if the purchaser’s circumstances are deemed suspect, even if the sector is not sensitive. Some of these characteristics are relatively straightforward, e.g., being controlled by a foreign state. However, others are so broadly defined that if the authorities applied them literally, they could potentially catch an unreasonable number of transactions that are irrelevant to Spanish national security. By way of example, one of the suspect circumstances covers all investors that “have made investments or taken part in activities in sectors affecting security, public order or public health in another Member State”.
Due to this substantial uncertainty, an informal process to determine the need for prior approval came about “organically”, even though it was not set out in the legislation. As soon as the new FDI regime was introduced in 2020, investors and legal advisors began sending emails to the officials in charge of applying the rules to check whether transactions required authorisation. In their initial responses, officials showed a great deal of leeway in their reading of the law and began clearing most transactions quickly, confirming that they caused no concerns under the new rules. The authorities gave speedy responses – sometimes in as little as two days - which provided legal certainty for transactions in a very reasonable timeframe.
However, this quickly created another problem. As the process was free, fast, and informal, the authorities began receiving huge numbers of queries. Officials were snowed under and started to take much longer to respond. At one point in Spring 2021, replies could even take months.
To try to get their inbox in order, the authorities have turned this informal channel into a semi-formal process: queries are still received (and answered) by email, but an official form must now be submitted. The form requires detailed information on the transaction, the target, and the investor. The relevant department within the trade ministry has been appropriately staffed – response times remain long, but have been contained. It now takes around 4- 5 weeks to get a reply. By way of comparison, the formal notification procedure - in addition to being more logistically burdensome upfront - also involves a 6-month statutory deadline to issue a decision (even if it is to confirm that approval is not actually needed).
It is important to note that the officials in charge maintain two separate channels and aim to limit the number of formal FDI proceedings they open. If they end up concluding that a transaction requires approval and a formal application, the time spent on the informal query process is not wasted, because it will have enabled the officials to become familiar with the case and their analysis will already be very advanced.
Draft secondary legislation is in the works to clarify certain aspects of Spain’s FDI screening regime. If passed, it would officially establish the query process (called “voluntary consultation”) and make the authorities’ responses binding.
In summary, the query process remains cost-free, but is not so fast or informal now. The need to disclose information is also a major deterrent. Investors are becoming increasingly confident about conducting their own assessments (assisted by their legal advisors) and going ahead with transactions if they consider them immaterial to Spain’s public order, security, or health.