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Government restrictions to M&A in Spain

21 Mar 2023 Europe

An aspect to take into account in M&A transactions is the need for government approvals. By European standards Spain had a somewhat liberal legislation which only required reporting of the investment by a non-Spanish investor (“horizontal restriction”) with the exception of certain strategic sectors for reasons of public policy and security (“vertical restriction”) where approval was required. This has changed since Royal Decree-Laws 34/2020 and 20/2022. On the one side, the new legislation requires official approval for a foreign investor to acquire 10% or more of the corporate capital of a Spanish company or if the foreign investor acquires the control of the Spanish company (by way of a merger or by appointing the majority of directors, etc). This restriction applies to investors of third countries which are not members of the European Union or to investors of a member countries of the European Union when such investors are controlled by a non-European entity, or such non-European entity has a direct or indirect shareholders exceeding 25% of the capital or voting rights of the European investor. On the other side, the legislation has also expanded vertical restrictions applicable to certain sectors of the Spanish economy. Spain is not an exception to a recent trend according to which countries why were very liberal have introduced foreign investment restrictions, for example the National Security and Investment Law (2021) of the UK.

The Spanish Royal Decree-Laws in their preambles give certain vague justifications for the new restrictive regime by referring to the impact of the pandemic, to geopolitical tensions, the disruption in the value chain and the instability in the financial markets. However, there are other untold reasons as the decline of share prices in the Spanish stock market creating a takeover threat by aggressive investors and funds wishing to control the largest corporations of the Spanish economy at a low share price. However, the horizontal restrictions are temporary, as they will be removed after the 31st December 2024. It is curious that prior to Spain joining the euro, horizontal restrictions were driven by balance of payments, employment or technology considerations, i.e. foreign investors were directed to sectors which would increase exports, will ensure a better training of local employees or promote innovation. Nowadays, the new parameter seems to have moved to protect entrenched interests in local listed companies, i.e. the plutocratic class in the words of Martin Wolf with close connections with the political establishment.

Regarding vertical restrictions the new legislation has not only reinstated or reinforced the existing restrictions on critical infrastructures, double use of technology, telecommunications, defense and the aerospace industry, energy and oil and food security, but has expanded them to new areas such as digital infrastructure, semiconductors, artificial intelligence, cybersecurity, nuclear energy storage, nanotechnology, data protection, mass media, etc.

Certain restrictions are difficult to understand such as the licensing for the acquisitions of newspapers and TV channels and the explanation may be the influence of TV and certain newspapers in public opinion during electoral periods. An example was the government veto of the takeover by Vivendi of the “El Pais” newspaper. Regarding semiconductors, the restrictions would seem to be premature as Spain does not have a manufacturing base so that it will make more sense an open policy. In defense, the government decisions have been erratic. Santa Barbara S.A., the manufacturer of a version of the Leopard tank is an affiliate of General Dynamics. In Indra, a participant in the future European combat aircraft, there is a significant stake of non-Spanish shareholders. Summing up, vertical restrictions are now greater, but their enforcement depends very much on political vagaries. All of this recommends that a potential investor carries out a prudent due diligence to ascertain from which side the political wind is blowing before embarking in a M&A transaction in strategic sectors.