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Direct foreign investments and renewables, a new problem in the sector?

| News | Corporate Law and M&A

Ignacio Blanco analyzes the model of foreign investment control

The 17th March Royal Decree-Law 8/2020 on urgent extraordinary measures to deal with the economic and social impact of COVID-19 has modified the model for the control of foreign investments, which is regulated, among other things, by 4th July Law 19/2003 on the legal regime for capital movements and economic transactions abroad, in 23rd April 1999 Royal Decree 664/1999 on foreign investments and in the 28th May 2001 Order establishing the procedures applicable to foreign investment declarations and their settlement, as well as the procedures for the submission of annual reports and authorisation dossiers.

However, the general principle before Royal Decree-Law 8/2020 was the absence of prior authorisation, and there were highly priced exceptions in specific sectors.

The aforementioned Royal Decree introduced a new article into Law 19/2003 (Article 7 bis) establishing the suspension of the liberalisation regime established as a general principle in that law when these are acts, businesses, transactions or operations that affect or may affect activities related to public power, national defence, order, security or public health.

The consequence of this new Article 7a is the creation of a system of ex ante control by which administrative authorisation will be required prior to the completion of the transaction and, in the absence of such authorisation, the transaction will be sanctioned with inefficiency and a financial fine.

The foreign investors to whom this restriction applies are:

  1. Those investors who do not have their residence in a country of the European Union or in a country member of the European Free Trade Association (Brexit deserves particular consideration insofar as its consequences will have full impact in the future).
  2. Those investors who, although resident in the European Union or in a member country of the European Free Trade Association, are owned by non-resident investors from the European Union or the European Free Trade Association. For these purposes, the real owner will be understood to be the person or entity that, either directly or indirectly, controls 25% of the capital or voting rights of the investor, or when, without holding 25% of the capital, the person or entity in question exercises real control over the investor, either directly or indirectly, by any other means. 

They will be considered as direct investments if they exceed one million euros:

  1. Acts, business dealings, transactions or operations that result in the investor becoming the owner of a stake of more than 10% in the capital of a Spanish company.
  2. Corporate operations, acts or legal business through which the investor comes to hold a position of management or control of a Spanish company.

The sectors in which the new administrative authorisation will be required, as provided for in Law 19/2003, are those that affect or may affect public order, security or health, these being at present the following: critical infrastructures, critical technologies and dual-use items, supply of key inputs, sectors with access to sensitive information and the media.

Within the previous enumeration are the "critical infrastructures" Law 19/2003 stating that it is independent that these are physical or virtual and therefore making express reference to the energy infrastructures as well as land and real estate that are key to the use of these infrastructures.

Having established the regulatory framework very briefly, it is now time to interpret it in the context of greenfield and brownfield transactions in the renewable energy sector.

There are arguments to argue that the correct interpretation would be for the new control regime not to apply to transactions in the renewable sector because of the reference to "critical" infrastructure. The meaning of what is "critical" is given by Article 2 of 28th April Law 8/2011, which establishes measures for the protection of critical infrastructures, considering only those "whose operation is indispensable and does not allow for alternative solutions, so that their disruption or destruction would have a serious impact on essential services".

We cannot consider each and every production facility already in operation as subsumable in the "critical" concept: that would mean giving the same rank in the system to a photovoltaic plant and to a nuclear or combined cycle plant when they do not fulfil the same functions. Since it is difficult to sustain the consideration as critical of any production facility using renewable sources, it is more difficult to sustain the need for prior control in transmission operations of greenfield projects in the renewable sector.

Notwithstanding the above, at this stage we do not know the interpretation that the competent administration will make. Given that the transactions in progress in which we are involved are not going to stop, what is advisable is the detailed study, case by case, of the particularities of the operation while delimiting the scope of the recently approved regulations, especially when the competent administration has shown signs that it can opt for a broad interpretation of the term "critical".

You can see the article in El Períodico de la Energía

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