On the Government's decision
On 27th August 2024, the Spanish Council of Ministers agreed to not authorise the acquisition of control of the listed Spanish railway equipment manufacturer Talgo S.A. by Hungarian competitor Ganz MaVag Europe Private Limited on grounds of protection of Spain's strategic interests and national security.
The authorisation was requested by the investor as a legal requirement for the execution of the takeover bid for 100% of Talgo for 620 million Euro. The takeover bid had been previously admitted for processing on 22nd April by the Spanish National Securities Market Commission ("CNMV"), but despite being a EU investor, the transaction required the prior approval of the Government. Due to the rejection, the takeover bid cannot be implemented.
The non-authorisation decision has been sustained on Spain’s current FDI transitional regulations (which were extended for the third time at the end of 2022 until 31st December 2024) specially covering certain investments made in strategic sectors by residents from EU and/or EFTA member states.
The Spanish Government considers Talgo to be a strategic company in a key sector for Spain's economic security, territorial cohesion and industrial development. The detailed evaluation of the transaction -carried out by the FDI Board ("JINVEX")1 - has determined that the authorisation would entail risks to the national security and public order. It should be noted that only said (limited) conclusion of the analysis has been disclosed by the Council of Ministers, as the rest of the information and arguments contained in the administrative dossier has been classified, so that -despite speculation- the specific reasons for the adoption of such decision have not yet been entirely made public.
This decision by the Spanish Government to veto the transaction has not been challenged by the European Commission, as it has considered that it is a prerogative of Member States to adopt this type of decisions and that Spain has the right to protect the country's interests and national security. Brussels has also confirmed that Spain did not even have an obligation to inform them.
The Hungarian consortium Ganz-Mavag has criticised the “unfounded decision”, while withdrawing its takeover bid, and announcing that it will appeal the Government's veto to the administrative chamber of Spain’s Supreme Court.
On the control of FDI in Spain and the EU
In Spain, since its introduction in 2020, the control of FDI is mostly regulated by (i) Article 7 bis of Law 19/2003, of 4 July, on the legal regime of capital movements and economic transactions abroad, (ii) the Sole Transitory Provision of Royal Decree-Law 34/2020, of 17 November, on urgent measures to support business solvency and the energy sector, and on tax matters, and (iii) Royal Decree 571/2023, of 4 July, on foreign investments.
In additional to the specific FDI regulations relating to national defence and weapons and diplomatic real estate screening mechanisms, the Spanish general FDI regulation requires the obtention of a prior administrative authorisation for certain FDI in Spain that are deemed to affect public order, public safety or public health.
Investment falling within the FDI regulation that are carried out without the required prior authorisation shall have no legal validity and effects until they have been legalised. Additionally, investors may be subject to public and/or private warnings, as well as economic fines which may go from 30,000 Euro to up to the total amount of the economic content of the transaction.
The control of Talgo’s transaction has been in particular based on the Sole Transitional Provision of Royal Decree-Law 34/2020, which establishes that investments by residents of EU or EFTA countries will be subject to authorisation when either their value exceeds 500 million Euros or they are affect companies listed in Spain, provided that the investment is made in a company active in any of the strategic areas contemplated in Section 2 of Article 7bis of Law 19/2003, of 4 July2. It should be noted that this transitional regime shall only remain in force (unless it is formally extended again) for a few additional months - until the end of the present year.
Spain’s Transitional Provision represents an extension of the FDI regime applicable not only to foreign investors, but also to those from EU countries. Within the EU, some regimes - such as the Spanish and French regimes - monitor and track EU-based investors, while others are exempt from the need to notify in certain circumstances.
The controversial application of this special regime and the fact that it shall actually cease to apply soon, has brought to the table the question on whether or not it would be extended (again) or even definitively incorporated into the general regime.
One of the reasons for its controversial nature has been that to date the Spanish Government has only very rarely rejected -or even conditioned- FDI authorisations. Indeed, according to the Government's annual report on Control of FDI in Spain in 2023, of the 97 applications for authorisation formally reported by the JINVEX that year, 9 were shelved after analysis and discussion, as it was considered that there were no cases under Article 7 bis justifying the suspension of the general regime. Of the remaining 88 transactions, 80 were authorised without mitigation measures, as no significant risks to public safety, health or order were identified, and only 8 were authorised with mitigation measures (conditions). As per the number of blocked transactions, it should be noted that since 2020 (where the Government interventions in FDI started), there is only one reported case of a transaction not being authorised (back in 2022) because, apparently3 it was impossible to establish effective mitigation measures.
Despite the high degree of integration of FDI control regimes in the EU, and the increasing cooperation at the European level (whose regulations establish, inter alia, the obligation for all transactions subject to control by the Member States to be notified to the rest of the EU countries and to the Commission in order to be duly reviewed and, if necessary, to make observations), the necessary control mechanisms to detect risks to security or public order arising from certain investment transactions remains at the Member States’ level, who maintain the final say on them. Bearing in mind the powerful instrument of control on investments that FDI policies represent, it does not seem probable that Member States will willingly renounce to it.
In the above context, the European Commission is currently in the process of strengthening the FDI regulatory framework and proposed last January to reinforce the effectiveness of its mechanisms of control. The review of the legislative framework aims at increasing the control over security risks that (allowing the entry into strategic companies of nationals of) countries such as (the current) Russia may pose for EU Member States.
Practical recommendations for foreign investors in this context
With the current increasing sensitivity to allowing external investments that affect not only Spain but other EU countries as well, foreign investors should be particularly cautious and pay express attention to designing and adopting an efficient and realistic strategy to secure all the required regulatory approvals for a transaction, in particular if such transaction is subject to an FDI authorisation in any EU Member State.
In doing so, not only the sensitive nature of the target's activities but also the nationality, structure of control, sector of activity and circumstances of the investor (including EU and EFTA residents themselves, where applicable), as well as the whole economic, political and social surrounding context, will have to be taken into account in determining the best possible strategy.
The way the jurisdiction of the Spanish FDI regime applies to foreign (or EU) transactions is so broadly drafted as regards those that can affect the public order, public security and public health that the capacity of the Spanish Government to intervene is very broad and extensive. This extended intervention capacity should be duly factored when evaluating the best strategy to obtain regulatory clearances for the transaction, paying special attention to existing relationships of the country of origin of the investor (or any other country that may have -for whatever reason- an influence on the investor).
The evaluation should also bear in mind that Governments (both Spain’s and others) are increasingly extending the scope and depth of their evaluation of the investor’s origin and position in their analysis. Indeed, Governments are considering not only the information provided by the investor itself in its formal application from, but are also extending their research to other sources, such as the EU Commission or other Member States, as well as to different branches of the General State Administration, other administrations, economic agents, civil society organisations or social partners.
This extensive and strengthened analysis of transactions subject to FDI must be duly advanced, its potential effects considered and everything must be factored by companies facing the approval of complex (specially if politically exposed) transactions into their overall strategy. This implies advancing the 360° evaluation of the investment opportunity as much as possible, and taking it into account during the entire process, starting with the design of the due-diligence process, following with the drafting of the transaction documents and advancing the potential negotiation of the FDI approval.
Authored by Casto González-Páramo Rodríguez and Raquel Fernández Menéndez.
References
1 A collegiate inter-ministerial body which is responsible for analysing and reporting on notified transactions (on the basis of the information provided by the relevant ministries and agencies):
2 The sectors that have been declared to be strategic are:
3 The limited information disclosed in the Government's annual report on FDI in Spain in 2022 does not provide further details.
