An acquisition may require several regulatory controls before it can be closed
One and the same acquisition may be subject simultaneously to several public controls before it can be closed. Beyond the agreement between buyer and seller, certain transactions must clear merger control, the foreign investment regime and, where applicable, the new control of foreign subsidies distorting the internal market. These are not alternative regimes, but cumulative ones with different rationales. The practical result is that a sale and purchase may be perfectly agreed between the parties and yet be incapable of being completed until certain authorisations have been obtained or the corresponding regulatory procedures have concluded. Integrating these controls into the contractual structure from the outset is essential in order to manage timetables, risks and, ultimately, the viability of the transaction itself.
1.Merger control: change of control and effects on competition
The first classic filter is merger control. An M&A transaction constitutes a concentration where it brings about a lasting change of control over all or part of one or more undertakings, whether by merger, acquisition of sole or joint control, or creation of a joint venture performing on a lasting basis the functions of an autonomous economic entity. Control is defined as the possibility of exercising decisive influence over an undertaking, whether through rights of ownership or of use over assets, or through contracts or the ability to determine the composition and the decisions of its governing bodies. Mere intra-group reorganisations, certain temporary acquisitions by financial institutions and those carried out in the context of insolvency proceedings are not regarded as concentrations.
In Spain, the “Ley de Defensa de la Competencia” —the Spanish Competition Act— makes concentrations exceeding certain thresholds subject to prior control. A transaction must be notified where, as a result of the concentration, a share equal to or greater than thirty per cent of the relevant product or service market is acquired or increased, at national level or in a geographic market defined within it, unless the turnover in Spain of the company or assets acquired does not exceed ten million euros and the parties do not hold a share equal to or greater than fifty per cent in any of the markets concerned. Notification is also required where the aggregate turnover in Spain of all the parties exceeds two hundred and forty million euros and at least two of them individually generate more than sixty million euros. Concentrations with a Community dimension, defined by the European Merger Regulation by reference to worldwide and Community turnover thresholds, are notified to the European Commission, save where they are referred to the Member States.
The practical effect is that the transaction cannot be implemented until the competent competition authority clears it, with or without conditions, or until the time limits expire without objection. The sale and purchase agreement must therefore include conditions precedent relating to obtaining competition clearance, notification and cooperation obligations, and clauses allocating the risk that the authority may impose remedies or even prohibit the transaction. In complex transactions, the negotiation over who bears the “antitrust risk” and how far that party is prepared to accept divestments or behavioural commitments is as important as the price.
2.Foreign investment: security, public order and strategic sectors
The second relevant filter is the screening of foreign direct investment. The Spanish regime starts from the freedom of movement of capital, but suspends that freedom for certain foreign direct investments capable of affecting security, public order or public health. Foreign direct investments are those which lead the investor to hold a stake equal to or greater than ten per cent of the share capital of a Spanish company, or to acquire control of all or part of it in accordance with the control criteria of competition law, where they are made by residents of countries outside the European Union and the European Free Trade Association, or by residents of the EU or EFTA whose beneficial ownership lies with residents of third countries.
The suspension of the liberalisation regime applies to investments in strategic sectors such as critical physical or virtual infrastructure, critical and dual-use technologies, the supply of key inputs such as energy, sectors with access to sensitive information and the media. It is also triggered where the investor is controlled by the government of a third country, has made investments in sensitive sectors in other Member States, or there is a serious risk of criminal or unlawful activities. The Government may extend the suspension to other sectors by a decision of the “Consejo de Ministros”, Spain's Council of Ministers.
The consequence is that the transaction becomes subject to prior authorisation. Investments made without the required authorisation have no validity or legal effect until they are regularised, and the investor may not exercise economic or voting rights in the company acquired. The authorisation procedure has its own time limits, which may run to several months, and the decision may grant authorisation, grant it subject to commitments or refuse it. The sale and purchase agreement must reflect this reality: closing must be made conditional upon obtaining foreign investment authorisation, the parties must undertake to cooperate in the procedure, and they must agree what happens if authorisation is refused or is made subject to conditions which substantially alter the transaction. In sectors such as defence or energy, moreover, there may be additional sector-specific controls over the acquisition of significant holdings.
3.Foreign subsidies: a new control over the origin of certain advantages
The third and more recent filter is the control of foreign subsidies distorting the internal market. The European Foreign Subsidies Regulation has introduced a system of ex ante control over certain concentrations and over participation in public procurement procedures where the undertakings involved have received financial contributions from third countries above certain thresholds. The aim is to prevent subsidies granted by non-Union States from conferring on undertakings an undue competitive advantage in the internal market, distorting competition in M&A transactions or in tenders.
In the field of concentrations, the Regulation requires notification to the European Commission of transactions in which at least one of the undertakings involved is established in the Union and generates a significant turnover, and in which the undertakings taken together have received financial contributions from third countries above a given threshold in the preceding three years. The Commission may examine whether those contributions amount to foreign subsidies distorting the internal market and, where appropriate, impose remedies, prohibit the concentration or accept commitments. In public procurement, economic operators taking part in certain procedures must declare the foreign financial contributions received and, where appropriate, submit to a similar examination.
For an M&A transaction with a European dimension and the presence of funding or support from third countries, this adds a further layer of control. The transaction may be subject at the same time to merger control and to foreign subsidies control, with different procedures and different time limits. The agreement must provide for the parties' obligation to gather and supply information on foreign financial contributions, to cooperate in the notification and to bear any remedies the Commission may impose. Failure to notify, or implementation of a notified concentration before the Commission's decision, may give rise to significant penalties and to the nullity of the transaction.
4.Interaction of the three controls and effects on the contractual structure
These three regimes do not exclude one another; they may apply simultaneously to the same acquisition. A transaction in which an investor from a third country acquires control of a Spanish company active in a strategic sector and with a significant presence in the internal market may require, at one and the same time, foreign investment authorisation, competition clearance and examination of foreign subsidies. Each procedure has its own rationale, its own competent authority, its own time limits and its own possible outcomes. From the parties' perspective, this translates into a regulatory complexity which must be managed from the moment the transaction is designed.
In practice, the sale and purchase agreement must include a set of conditions precedent covering all the relevant controls: competition clearance, foreign investment authorisation, a favourable decision on foreign subsidies where applicable and, where appropriate, specific sector authorisations. It must lay down detailed obligations to cooperate in the preparation of notifications and applications, in responding to requests for information and in negotiating any commitments or remedies. It must allocate the risk that an authority may impose onerous conditions or prohibit the transaction, determining who bears the obligation to offer remedies, how far and with what financial consequences.
The timetable of the transaction is inevitably affected. The review periods for competition, foreign investment and foreign subsidies may overlap or run one after another, and the notification strategy must be coordinated in order to avoid inconsistencies and to take advantage of synergies. In some cases it may be advisable to notify one authority first in order to test its reaction before approaching another; in others, proceeding simultaneously may be preferable in order to shorten timescales. In any event, the idea of a swift closing after signing becomes unrealistic in transactions subject to multiple controls.
5.Conclusion: an agreed sale and purchase is not always a sale and purchase that can be closed
An acquisition may be perfectly agreed between buyer and seller in terms of price, perimeter and warranties and yet not be capable of being completed until several regulatory filters have been cleared. Merger control, the foreign investment regime and foreign subsidies control pursue different objectives, but they converge on one point: they determine whether the transaction can be closed and can produce its effects. For the parties, this means that the regulatory dimension cannot be treated as a late appendix, but as a structural element of the transaction.
Identifying from the outset which controls may apply, designing the transaction with their impact in mind, planning the timetable of notifications and authorisations, and reflecting all of this in the contractual structure through conditions precedent, cooperation obligations and risk allocation clauses is today an inseparable part of M&A work. Ignoring this reality may lead to blocked transactions, forced renegotiations, additional costs or even the impossibility of closing. In an environment in which public intervention in large transactions has become more intense and more sophisticated, understanding that an acquisition may require several regulatory controls before it can be closed is the first step towards structuring it viably.
