Foreign investment monitor #9

Ganz-Mavag’s investment was scrutinized under Spain’s so-called provisional FDI regime for European Union (EU) investors, implemented in November 2020. This regime, set up amidst the heavy economic impact of the early days of COVID, was subsequently extended on three occasions. The current temporary FDI regime is set to expire at the end of 2024, though Spain’s Minister of Economy has already announced another extension.

This transaction shows Spain’s continuous willingness to scrutinize foreign investments in some sectors of the Spanish economy (and intervene, if required), even if such investments come from elsewhere in the EU. Ganz-Mavag has nevertheless announced its intention to appeal the prohibition before the Spanish Supreme Court.

This appeal should shed light on the boundaries of Spanish FDI rules and compatibility with EU fundamental freedoms, as well as on the balance between confidentiality and parties’ access to the case file in FDI reviews.

Why was Ganz-Mavag’s investment in Talgo blocked?

From the outset, it was clear the Spanish government has reservations about the transaction. Talgo was publicly labelled a strategic operator and the government openly signaled a preference for other bidders. The Spanish Minister for Transport and Sustainable Mobility even declared that the government would do “everything possible” to prevent a takeover.

Following a lengthy review under the above-mentioned temporary FDI regime for EU investors, the Spanish government prohibited the transaction following a negative report from the Foreign Investment Board, which is a public body comprised of representatives of different ministries and the Spanish secret services in charge of reviewing investments prior to final consideration by the Council of Ministers.)

The decision of the Council of Ministers, although technically confidential and addressed only to the applicant, was made public in the context of the review of the takeover offer by the National Securities Market Commission (CNMV).

Consistent with the customary practice of the Council of Ministers when issuing a decision regarding a request for FDI approval, the decision at stake is succinct and contains minimum details regarding the review. However, despite its relevance, the decision lacks any meaningful reference to the grounds for the prohibition.

In detail, pursuant to the decision, the Spanish government considered that the activities of the target would fall within two of the strategic sectors foreseen in the applicable FDI rules, thus requiring prior FDI approval, namely: (i) critical technologies and dual-use items; and (ii) supply of critical inputs, foreseen in Article 7 bis 2(b) and (c) of Law 19/2003 on the legal regime of capital movements and economic transactions abroad.

However, no further reference is made to the specific activities of Talgo falling within such strategic categories. The decision simply highlights Talgo’s “commercial relationships with Renfe” and “the company’s technology,” that can amount to “dual-use items, key technologies for industrial leadership and capacity building, and technologies developed under programmes and projects of particular interest to Spain.”

Most notably, there is no reasoning as to why such activities could be jeopardized as a result of Ganz-Mavag’s investment or why the investment entails a risk from a public order, security and health. In this respect, Ganz-Mavag noted in a communication to the CNMV that the decision “lacks the slightest motivation and produces the offeror the most absolute defencelessness.”

A press release published by the Spanish Government on 27 August 2024 offered limited additional details on its decision, reportedly adopted seeking the “protection of Spain’s strategic interests and national security.” The prohibition would be warranted due to the “risks to national security and public order,” and the fact that Talgo is “a strategic company in a key sector for economic security, territorial cohesion and industrial development of Spain.”

No additional information on the decision was officially published, and the case file has been declared as classified by the Spanish government.

Media reports national security concerns

Despite the lack of official details, international and Spanish media has reported that the decision was influenced by reports from the Spanish secret service and the national security unit. The reports apparently expressed concerns over the consortium’s ties to the Hungarian government and Russia. Reportedly, Magyar Vagon Group had ties with the Russian railway company Transmashholding until 2022 (with Politico reporting reputational and national security concerns).

Media (including the FT) has also reported Spanish government wariness of an investor with potential ties to Russia gaining control over allegedly critical technology, in particular Talgo’s patented variable gauge technology. This technology allows trains to travel across railway networks with different track gauges and could potentially be useful in Ukraine’s reconstruction, according to press sources. (The Spanish government has not officially confirmed any details.)

What’s next for Ganz-Mavag and Talgo?

Following the prohibition decision, Ganz-Mavag withdrew the takeover offer and announced to the CNMV that it would appeal the decision of the Council of Ministers, both at national and EU levels. In particular, and without prejudice to other actions, Ganz-Mavag intends to directly file an appeal before the Spanish Supreme Court following the contentious administrative jurisdiction. It has also been reported by Reuters and other Spanish media that the Spanish Association of Minority Shareholders also intends to file an appeal against the decision and challenge the temporary FDI regime for EU investors. Nevertheless, latest news indicates that such appeals may not be filed ultimately.

While there are no public details yet on any such appeals, it is likely that applicants would seek, among other things: (i) to trigger a preliminary ruling request in order to challenge the validity of the temporary FDI regime for EU investors in light of the freedom of establishment and the free movement of capital enshrined in the Treaty on the Functioning of the EU; (ii) from a substantive perspective, to challenge the boundaries of the definition of the relevant strategic sectors foreseen in the applicable FDI rules as well as the Spanish Government’s discretionary powers in limiting the freedom of establishment of EU investors (in line with the Court of Justice’s case law in the Xella case); and (iii) at a procedural level, to protect their rights of defense and due process, including parties’ right to access the case file and the authority’s duty to state grounds for its decisions.