Analysis of developments and trends for 2023 in commercial law practice in the Iberian market
The following is a brief analysis of the main developments and trends that, in our opinion, we will see in commercial law practice in the Iberian market in the course of 2023.
1. Restructurings and special situations
The increase in financing costs due to the hike in interest rates is likely to put a strain on companies’ financial performance in a complex economic climate where they continue to face the knock-on effects of the pandemic, inflation and the war in Ukraine. In Spain the new “restructuring plans” are expected to play a key role; restructuring of the ICO-guaranteed COVID-19 loans may be problematic; and the new “liquidation restructuring plans” could be a powerful tool for distressed M&A. An increase in financing transactions through direct lending and rescue financing is also expected in 2023.
In Portugal, 2023 will be the year that the reforms made to the Portuguese insolvency and pre-insolvency legislation in 2022 are tested, in particular those on voting by classes of creditors and protecting new money in the context of preventive restructuring proceedings, the non-subordination of specific claims held by related persons and the loosening of the rules on distributions to creditors
After a couple of years dominated by the energy crisis and the resulting intense legislative activity in the sector, no new far-reaching measures are anticipated in Spain in 2023, but we might see further extensions of some of those already in place and we also expect developments in the regulation of green hydrogen. The debate at an EU level on the reform of the electricity market will have to be followed closely, although it is unlikely that we will see any actual results this year. With regard to investments, the coming months should see the first offshore wind auctions, which the sector is eagerly awaiting. In addition, the large number of environmental impact statements (declaraciones de impacto ambiental or “DIA”) granted in recent weeks suggests that we will see a lot of activity in the project finance market.
In Portugal, 2023 will be marked by (i) the development of the solar projects auctioned since 2019, (ii) further development of the green hydrogen regulatory framework (as in Spain), and (iii) auctions of offshore wind capacity and a new regulatory framework for the sector.
3. Real estate
We expect 2023 to be a year of great uncertainty for the real estate sector in both Spain and Portugal as its evolution is inexorably linked to inflation, rising interest rates and the increasing price of commodities. This, together with the undoubted recovery of the tourism sector, could lead to an increase in hotel and tourism investment in 2023, as well as to growth in the residential leasing sector through build-to-rent, tourist accommodation, coliving and student residence developments.
From a legislative standpoint, if the deadline is met, in 2023 Spain will witness the approval of one of the most important pieces of legislation in the real estate industry in recent years: the Housing Law (Ley Estatal por el Derecho a la Vivienda).
4. Digital law, cybersecurity and blockchain
In 2023 numerous regulations on digital matters – mainly triggered by EU initiatives – will be approved, which will have a significant impact on how companies operate in the digital world; these include the new EU rules on data, artificial intelligence and cryptoassets (MiCA). M&A and contracting in digital and telecom assets, businesses and services will continue to grow as in recent years.
In 2023 we can expect to see the most important pharmaceutical legislation reform in Spain in decades, with the simultaneous amendment of both the European legislative package on medicines and the Spanish Law on Guarantees and Rational Use of Medicines and Medical Devices (Ley de garantías y uso racional de los medicamentos y productos sanitarios). After the hiatus caused by the pandemic, the consolidation of the healthcare and hospital sector is expected to continue and intensify. Despite some regulatory uncertainty, intense investment activity is also expected in the social care sector. And, as in almost all areas, digitalisation will continue at an unrelenting pace.
6. Foreign investments (FDI) screening mechanism
The FDI regime and its practical enforcement are developing constantly, and this trend will continue during 2023. While the text of the FDI rules has barely changed since they were introduced in Spain in March 2020, there will be significant regulatory developments in 2023 if, as expected, the developing regulations on this matter are approved.
7. Capital Markets
The new Securities Markets and Investment Services Draft Law will come into force in Spain in 2023, introducing important new features for issuers, intermediaries and other securities-market participants, while the European Commission’s Listing Act Package aims to reform the rules on prospectuses, market abuse and admissions to trading on regulated markets to increase flexibility. In the meantime, the volume of debt and equity transactions is expected to recover and new takeover bids over listed companies are also awaited. Pending appeals against previous takeover bids may be decided, lending greater certainty to future bids.
In Portugal, 2023 will be the year in which capital markets adapt to legislative changes approved in 2022, both at a national and EU level. The Portuguese legislature made significant amendments to the Securities Code (the CVM) to align it with EU law on aspects such as improving equal treatment of issuers and investors and easing access to markets with the goal of developing the Portuguese capital markets and making them more competitive. In order to achieve this alignment and reduce and simplify issuers’ obligations, various regulations issued by the supervisory authority (the Comissão do Mercado de Valores Mobiliários or CMVM) are being reviewed.
8. Financial regulation
This year will be one of significant change in regulatory areas that have been transforming the sector for some years, with sustainability being the most important driver given its pervasive impact. Additionally, minor reforms will be introduced in “cornerstone” European directives and regulations related to investment vehicles and providing investment services (AIFMD, UCITS, MIFID and MIFIR) as there will be local reforms that could also have a huge impact, such as the creation of the controversial Spanish Financial Client Defence Authority.
The new Banking Package (CRRIII/CRDVI) is expected to be approved, which will bring about important developments in prudential regulation and supervision, and the prudential management of climate and ESG risks. This year will see a new stress test for the banking sector, as well as the launch of the EU Anti-Money Laundering Prevention Authority (AMLA). However we do not expect major progress in the bank resolution framework.
The deadline for implementing Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on Credit Servicers and Credit Purchasers and amending Directives 2008/48/EC and 2014/17/EU is 31 December 2023. In Spain, the legislative process was launched at the end of December last year with a public consultation process.
The Directive lays the foundations for the legal regime applicable to purchasers and servicers, two of the main players in the market for the sale of non-performing loans (NPLs), which has been so important in Spain in recent years. Proper implementation of the Directive therefore seems necessary to consolidate this market, which is essential in order to keep financial institutions’ balance sheets as sound as possible.
In light of the pervasive nature of ESG aspects, the new developments expected in this field will affect several areas, as we touched on in the financial regulation section. Various EU regulations developing the company disclosure requirements and the Directive on corporate sustainability due diligence are due to be approved in the course of the year. Regulating sustainability ratings agencies and transposing the Directive to improve the gender balance on boards of directors is also on the table.
The entry into force at the end of 2022 of Law 28/2022 to foster the start-up ecosystem in Spain, also known as the Start-up Law, is an important milestone to support innovation-based entrepreneurship and attract qualified talent and specialised investment. From 2023, the new tax, employment and corporate measures will provide start-ups with a legal framework adapted to their particular needs that will boost their creation and growth.
In Portugal, new tax measures are expected to be approved during 2023 to provide start-ups with a legal framework more suited to their particular needs and to support the development of the start-up ecosystem in Portugal.
1. Restructurings and special situations
Companies should carry out an early review of the circumstances that may jeopardise their compliance with their financial obligations in 2023 (e.g. breaches of covenants, ratios, amortisation calendar) and could require them to restructure their obligations or obtain additional financing.
Where potential problems are detected, contingency plans analysing the appropriate means and instruments to resolve them are advisable.
The new restructuring plans introduced by Law 16/2022 of 5 September amending the consolidated text of the Insolvency Law are a useful and effective way to agree and implement a restructuring outside of insolvency proceedings and mitigate the loss of value that these crisis scenarios entail.
One of the most complex issues will be the restructuring of ICO-guaranteed COVID-19 loans because of the statutory limitations that apply to them even in insolvency proceedings or when a restructuring plan is in place.
Apart from restructuring liabilities, the new restructuring plans are a useful tool for dealing with distressed M&A as they introduce “liquidation restructuring plans”. These plans enable companies in financial distress to be acquired outside of insolvency proceedings and favour loan-to-own strategies by investors that may decide to purchase a company through debt within the framework of a restructuring plan.
More direct lending and rescue-financing transactions are also expected this year due to the need for companies to obtain financing in scenarios such as this. These will require more complex structures than those used for standard bank financing.
The accounting moratorium under article 13 of Law 3/2020 of 16 September was extended in late 2022, meaning that, for the purposes of the capital impairment test, losses in financial years 2020 and 2021 will not be taken into consideration for three financial years (i.e. until the closing of financial year 2024). This will give companies that struggled during the pandemic breathing room to reset their balance sheets.
Companies should therefore analyse their capital impairment situation during the first two months of 2023 taking into consideration losses that arose in 2022 (which do not benefit from the moratorium) and, if applicable, take appropriate action.
In Portugal, 2022 saw an extensive reform of the Portuguese insolvency and pre-insolvency framework brought about by the enactment of Law 9/2022 of 11 January, which transposed Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019.
One of the most important changes gave creditors the ability to vote in classes in preventive restructuring procedures (the Portuguese “processo especial de revitalização”), a mechanism that was previously not available under Portuguese law.
Another important feature of the reform is the substantially increased protection given to new money injected into the company during a preventive restructuring procedure or the implementation of its recovery plan. As a result, if insolvency proceedings begin within the two years following the date of the court decision sanctioning a recovery plan, the new money is treated as a claim against the insolvency estate (and therefore “super-senior”) up to 25% of the value of the aggregate non-subordinated liabilities of the company when the proceedings began. The new money also continues to be secured by a first lien over all the company’s movable assets.
Major changes were also made to the grounds for subordinating claims. For example, it was clarified that the existence of a “special relationship” between the creditor and the debtor only constitutes a ground for subordination if it already existed when the claim originated. And secured or privileged creditors are not deemed to be shadow directors of the debtor simply because they have appointed an individual as a director, provided that the individual appointed by the secured or privileged creditor(s) does not have the power to dispose of the debtor’s assets.
Finally, the 2022 reform loosened the rules on distributions to creditors in insolvency proceedings to allow insolvency practitioners to distribute the proceeds from the sale of the debtor’s assets more swiftly.
On a separate – less positive – note, the number of insolvent companies in Portugal is expected to rise by 16% to 20% in 2023 when the Covid-19 moratorium on repaying bank debts is lifted and the effects of higher interest rates, inflation and energy costs kick in. For this reason 2023 will prove to be a solid test for the 2022 reforms in insolvency and pre-insolvency legislation.
Listed below are some of Uría Menéndez’s recent publications in this area:
The energy crisis caused an avalanche of measures in the energy sector during 2021 and 2022, some of which have had a very significant impact, such as the mechanism to reduce excessive revenues (so-called “windfall profits”) in the electricity market regulated in Royal Decree-Law 17/2021 and the “gas cap” or “Iberian exception” implemented pursuant to Royal Decree-Law 10/2022. While we do not expect to see such significant regulatory changes in 2023, the Minister for Ecological Transition and the Demographic Challenge has already announced that she hopes to extend the gas cap (which currently expires on 31 May 2023) until the electricity market is reformed or, at the very least, until the end of 2024.
Although the process of reforming the electricity market will presumably be a lengthy one and it is unlikely to result in any actual regulatory changes this year, the debate surrounding it should be followed carefully. For the time being, the European Commission has launched a public consultation that will last until 13 February and the Spanish Government submitted its proposal to the European Commission at the beginning of the year. The Spanish proposal seeks to reduce prices and volatility by having Member States hold auctions of long-term (the entire useful life of the facilities) contracts for differences for volumes of renewable energy production in line with their NECPs, as well as implementing capacity markets to ensure the security of supply.
Further regulatory developments on green hydrogen are expected this year, both at the EU and the national level. The approval of the European Commission’s delegated act on the requirements that hydrogen must meet to be considered renewable for the purposes of Directive (EU) 2018/2001 on the promotion of the use of energy from renewable sources (known as “RED II”) could prove to be particularly important. The European Commission seems to be inclined to put forward strict requirements in terms of additionality and temporal and geographical correlation (although it appears to have softened its position according to the latest draft of the delegated act that has been leaked), while the European Parliament has recently voted to approve an amendment to RED II (which must be approved by the European Council to take effect) that, with the aim of boosting the development of the sector and encouraging private investment, eliminates the additionality requirement and relaxes the temporal correlation requirement. This difference in the approach taken by the European institutions has created considerable uncertainty as to how this issue will finally be resolved.
Meanwhile, in order to meet the goals set out in the Roadmap to develop Offshore Wind and Marine Energy in Spain, during the first few months of this year the regulatory framework for offshore wind should be defined and the first auctions should be called by the government, something the sector is eagerly awaiting.
Finally, we anticipate intense project finance activity in the renewable sector in view of the large number of projects that have obtained the DIA in recent weeks as a consequence of the 25 January 2023 deadline for completing this process set by Royal Decree-Law 23/2020. Given the high interest rates and the high and volatile prices of the equipment needed to build the facilities, we are likely to see many developers opting for alternatives to the usual structure of a long-term financing with PPA.
In January the President of the Republic of Portugal approved the Decree-Law on the simplification of environmental licensing procedures (Simplex Ambiental), which will be published and enter into force imminently. It is hoped that the Simplex Ambiental will resolve some ambiguities between the different environmental protection and licensing regimes, with the prospect of accelerating the efficient and timely use of the megawatts (in particular PV) that were auctioned in 2019 and those that are still in the project pipeline in Portugal.
With regard to the development of offshore wind in Portugal, the government has received the details of the reference seabed areas for the development of 10 GW of offshore wind capacity from the working group appointed in 2022. The public consultation phase is due to start soon and will be open until 10 March 2023. The legal framework for offshore wind is expected to be approved by September and the first auction is expected to take place in the last quarter of the year.
Due to the Simplex Ambiental and the measures adopted by the government at the end of 2022 –which allow solar projects auctioned at a reduced tariff to benefit from an experimental period at market tariffs for up to 24 months –, we anticipate intense activity in the financing of renewable projects in Portugal to come online in the immediate future, as well as some M&A activity around these assets, as the change-of-control prohibition applicable to the auctioned projects will cease to apply on COD.
Depending on the structure, capacity and conditions of the offshore wind auctions in Portugal, if they do in fact take off in 2023 they will mark a very important milestone in the market.
3. Real estate
The residential leasing sector may become an attractive option for investors taking into account high housing prices. As a result, 2023 could be a landmark year for build-to-rent, tourist accommodation, coliving and student residence transactions.
As it stands, the draft text of the Housing Law seeks to
- increase the supply of public and social housing;
- adapt housing stock to new demands by fostering new forms of housing (e.g. coliving);
- guarantee the right of access to housing. The ability to monetise urban development assignments in stressed residential market zones (known as “ZMRT” in Spain) will be limited, forcing this land to be used for social or public housing;
- allow the public authorities responsible for housing to compel large landlords (grandes tenedores) to comply with the obligation to provide information and collaborate on the use and designation of the residential units they own in the ZMRTs. It also establishes limits on rent in the ZMRTs and introduces specific regulations in relation to passing on expenses and unfair clauses in lease contracts;
- foster the protection and transparency of residential leasing transactions by creating a public registry of residential leases and regulating rent setting for leases located in a ZMRT, among other measures;
- introduce a series of procedural measures in eviction and criminal proceedings, aimed at protecting tenants or occupants who are considered vulnerable;
- promote tax incentives and disincentives in relation to Personal Income Tax and Real Estate Tax.
In Portugal, as a measure to support tenants in a context of high inflation, Law 19/2022 of 21 October introduced a 2% cap for 2023 on rent increases that are subject to CPI updates and tax benefits to compensate some landlords during 2023. In order to provide additional protection to tenants, Law 24-D/2022 of 30 December, which approved the State Budget for 2023 (Lei do Orçamento de Estado), has also capped advance payment of rent and security deposits (caução) at two months.
As a result of the housing policy pursued by the current Government, changes in the law which attempt to make affordable housing more viable have come into force. This type of property investment is expected to attract more investors.
Lastly, the Government has commissioned a study on pre-1990 rent levels to decide whether to waive the restrictions on rent reviews or to extend the ten-year term that was set for such restrictions when the lease law (NRAU) reform of 2012 came into force, so updates in this regard are also likely. As for historic shops (lojas com história), Law 1/2023 of 9 January extends protection for these shops until the end of 2027. It is also clear that fewer permits for local accommodation activity (Alojamento Local) are being granted in areas identified as being under greater “urban pressure” (contention areas), and more restrictive municipal regulations are being passed, particularly in Greater Lisbon and Porto.
No major changes are expected with regard to tax matters, although the Municipal Real Estate Transfer Tax Code (CIMT) will be changed under the 2023 State Budget with regard to the transfer tax exemption for real estate acquired for resale, for which the taxpayer will have to prove that it has been reselling real estate as an activity for the last two years (instead of only one year as previously established).
4. Digital law, cybersecurity and blockchain
Similarly to what happened in 2022, 2023 will bring key developments in digital regulation, especially at the EU level. The EU has stated that digital transformation is central to its strategy and that it intends to review the rules of engagement for digital market participants to foster the digital competitiveness of the EU economy and businesses, and to ensure that the digital world develops in line with European and democratic values. It also confirms the EU’s growing interest in encouraging companies and other digital players to share and make available to the market a large amount of data, by adopting rules that seek to create an EU market with a secure and trustworthy legal environment.
Therefore, in addition to the EU rules on digital matters approved during 2022 (many of which will become applicable during 2023 and 2024), such as the digital services package (i.e. the Digital Services Regulation or DSA and the Digital Markets Regulation or DMA) or the Data Governance Regulation (known as the DGA), in 2023 and following years other important EU rules are expected to be approved to regulate the digital economy, such as the proposal for the Artificial Intelligence Regulation and the proposal known as the Data Act. All these developments will require companies operating in the digital world to review and adapt their operations over the coming months to comply with this new and increasingly complex regulatory framework. In addition, they will need to engage with the new authorities that are expected to be created to oversee compliance with these new rules (e.g. national authorities responsible for artificial intelligence, which in Spain is the Spanish Agency for the Supervision of Artificial Intelligence -AESIA- and in Portugal the National Innovation Agency, which is responsible for supporting the digital transition and the national artificial intelligence strategy).
From a digital market point of view, companies are expected to continue in the race towards further digitalisation in 2023, which means it is likely that M&A activity, for example, will continue to focus on digital and telecoms businesses and assets. In addition, we can expect companies to continue to contract high levels of increasingly specialised digital assets and services that are critical to operations, such as cloud infrastructure, artificial intelligence, big data tools and cybersecurity services. Cybersecurity is essential for companies because of the growing operational and technological risks they face, which also give rise to significant legal risks.
The European Parliament is expected to vote in April 2023 on the final approval of the proposed Regulation on Markets in Cryptoassets (MiCA). The purpose of the MiCA Regulation is to provide a stable regulatory framework for the cryptoassets market, regulating in detail (i) the issuing and offering of all kinds of cryptoassets other than traditional financial instruments, dividing them into three distinct categories (asset referenced tokens, e-money tokens and cryptoassets that do not fall into the previous categories); (ii) the provision of specific services related to cryptoassets, and (iii) measures to prevent market abuse in this context.
It is, therefore, a pioneering regulation at the international level, much awaited and demanded both by the main regulatory bodies and by cryptoasset market operators (issuers, investors, service providers, etc.). However, due to its broad and ambitious scope, inspired by the regulatory framework applicable to traditional financial instruments under the MiFID II Directive, its entry into force in relation to specific aspects is expected to be delayed for 18 months following final approval.
Listed below are some of Uría Menéndez’s recent publications in this area:
The EU legislation reform has the ambitious objectives of reducing inequalities in access to medicines between EU Member States, guaranteeing the availability and supply of medicines, promoting local production, encouraging innovation, especially in unmet medical needs, and reducing environmental impact. The new Spanish law is expected to modify, among other aspects, the reference price system, the system of contributions made by the pharmaceutical industry to the National Health System and the market supply guarantee. In Portugal, legislative measures providing for price revisions to ensure the national market is supplied are also currently being discussed.
As regards the objective of improving supply (e.g. by fostering local production), projects benefiting from significant EU funding were launched in 2022 to foster the manufacture of both APIs and finished products within the EU territory. In 2023, more projects to construct new factories, put in place important co-development and manufacturing agreements on European territory, etc. are expected to materialise.
Everything seems to indicate that the consolidation of operators in the healthcare and hospital sector will continue and intensify in a market that, despite the many transactions in recent years, is still fragmented. There are still many small and medium-sized healthcare operators, owned by family groups or by professional healthcare teams themselves, that have potential for growth and optimisation and are very appealing to national and international investors, both financial and industrial, who are planning to enter the Spanish market or to expand their portfolio in Spain. There is also appetite among Spanish and Portuguese operators to explore opportunities to expand abroad.
In the social care sector, the increasing demand for nursing homes led to intense investment activity in 2022, which is expected to increase in the medium and long term. Owners and investors should keep a close eye on regional regulations on accreditation and licences to operate nursing homes, especially the requirements to be met to provide services to the public sector.
In Portugal, a new version of the code of conduct of Apifarma, the Portuguese Pharmaceutical Industry Association, has been approved, effective from 1 January 2023, to regulate relations between the pharmaceutical industry and healthcare professionals and organisations with the aim of increasing transparency in business practices.
Another unstoppable trend is the digitalisation of the healthcare sector in all areas: distance care, AI, hospital management, healthApps, online sales of medicines, etc. In fact, more and more companies in the sector have digital specialists on their staff.
6. Foreign investments (FDI) screening mechanism
The FDI regime is particularly important in M&A transactions: direct and indirect acquisitions of both Spanish companies and assets; equity and debt instrument issuances; and even in financing deals. FDI issues must be taken into account when drafting transaction documents and factored into the timings between signing and closing. This matter is becoming increasingly complex and 2023 will not be an exception in this trend of constant change.
A royal decree developing the FDI regime set out in Law 19/2003 is expected to be approved in 2023. The draft was published for public consultation in November 2021 and it was thought it would be approved in 2022, but the process was delayed. The developing regulations serve a dual purpose. On the one hand, they put into writing the way in which the FDI regime has been interpreted and applied in practice, which will help to resolve doubts as to how to interpret some of the more ambiguous concepts. On the other hand, they shorten the term for the authorities to complete FDI procedures from the current six months to three, and they introduce new exemptions that clarify that transactions that are currently notified (as voluntary consultations) do not have to be.
Listed below are some of Uría Menéndez’s recent publications in this area:
7. Capital Markets
The Spanish Securities Markets and Investment Services Draft Law is expected to be approved and to enter into force in 2023. Some of the main amendments (laid out in our client briefing dated 12 September 2022) (i) simplify the supervision of issuances and admissions to trading on regulated securities markets; (ii) extend the rules on takeover bids to issuers of shares on BME Growth; and (iii) regulate specific features applicable to SPACs. Although the prominence of SPACs declined in 2022, the new regulation of these vehicles reflects institutional support for them being allowed to make initial public offerings in Spain.
The Draft Law also includes the necessary provisions to implement EU regulations on cryptoassets, primarily the European Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT), which could lead to the first offerings and admissions to trading of cryptoassets that are financial instruments through the use of DLT-based systems.
In addition, the European Commission published the Listing Act Package in December 2022, which includes proposals for (i) Regulations to amend the Prospectus Regulation, the Market Abuse Regulation and MiFIR, (ii) a Directive to amend MiFID II (repealing Directive 2001/34 on the admission of securities to official stock exchange listing and on information to be published on those securities); and (iii) a Directive on multiple-vote share structures in companies that seek the admission to trading of their shares on an SME growth market, which will relax the requirements to apply for the admission to trading of securities and will simplify and clarify market abuse requirements while also making the prospectus rules simpler for issues and public offerings of securities, among other measures. Key reforms include increasing the threshold to apply the exemption to publish a prospectus for admission to trading of shares from 20% to 40% and extending that exemption to the obligation to publish a public offering prospectus, as well as reducing the percentage of free float required to obtain an initial admission to trading of shares from 25% to 10% (subject to a potential waiver). We will keep a close eye on how this regulatory initiative develops throughout 2023. Furthermore, the Spanish Securities Market Commission has updated the Q&A on the prospectus regime to reduce the red tape associated with public offerings and admission to trading of securities on Spanish regulated markets (basically by requiring fewer documents).
In terms of transactions, there was only one initial public offering in 2022 and only a handful of equity and debt transactions. In 2023, interest rate changes and market conditions are expected to offer more opportunities for these types of transactions. The appetite for acquiring listed companies through takeover bids is also expected to continue (four such transactions were authorised in 2022) despite the control regime for foreign direct investment by EU investors being extended to December 2024.
Finally, appeals regarding some recent takeover bids are expected to be decided in 2023 (the Natra takeover bid appealed to the Spanish Supreme Court and the Másmóvil takeover bid appealed to the Spanish National Court), which could influence potential appeals against future takeover bids.
In addition to the amendments brought about by EU legislation mentioned previously in relation to the Spanish market, which are also applicable in Portugal, legislative changes that are expected to be approved and enter into force in 2023 in Portugal mainly relate to (i) reporting obligations (through amendments to CMVM Regulation 5/2008); (ii) public offerings (through amendments to CMVM Regulation 3/2006); and (iii) financial information (through amendments to CMVM Regulation 11/2005).
The aim of these amendments is to adapt the regulations to the changes introduced by the CVM and to continue the simplification process by getting rid of national rules that are redundant or duplicate EU rules, except where there are circumstances specific to Portugal that justify keeping them. The most important potential legislative amendments are likely to do the following:
- limit the subjective scope of the regulatory obligations of companies whose shares are admitted to trading on a regulated market (to exclude those that have simply carried out a public offering);
- remove the quarterly financial reporting obligation;
- remove certain functions relating to management operations or treasury stock;
- remove duplicated reporting obligations, including those relating to annual and half-year accounts; and
- in terms of public offerings, simplify the structure of prospectuses and remove the process for approving the telephone assistance handbook.
All the information on these topics published by the CMVM can be found on its public consultation website.
Listed below are some of Uría Menéndez’s recent publications in this area:
8. Financial regulation
Regarding investment vehicles, the most important changes will affect European Long Term Investment Funds (ELTIF). The reform seeks to relax the regulations in response to the scarce demand that there has been for this product since its creation, even though it is the only alternative EU vehicle that may be marketed to retail clients. The main aim of the reform is to broaden eligible assets, currently straitjacketed, so as to include funds of funds, for example, or to relax entry barriers to retail investors. The reform, although necessary, may not suffice if it is not accompanied by tax incentives.
The proposal to create a Financial Client Defence Authority in Spain has proved to be very controversial and been criticised by many sectors. It is currently going through parliament and it is expected to continue generating debate.
Additionally, there is a proposal to modify MIFIR, a European regulation which regulates the operation of entities which provide services related to capital markets, and Member States made a political commitment on 20 December 2022 to initiate negotiations with the Parliament aimed at undertaking this reform. Their objective is to reduce liquidity and execution risks in capital markets operations.
Moreover, at the end of 2022, the Council and the Parliament reached a provisional agreement regarding the Consumer Credit Directive draft proposal that aims to broaden the scope of product application and generally reinforce the rules of conduct, and includes training and skills initiatives for staff in charge of offering financing. Despite the transposition date of the CCD II being relatively far off, the reformed text will be revealed throughout this year along with the real magnitude of the changes it will introduce.
On another note, in the area of banking regulation, the new Banking Package (CRRIII/CRDVI) is expected to be approved in 2023 following the European Commission’s legislative proposal in 2021. The new package contains important developments in the fields of prudential regulation and supervision, and the prudential management of climate and ESG risks. Specifically, it includes the following:
- The EU adaptation of the latest prudential rules approved by the Basel Committee, including new criteria on the calculation of risk weights under the standardised approach to credit risk and the new method for calculating capital requirements for operational risk. The most significant new development may be the introduction of the output floor and its effective date, scheduled for 1 January 2025 (i.e. two years later than in the Basel Agreement), while the phase-in period is also extended by two years (until 2030). However, these dates (which are also relevant for other new rules tightening capital requirements) are not definitive and could be further postponed.
- The obligation for banks to prepare annual Transition Plans detailing their sustainability objectives, particularly those related to the decarbonisation of banking activities. The plans will be subject to prudential review by the supervisor and are expected to act as a catalyst towards reducing the carbon footprint of the economy.
- Rules on the restriction of the activities that a branch of a third-country bank authorised in a Member State may carry out in another Member State. The aim is to avoid forum shopping, whereby third-country banks traditionally enter the EU through the most favourable jurisdiction and take advantage of the EU passport and the freedom to provide services within the EU.
- Finally, it entails greater harmonisation, with a more regulated “fit and proper” procedure for directors and key function holders in the banking system.
During 2023, the EBA (European Banking Authority) and the European Central Bank will subject the largest banking entities in the EU to a new micro-prudential stress test, which follows the climate risks test carried out in 2021. The EBA will seek to test the resilience of the banking sector to the potential worsening of the current uncertain economic situation.
The new EU Anti-Money Laundering Prevention Authority (AMLA) should be set up in 2023 although it is not expected to be fully operational until 2024.
It also appears that 2023 may be the year in which we see a new plot twist in the European Commission’s approach to the bank resolution regulation under the future BRRD3 package. Many have called for deposit guarantee funds to be more involved in financing the resolution of medium-sized bank crises, and for the powers of the Single Resolution Board (SRB) in relation to smaller banks to be broadened in a proposal that some academics have described as “turning the SRB into the European FDIC”. Progress being made on the single deposit guarantee fund, the great pillar that the European Banking Union lacks, seems even more remote - unless there is a major crisis that provokes a response from the relevant parties.
In our view, another important prudential aspect will be the supervisory priorities of the Single Supervisory Mechanism (SSM). The SSM has communicated its willingness to exercise more active oversight in 2023 over credit institutions’ lending activity and the stability of their funding sources, and to analyse the strengths and potential weaknesses in the banking sector’s digital transformation and technological environment. Finally, the SSM will focus on deficiencies within the entities’ governance framework, and on assessing banks’ exposure to physical and transitional risks generated by climate change.
In Portugal, the draft Banking Activity Code (Código da Atividade Bancária), the statute that will replace the General Framework of Credit Institutions and Financial Companies (Regime Geral das Instituições de Crédito e Sociedades Financeiras), which currently governs the activity and authorisation requirements of credit institutions and financial companies in Portugal, is still being prepared. Among other matters, the Banking Activity Code is expected to transpose the new Banking Package (CRRIII/CRDVI), to clarify specific powers of the Portuguese banking supervisory authority and to make changes to administrative procedures and confer new powers on the Bank of Portugal (Banco de Portugal), such as the power to impose the sale of a qualifying holding in a regulated institution.
In the area of asset management, the new Portuguese Asset Management Legal Framework is expected to be enacted during 2023, which will comprehensively overhaul the current regulation of collective investment undertakings and venture capital. The main objective is to simplify and make the regulation of the asset management sector more proportionate so that the market grows and becomes more competitive, while safeguarding investors’ interests.
Listed below are some of Uría Menéndez’s recent publications in this area:
Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU (the “Directive”) has two main objectives: on the one hand, to create a robust, stable and transparent framework for purchasers of NPLs; and, on the other hand, to consolidate and unify the regulation of servicers across the EU.
There is a clear mandate in the Directive to remove regulatory barriers to purchasers in Member States in order to allow the free movement of capital and to encourage investment in NPL portfolios from entities based in jurisdictions other than the country where the claims comprising that portfolio originated.
Likewise, the Directive aims to homogenise the regulation for servicers, which to date have only been subject to national regulations and, in some cases, such as Spain, do not even have a specific legal framework. The implementation of the Directive should give servicers their own regulatory status, which will presumably be supervised by the central banks. Furthermore, as a result of implementing the Directive, servicers authorised in one Member State will be able to provide cross-border services in other Member States directly or through a permanent establishment, without the need to apply for authorisation in the Member State of destination.
In short, the aspiration of the Spanish and Portuguese legislators when implementing the Directive in 2023 should be to consolidate their markets for the sale of NPLs, to provide them with the necessary legal certainty and flexibility to make them attractive to all types of investors and, in particular, to capital from other Member States, thus facilitating the cleaning up of the balance sheets of our credit institutions.
One of the main ESG trends we can expect to see in 2023 is the regulatory development of company reporting of sustainability information.
Following the entry into force on 5 January 2023 of the Directive regarding corporate sustainability reporting (Corporate Sustainability Reporting Directive or “CSRD”), this year the EU is expected to approve cross-cutting standards on sustainability matters and the first delegated acts specifying the information that companies must disclose in their sustainability reports. In the coming months, the European Financial Reporting Advisory Group (EFRAG) will publish the draft European Sustainability Reporting Standards (ESRS), which could have a significant impact on the definition of performance metrics (KPIs) that companies will have to take into account when reporting on their sustainability goals. In practical terms, companies will have to analyse, on the one hand, whether the new Directive applies to them and if so at what level of their corporate structure; and, on the other hand, how detailed their assessment of their activities and reporting to the market should be. Member States have until 6 July 2024 to transpose this Directive, so work to incorporate it into the Spanish and Portuguese legal systems should have already started, although the electoral calendar in Spain could alter this.
Another issue to be highlighted in the ESG field is the Directive on Corporate Sustainability Due Diligence (CSDD), which is currently going through parliament and is expected to be approved sometime in 2023. The new text will clarify specific matters that, after the position adopted by the European Council in December 2022, are up for debate. From a corporate law point of view there are three aspects of particular interest: (i) whether the Directive will apply to specific sectors (banks and financial undertakings and technology and security equipment companies); (ii) the link between directors’ variable remuneration and their contribution to a company’s long-term business and sustainability strategies; and (iii) the regulation of penalties and civil and directors’ liability when a company fails to comply with the obligations imposed by the Directive.
There may also be some regulatory progress at the EU or national level in relation to the Directive on gender balance on corporate boards for listed companies, which was approved in December 2022 and which will be transposed within the next two years. This Directive establishes that, by 2026, at least 40% of non-executive directors of listed companies must be members of the under-represented sex. Additionally, these companies must provide yearly information on gender representation on their boards of directors, and on the measures they are taking to reach the 40% target.
Finally, it cannot be ruled out that the EU will progress with regulating sustainability rating agencies during 2023. The European Securities and Markets Authority (ESMA) has proposed to the European Commission that a common legal definition of ESG ratings be developed, and that any legal entity whose activity includes providing ESG ratings and certifications be registered and supervised by a public authority.
Moreover, in Portugal, the CMVM created the CMVM inov - Polo de Inovação do Mercado de Capitais, which includes a specific segment on “ESG innovation” related to innovative and financial technology products (FinTech) that incorporate ESG sustainability elements. The aim of CMVM inov is to bring the CMVM closer to market players, as well as to foster and incentivise financial innovation, including financial products linked to ESG indexes (but without seeking to make the current regulations more flexible).
With the aim of positioning Spain at the forefront of Europe, the Start-up Law was created to provide innovative emerging companies with a specific regulatory framework to boost their creation and growth that is adapted to their specific characteristics, such as financing needs without immediate revenue generation, uncertainty about the success of their business model and strong international competition to attract foreign capital and talent.
Together with the approval of the Create and Grow Law (Ley Crea y Crece) and the new Insolvency Law, the Start-up Law’s tax, employment and corporate provisions (which will be fine-tuned throughout 2023 in more detailed regulations) will have a notable impact on eliminating the barriers that start-ups currently face.
The key measures include: in the tax area, (i) reducing the corporate income tax rate and easing the payment of corporate income tax, (ii) increasing the personal income tax exemption for the transfer of shares, and (iii) improving the deductions for investment in new or recently created companies; in employment matters, (i) introducing rebates on self-employed workers’ contributions, (ii) easing the residence and permanence requirements in Spain for work purposes, and (iii) regulating international remote workers; and in corporate matters, (i) easing the acquisition of treasury stock and its use for incentive plans, (ii) introducing an exemption from the obligation to wind-up due to losses, and (iii) making registration more flexible and introducing reductions in notary and registry fees in specific cases.
As for Portugal, on 22 December 2022 the Portuguese Government submitted to parliament Law Proposal 56/XV, which aims to develop the start-up and innovative companies ecosystem in Portugal, creating a regulatory framework that encourages their establishment and growth in line with the EU’s Startup Nations Standard and has the following main features:
- Definition of the concept of start-up and scale-up. Start-ups will be companies that, among other requirements, have been operating for fewer than ten years, employ fewer than 250 employees, have a turnover not exceeding EUR 50 million, are not owned by a large company nor are the result of a spin-off of a large company, and have their headquarters or at least 25 employees in Portugal. Scale-ups will be those entities that, without meeting the criteria on years of activity, number of employees and turnover, meet the necessary conditions to obtain the tech visa certification, which is a programme to help Portuguese innovative technology companies to recruit specialised foreign technicians.
Startup Portugal, an entity created in 2016 to manage and monitor national start-ups and incubators, will be involved in identifying start-ups and scale-ups in line with these criteria.
- Changes to tax incentives for companies carrying out innovation and development activities.
- Approval of a more favourable regime for stock option plans, according to which employees of start-up companies would only be taxed when they sell their shares.
Listed below is a recent client briefing by Uría Menéndez in this area: