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Statutory regulations on authorising acquisitions by foreign investors in Hungary

Pursuant to a government decree adopted in relation to the emergency situation on 25 May, in certain business sectors, foreign investors could only acquire shares in business entities with registered offices in Hungary subject to the acknowledgement of the relevant minister. Following the repeal of the government decree, statutory regulations entered into force as part of the miscellaneous amendments concerning the end of the emergency situation, effective from the day on which the emergency situation was declared to have ended, which amended certain provisions of the decree.

Key differences and clarifying amendments

The basic purpose of the statutory regulations was clarification; however, they introduced certain substantial changes as well compared to the earlier government decree. 

  1. One of the most important provisions, which was the source of heated debates earlier, was the fact that the effective period of the regulations was set to end on 31 December 2020. 
  2. In addition, the Act explicitly states that it is not required to be applied if a legal transaction, which was performed in connection with a legal entity or other organisation with its registered office located abroad and which otherwise would be subject to the reporting obligation, results in changes to the ownership structure of a subsidiary of the legal entity or other organisation with its registered office located abroad, which subsidiary has its registered office in Hungary and it is classified as a strategic enterprise. This clarified the question about what the procedure was if the change in the control structure is the result of a company acquisition in a country other than Hungary.

Additional clarifications, relaxed, and stricter provisions

It can be considered a positive change that the Act specified the HUF 350 million value threshold as almost generally applicable to EU, Swiss, and EEA majority acquisitions, as well as to share acquisitions by foreign investors, which concern at least 10% of the total shareholding. 

Clarifications were included with respect to other provisions as well:

  • the term ‘state interest’ was defined;
  • the deadline for the ministerial procedure  was reduced to 30 working days from 45 days;
  • financial infrastructure was removed from the list of strategic sectors subject to the reporting obligation, and
  • private companies limited by shares and joint-stock companies were removed from the list of entities subject to the provisions if the total shareholding of foreign investors exceeds 25%. 

The Act also introduced stricter regulations which expanded the scope of the reporting obligation by specifying that acquisitions by citizens of the EU, Switzerland, and other member states of the European Economic Area, that is acquisitions by private individuals, are also subject to the reporting obligation.

The decree specified the scope of affected industries, which the Act placed under regulation by government decree—the relevant decree was adopted at the same time as the Act. The scope of the affected strategic activities was also modified to an extent; the financial sector, that is brokerage, insurance, and other financial activities were removed (accordingly, financial industry is not subject to reporting obligation),and labour-hire activities were added. 

What provisions remained unchanged?

Scope of the affected companies

With the above exceptions, the Act did not introduce changes to the scope of the affected companies, which may be subject to the reporting obligation concerning acquisitions. To fall under the scope of the legislation, the company in question is required to have its registered office in Hungary and as far as its legal form is concerned, it either has to be a limited liability company, a private company limited by shares, or a joint-stock company.

Scope of legal transactions subject to the legislation

The scope of legal transactions subject to the legislation remained practically unaffected as well, and thus still includes the transfer of shares, capital increase, restructuring, merger, demerger, the issuance of convertible bonds with subscription rights or converted bonds, as well as the granting of usufruct rights with respect to shares or stock. In addition, the transfer of infrastructure, equipment, and tools essential for performing the activities of the strategic company, as well as the usage or operating rights thereof, and the provision of such assets as collateral are also subject to the reporting obligation. 

Scope of the reporting obligation

The scope of the reporting obligation was not modified apart from the above exceptions; therefore, acquisitions by legal entities registered in the EU, the EEA, or Switzerland continue to be subject to the reporting obligation in the case of majority acquisitions, now also including acquisitions by private individuals as detailed above. Furthermore, a 10% share acquisition with  a HUF 350 million total investment value gives rise to a reporting obligation in the case of any person defined as a foreign investor. 

Foreign investors are defined as citizens of a state outside the EU and the EEA and other than the Swiss Confederation, as well as legal entities or other organisations registered in such states, and all legal entities or organisations under the majority control of such foreign legal entities and organisations. 

In addition to the exception of joint-stock companies in relation to joint ownership, the difficult-to-interpret provision, which states the following, remained unchanged as well: the reporting obligation is also in effect in cases where the foreign investors acquire 15%, 20%, or 50% of the shares of the company or where following the acquisition of shares, the total shareholding of foreign investors exceeds 25%.

Procedural rules

The procedural rules and the legal consequences were not modified either. The result of the enquiry of the acting minister can either be the acknowledgement of the report or the prohibition of the legal transaction. The minister is obliged to justify their decision to prohibit a transaction and this decision may be challenged in the Budapest-Capital Regional Court. A statement issued in the form of a private instrument with full probative force concerning the fact that the company is considered a strategic enterprise is to be attached to the change registration request submitted to the company court, together with the acknowledgement issued by the minister.

In the event of failure to submit the report, the minister may perform an enquiry ex officio, in the course of which they can either acknowledge or prohibit the transaction. Furthermore, the minister is entitled to impose a penalty, the value of which may be up to double the value of the transaction and the minimum value of which is HUF 100,000 in the case of foreign private individuals and it is required to exceed 1% of the net revenue of the target company in the past business year in the case of a foreign investor that is a legal entity or other organisation. 

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Remaining uncertainties, questions regarding interpretation

Several interpretation-related questions have arisen with respect to the government decree, most of which continue to be ambiguous and are expected to be answered in the course of the law being applied, first via the interpretations of the minister and later via the interpretations of the court. 

However, the act poses new questions as well. The source of one such question is the fact that the original decree became void upon the emergency situation being declared over, while the statutory regulations became effective from the same day, 18 June. It is questionable which piece of legislation transactions performed and reported during the effective period of the decree will be subject to, and what with the correct procedure is going to be in the case of transactions performed during the effective period of the decree but not reported, especially if the transactions occurred in an industry which is subject to one of the amended provisions. 

It continues to be an open question whether the listed activities are required to be actually-performed activities and whether the provisions of the Act apply to a company if it is performing one of the relevant activities as a secondary activity. If interpreted strictly, the reporting obligation could apply to all companies the scope of activities of which include any of the activities specified on the list. 

It is also going to be difficult to decide in specific situations if an asset is considered essential for the performance of an activity with respect to an asset transfer.

The provision of the legislation which defines a percentage-based system for foreign investors, specifying 15%, 20% and 50% share acquisitions as subject to the reporting obligation without a value threshold, continues to be contradictory and difficult to interpret. The regulation may be interpreted as stating that a 9% share acquisition the value of which reaches HUF 350 million is not subject to the reporting obligation, while a 15% acquisition must be reported regardless of its actual value, which would significantly and unnecessarily expand the scope of application of the legislation. 

It continues to be uncertain, whether the decree is applicable to intra-group restructuring operations where the identity of the ultimate foreign investor with indirect majority control remains unchanged.

Planning of transactions in Hungary 

Based on the mostly-unchanged regulations, it can be stated with certainty that the changes could result in a significant additional burden not only during company acquisitions but even during the restructuring of existing ownership arrangements, as well as in the case of (movable and real estate) property sale and purchase, transfer of business as a going concern, and collateral transactions. Due to this fact, it is recommended to review the circumstances of the transaction at hand in the case of transactions that are already underway, as well as the potential impact of the regulations on the conclusion of the transaction, and even consider the rescheduling of transactions, provided that the deadline, 31 December, remains the same. 

*2020. évi LVIII. statute
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