A new ESOP arrangement on the horizon

The Employee Stock Ownership Plan (ESOP) for managing financial assets available under the so-called remuneration policy was introduced by the amendment in 2015 to the Act of 1992 on the Employee Stock Ownership Plan. As part of the general provisions, the amendment stipulates that for a financial institution, an insurance undertaking, an investment firm, and for a legal person that is authorised to market securities issued by or with a majority influence on a regulated market in a Member State of the European Union ESOP can only be initiated for the management of financial assets that may be acquired under a remuneration policy.

This was amended by the Act CI of 2021 on Certain Asset Management Issues and Amending Certain Laws to Strengthen the Coherence of the Legal System, adopted on 15 June 2021. It created the legal framework for the so-called Special Employee Stock Ownership Plan (SESOP). Accordingly, these organisations may only initiate ESOP to manage financial assets available under the SESOP or a remuneration policy.

SESOP provides an opportunity to acquire ownership based on certain rules of ESOP, but specifically different from it, in order to acquire participations (shares or business shares) of a limited liability company or private company limited by shares by the company’s employees or members of its supervisory board or board of directors.

According to the Act, the SESOP is created on the basis of the employees’ initiative and programme launch (as opposed to an ESOP, which is initiated by the company). Therefore, while several parts of the general normative material governing ESOPs apply to the SESOP, the current rules governing the ESOP for the management of financial assets available under the remuneration policy are excluded one-to-one.

An organising committee should be set up to establish a SESOP; the inaugural general meeting will adopt the articles of association and elect the body responsible for operations as well as the executive officers. At the general meeting, participants have voting rights in proportion to their payments (in the absence of a payment, in equal proportions).

The company concerned may make a non-refundable contribution to the operation of the SESOP in order to acquire the shares. An interesting possibility is that in addition to establishing the SESOP organisation, employees can also establish a trust foundation under the Asset Management foundation Act to manage SESOP. In this case, at least HUF 10 million of SESOP assets must be transferred to the foundation managing the same in trust. Such a foundation may manage more than one SESOP.

The number of participants in the SESOP may not be increased after the establishment of the organisation, and, as a rule, membership in the sorganisation may not be terminated, except in the case of transfer. A company can operate multiple SESOPs at the same time. In the event of a participant’s death, the membership share may be inherited, and only one death beneficiary may be nominated, in the absence of which a new participant may become a member.

The plan may be operated for a fixed period of at least ten years, after which the participations acquired by the implementing body or the value thereof must be transferred to the participants, and the implementing body must be dissolved.

The asset management method chosen by the SESOP at the time of its formation cannot be changed during the fixed period.

According to the Act, the organisation distributes the assets in stages: first, it transfers the participations at its disposal to the participants or attempts to sell participations to them. In the event of an unsuccessful sale, in the alternative, the company is entitled to purchase the participations from the organisation. If this also fails, the organisation attempts to sell the participations on the market in the third stage. If the market sale was also unsuccessful, covered assets must be accepted by the eligible participants even if they have previously requested the value thereof.

The above-mentioned closing general meeting is convened by the SESOP’s operational body to decide on the dissolution of the SESOP without a legal successor, for example, if the SESOP’s term of operation has expired or the company dissolved without a successor or the number of participants fell below ten and are not replaced.

The SESOP differs from the existing remuneration policy-based ESOP in the following main features:

– the plan lasts for a pre-defined period,

– the number of participants may not be increased after the foundation of the organisation,

– the company may provide support for the operation of the organisation,

– the establishment of the SESOP does not require the approval of the company concerned,

– the SESOP may carry out other economic activities only on a limited basis, in the form of bond issuance and the purchase of government securities, and may not (usually) alienate the acquired assets before the closing general meeting,

– the sources of the acquisition of participations by the SESOP organisation are freely chosen,

– participants may acquire participations only after the expiry of the fixed term of the plan,

– participants may request consideration for the participations instead of acquiring them, provided that the organisation is able to sell them.

In connection with the amendment of the Act XLIV of 1992 on the Employee Stock Ownership Plan, it was also necessary to amend the Act on Duties, the Personal Income Tax Act and the Corporate Tax Act, which are also covered by the Act.

The new provisions will enter into force on 13 July 2021.