A recently enacted Statute – replacing an earlier Government Decree – is now the guiding regulation on the permissibility of foreign investors acquiring Hungarian strategic companies and their undertaking of specific legal transactions

On the 17^th of June 2020 an Act on the cessation of the emergency and the destiny of regulations made during this period[1] (Mixing-Act) was published according to which it has now been recorded at the statutory level that for the validity of specific transactions in strategic companies (by virtue of contract, unilateral declaration or a resolution permitting: transfer of ownership free of charge or for consideration; capital increase; transformation, merger and division of the company; the issue of bonds to be converted, bonds holding subscription right or convertible bonds; establishment of usufruct rights in shares, business quota) it is required to notify the Minister for the Economy (the Minister), and the Minister must acknowledge it.

The Mixing-Act is supplemented by Government Decree (VI. 17.) 289/2020 on the definition of the scope of activity necessary for the economic protection of companies established in Hungary (TEÁOR Decree).

The legislator has made several clarifying changes in the Mixing-Act compared to the previous regulation, however, the regulation will continue to apply until 31 December 2020. Let’s see what the most important changes are!

A new definition has been added, according to which the state interest is the public interest related to the security and operation of networks and equipment, as well as the continuity of supply, which is not regulated either by sectoral law of the European Union or by national law. The concept bears significance in the proceeding of the Minister[2], and although it has already been included in the regulations, the Government Decree did not clarify what was meant by it by the legislator. Another change is that the financial sector has been excluded from the scope of activities of the so-called strategic companies (both from the text of the Mixing-Act and from the table of the TEÁOR Decree). The determination of the value of the investment has become the basic condition of the notification obligation: only the notification of legal transactions reaching or exceeding HUF 350 million is mandatory. Citizens of the EU and another EEA member state or of Switzerland who acquire more than 50% of the votes or acquire majority control in the strategic company are also obliged to make a declaration for their investments reaching or exceeding HUF 350 million, however legal transactions involving the whole groups of companies present in more than one country are not subject to notification. Finally, although the numbers have decreased, the deadline for the Minister’s investigation has hardly changed: he has now 30 working days instead of the previous 45 days.

Taking into account of the changes in legislation notification (and taking note of it) is required for the above defined legal transactions of strategic companies if the following conditions are also met:

• the value of the investment reaches or exceeds HUF 350 million
• a foreign investor – as defined below – or a legal person or entity established in a Member State of the European Union (EU) or a Member State of the European Economic Area (EEA) or the Swiss Confederation (Switzerland) or the citizens thereof by acquiring ownership, ownership of a bond, a right of usufruct, directly or indirectly acquires more than 50% of the votes in the strategic company or acquires majority control; meaning that a dominant influence takes effect according to the provisions of Section 8:2 of the Civil Code. (Majority control includes, but is not limited to, the right to appoint or remove the majority of the executive officers and members of the supervisory board of the company concerned; the case where other shareholders vote together with the holder of the influence by agreement or where other shareholders vote through the holder of the influence, provided that the proportion of voting shares exceeds 50%. The majority control may be exercised not only directly but also indirectly.)
• any foreign investor acquires, directly or indirectly, at least a participation of 10% in the strategic company through the acquisition of ownership, ownership of a bond or usufruct right;
• any foreign investor acquires a participation of 15%, 20% or 50% in the strategic company (regardless of the value of the investment) by acquiring ownership, ownership of a bond or usufruct right;
• the combined shareholding of any foreign investors in the strategic company would exceed 25% through the acquisition of ownership, ownership of a bond or usufruct right, except for public limited companies;
• any foreign investor directly or indirectly acquires the right of operation in respect of the activity belonging to the sectors of the strategic companies – i.e.: the transfer of the infrastructure, equipment, assets, transfer of the right to use or operate thereof necessary for the continuation of the activity or the provision thereof as security takes place.

The regulations do not apply to legal transactions in respect of a foreign legal entity or other organization, in respect of the transactions related to its subsidiaries qualifying as strategic company (meaning that the whole group of companies present in more than one country is affected by the transactions defined by law, not just the Hungarian company/companies).

It is important to highlight that for legal persons and entities established in the EU, the EEA or Switzerland, for citizens of EU and EEA member states as well as of Switzerland, notification is only required when acquiring a majority control through specific legal transactions (regardless of the background of their ownership), while for foreign investors notification is compulsorily required for legal transactions specified in the Mixing-Act (acquisition of ownership, acquisition of ownership of a bond, acquisition of usufruct rights or operating rights).

What are strategic companies?

According to the provisions of the Mixing-Act, a strategic company is a

1) limited liability company,

2) private company limited by shares, or

3) public limited company,

with registered office (seat) in Hungary, the main area of activity of which falls within the sectors specified in the Appendix of the TEÁOR-Decree (attached below), or if its ancillary activities fall within the energy, transport, communications sectors and/or within sectors of strategic importance specified in Article 4 (1) (a) to (e)[3] of Regulation (EU) No 2019/452[4], excluding the financial infrastructures.

Who counts as a foreign investor?

Firstly, a legal person or other entity (i.e.: even a domestic entity) when acquiring shareholding or control in a company with registered office (seat) in Hungary performing a specific field of activity at the strategic company, if a person, being a citizen of a state other than a member state of the EU, the EEA and Switzerland or a legal person or other entity established in such a state, disposes on majority control as defined in the Civil Code in the acquiring entity.

Alternatively, a citizen of any state other than those in the EU, the EEA and Switzerland, or a legal person or other entity established in such a state.

Based on the above, the citizens (natural persons) and legal persons or entities of the EU, EEA and Switzerland are not considered to be foreign investors, unless a citizen, legal person or other entity other than those of the EU, EEA and Switzerland has majority control in them. Nevertheless, they are also required to notify if they acquire more than 50% of the votes or acquire majority control in a strategic company through their investment reaching or exceeding HUF 350 million.

Who should submit the notification and when? What are the main provisions for this new procedure?

The notification obligations, which partially has been amended compared to the previous regulation, apply to transactions concluded after the entering into force of the Mixing-Act – 18^th of June 2020 -.The notification with the content provided by the Mixing-Act must be submitted to the Minister within 10 days after the conclusion of the transaction. The notification must be made by the foreign investor or a legal person, other entity established in the EU, the EEA or Switzerland and the citizens thereof (or by the acquiring company and the afore mentioned persons jointly, if the acquisition of the right to operate is involved and it is not acquired by the foreign investor); legal representation is mandatory during the proceedings.

The Minister gives a notice on the receipt of the notification within a maximum of 8 days indicating therein the date of the reception, after which the Minister will have a 30 day period (which may be extended once by 15 days in duly justified cases; furthermore an extension of at least 3, but not more than 10 days may be granted for supplementing documents – or alternatively a 20 day extension for supplementing documents which are not to be submitted by the notifying party) to examine, whether:

• the notification meets the requirements for its content,
• there is a violation or threat of the state interest, public security or public order of Hungary with regard to the legal transaction, or the possibility of their occurrence,
• the transaction complies with Articles 36, 51 (1) and 65 (1) of the Treaty on the Functioning of the European Union,
• the notifying party is not under the control of an administrative body of an EU Member State,
• the notifying party has been involved in an activity in the EU concerning security or public order,
• there is a material risk that the notifying party will engage in illegal or criminal activities.

If on the basis of the investigation, no problematic circumstances arise, the Minister acknowledges the notification in writing. If on the basis of the above investigation problematic circumstances arise, the Minister prohibits the transaction. The Minister is obliged to give reasons for the prohibition. To a limited extent, this may be challenged in administrative non-litigation proceedings on the basis of the violation of essential rules of the procedure and in connection with the transaction’s classification according to the Mixing-Act. The Metropolitan Court will have exclusive jurisdiction in the case and legal representation is mandatory in this proceeding, too.

The notification will not prejudice any relevant reporting or authorization obligations under further legislation.

The Minister will monitor compliance with the notification obligations. If the notifying party fails to meet its obligation to notify, the above-described investigation will be undertaken with the possibility of imposing a fine. The amount of the fine may be up to twice the value of the transaction, and for a natural person acting as foreign investor at least HUF 100,000, while in the case of a legal person or entity acting as foreign investor at least 1% of the net revenue achieved in the last business year of the strategic company involved in the transaction (No reduction may be granted for the payment of a fine). The Minister will also keep records on the notifications on acknowledgments and prohibitions.

Important legal consequences of the notification obligation

When registering transactions specified in the Mixing-Act in the company register, the application for registration/modification must be accompanied by a private document of full probative value declaring that the company concerned is considered as a strategic company and by the Minister’s notification on acknowledgment. (Registrations made in the absence of these documents or in spite of the Minister’s prohibition will be deleted by the court of registration within the framework of the supervision of the legality of the procedure.)

A contract, unilateral declaration or company resolutions made in violation of the relevant provisions of the Mixing-Act or contrary to a Minister’s prohibition is considered to be null and void.

Engagement of legal counsel

The Regulation sets forth the mandatory legal representation, nevertheless, , in many cases, even during the planning phase of transactions, questions may arise as to whether they are bound by the notification obligations provided by the Decree.

Sectors specified in the TEÁOR-Decree:

Number	Sector	NACE Serial	Subsector
1	Chemical Sector	19	Manufacture of coke and refined petroleum products
		20	Manufacture of chemicals and chemical products
		21	Manufacture of basic pharmaceutical products and pharmaceutical preparations
2	Commercial facilities	45	Wholesale and retail trade and repair of motor vehicles and motorcycles
		47	Retail trade, except of motor vehicles and motorcycles
		46	Wholesale trade except of motor vehicles and motorcycles
3	Communication sector	61	Telecommunications
4	Essential industry sectors (including electronics, mechanical engineering, steel production and manufacture of transport equipment)	26	Manufacture of computer, electronic and optical products
		27	Manufacture of electrical equipment
		28	Manufacture of machinery and equipment n.e.c.
		29	Manufacture of motor vehicles, trailers and semi-trailers
		30	Manufacture of other transport vehicles
		24	Manufacture of basic metals
		25	Manufacture of fabricated metal products
5	Defence industry	25.4	Manufacture of weapons and ammunition
		30.4	Manufacture of military fighting vehicles
6	Dams	42.9.1	Construction of a water projects
7	Energy sector	35	Electricity, gas, steam and air conditioning supply
8	Emergency facilities	84.2.2	Defence activities
		84.2.4	Public order and safety activities
		84.2.5	Fire service activities
9	Food sector and agriculture	10	Manufacture of food products
		11	Manufacture of beverages
		12	Manufacture of tobacco products
		1	Agriculture, forestry and fishing
		2	Forestry and logging
		3	Fishing and aquaculture
10	Government facilities	84	Public administration and defence; compulsory social security
11	Health sector	86	Human health activities
		87	Residential care activities
		88	Social work activities without accommodation
12	Information technology	62	Computer programming, consultancy and related activities
		63	Information service activities
13	Nuclear sector	2446	Processing of nuclear fuel
14	Construction industry	41	Construction of buildings
		42	Civil engineering
		43	Specialised construction activities
15	Water supply and sewerage services	36	Water collection, treatment and supply
		37	Sewage collection and treatment
16	Waste management	38	Sewerage
		39	Remediation activities and other waste management services
17	Building material industry	8.1	Quarrying of stone, sand and clay
		23	Manufacture of other non – metallic mineral products
18	Transport, transportation, logistics	49	Land transport and transport via pipelines
		50	Water transport
		51	Air transport
		52	Warehousing and support activities for transportation
		53	Postal and courier activities
19	Manufacture of medical devices	32.5	Manufacture of medical  and dental instruments and supplies
20	Tourism	55	Accommodation
		56	Food and beverage service activities
21	Administrative and support service activities	782	Temporary employment agency activities

 

^[1] Act LVIII of 2020 on transitional rules related to the cessation of an emergency and epidemiological preparedness.

[2] During the examination of the notification the Minister also examines the damage or endangerment of the Hungarian state interests.

[3] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union

[4] a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;

1. b) critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC)

No 428/2009, including artificial intelligence, robotics, semiconductors, cyber security, aerospace technology, defence technology, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;

1. c) supply of critical inputs, including energy or raw materials, as well as food security;
2. d) access to sensitive information, including personal data, or the ability to control such information; or
3. e) the freedom and pluralism of the media.