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

author: dr. Katinka TÖLGYES

On the 17th 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 – 18th 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.

 

Tapping Capital: Sources of and Problems with Financing in the Hungarian Market

The Head of our Banking & Finance Practice Group, dr. Balazs J. Ferenczy, with other leading legal advisors of the Hungarian Banking/Finance industry, has been participating in the Banking Roundtable Discussion, organized by CEE Legal Matters Magazine back in February this year, in order to share thoughts about the current trends of the Hungarian banking sector from the lawyer’s table point of view. It is our pleasure to share CEELM Magazine’s article on the event.

 

The Government Decree – essentially setting forth a requirement for governmental approval – for foreign investors acquiring ownership in Hungarian strategic corporations and conducting specified transactions will remain in force until the end of the year

author: dr. Katinka TÖLGYES

On the 25th of May 2020 a Government Decree[1] (Decree) was published according to which 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, if the following conditions are also met:

  • 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) 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 and the value of the investment reaches or exceeds HUF 350 million;
  • 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;
  • 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, transfer of the right to use or operate the assets necessary for the continuation of the activity or the provision thereof as security takes place.

It is important to highlight that for legal persons and entities established in the EU, the EEA or Switzerland, notification is only required when acquiring a majority control through specific legal transactions (regardless of the background of their ownership), whilw for foreign investors notification is compulsorily required for legal transactions specified in the Decree (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 Decree, 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 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)[2] of Regulation (EU) No 2019/452[3], including the financial, credit and insurance sectors too.

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.

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

The notification obligations apply to transactions concluded after the entering into force of the Decree – 26th of May 2020 -. The Decree  is in effect until the 31st of December 2020.

The notification with the content provided by the Decree must be submitted to the Minister within 10 days after the initiation of the transaction. The notification must be made by the foreign investor (or by the acquiring company and the foreign investor 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 45 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
  • 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 per the Decree. 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 a foreign investor 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

Entry in the share register and members’ list is subject to the Minister’s notification on acknowledgement. When registering transactions specified in the Decree 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 provisions of the Decree 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.

Kapolyi Law Firm, a law firm recognized in the Hungarian capital markets with over two decades of experience fully supports the compliance of the specified legal transactions with the new provisions.

Should you have any further questions related to the notification obligations, please contact our experts.

[1] Government Decree No. 227/2020 (V 25) on the measures necessary for the economic protection of companies established in Hungary in order to prevent a human epidemic causing a mass illness endangering the safety of life and property and to remedy its consequences

[2] 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

[3] 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.

Specified sectors

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
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 Financial sector 64 Financial service activities, except insurance,

pension funding

65 Insurance, reinsurance and pension funding, except compulsory social security

 

66 Activities auxiliary to financial services and insurance activities
10 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
11 Government facilities 84 Public administration and defence; compulsory

social security

12 Health sector 86 Human health activities
87 Residential care activities
88 Social work activities without accommodation
13 Information technology 62 Computer programming, consultancy and related activities
63 Information service activities
14 Nuclear sector 2446 Processing of nuclear fuel
 

15

 

Construction industry

 

41

 

Construction of buildings

42 Civil engineering
43 Specialised construction activities
16 Water supply and sewerage services 36 Water collection, treatment and supply
37 Sewage collection and treatment
17 Waste management 38 Sewerage
39 Remediation activities and other waste management services
18 Building material industry 8.1 Quarrying of stone, sand and clay
23 Manufacture of other non – metallic mineral products
19 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
20 Manufacture of medical devices 32.5 Manufacture of medical  and dental instruments and supplies
21 Tourism 55 Accommodation
56 Food and beverage service activities

 

The pandemic may accelerate the spread of electronic procedures in Hungary

dr. Dániel Endre NAGY

The pandemic brought significant changes both in the everyday and work lives of people: the use of home office became widespread, while communication is conducted through phone, emails and video conferences. Concurrently for official matters, such as signing contracts and doing banking administration, a person’s signature and personal presence are often essential. According to Kapolyi Law Firm, the current situation will have a substantial impact on the spread of electronic signatures.

While restrictions imposed as a result of the coronavirus pandemic make it difficult to conduct official matters, they also highlight that it is necessary to consider how to facilitate the electronic signing of contracts and other written declarations. Kapolyi Law Firm emphasises that electronic signatures have several advantages: they are subject to the same laws throughout the EU and signatures made in any Member State are mandatorily recognized in other Member States. Documents signed electronically have the same probative value as a traditional signature and have the same effect as paper-based documents. According to Dr. Dániel Nagy, senior attorney at Kapolyi Law Firm, with the exception of a few sectors, the use of electronic signatures by the general population is limited and is currently not wide-spread in the corporate segment either. However, since 2016 Hungarian legislation provided for the possibility of signing various written legal documents electronically. According to the law, if a condition for the validity of a specific legal declaration is for it to be made in writing, this requirement is satisfied by doing so electronically, provided that the document is signed by the parties with an electronic signature with enhanced safety features. According to Dr. Dániel Nagy, there are four conditions for an electronic signature to be considered as having enhanced security features. One of the conditions is that the digital signature is linked exclusively and uniquely to the signatory person only. Secondly, it must be suitable for identification of the signatory. Thirdly it creates the signature in a way that only the signing person has access to the data required for creation. Additionally, it is linked to the signed data in a way that all subsequent changes made can be traced, and therefore the document cannot be modified or altered after its signing.

The spread of electronic signatures may also be facilitated through the issuing of new identification documents (e-IDs), which allow natural persons to access the benefits provided by e-signatures faster and easier than ever before. Dr. Dániel Nagy highlighted that if the e-ID has an electronic signature function, private and official documents may be signed electronically with a card reader, even at home. It is important to note that this option has not entirely replaced the work of companies providing authentication services, as functions belonging to e-IDs are limited in several respects. As such, it cannot be used for representing a company as an employee and it has a transaction limit (up to HUF 50 million). Therefore, the e-ID is suitable for electronic signatures if there is no need to provide information about the company or if it is not used to make a legal statement for practising employee rights. Overall, electronic signatures have several advantages and the necessary technical conditions are present. In the current pandemic situation, it may be an important tool for parties to sign a contract without any personal contact or to make a unilateral declaration electronically (such as a power of attorney or a unilateral termination of a contract).

The Hungarian National Bank clarified several questions with regards to the repayment moratorium

author: dr. Balázs József FERENCZY

The National Bank of Hungary (NBH) has published a prospectus on its website in the form of Frequently Asked Questions regarding the repayment moratorium and the supervisory measures related to the pandemic (Prospectus). The purpose of the Prospectus is to adjust questions, arising in the practice to the main provisions of the Government Decree on the payment moratorium and its implementing regulations from the Supervisory Authority’s point of view, including – among others –the so-called opt-out right, delegated into the client’s sphere of competence and authority for the purpose of its exemption from the automatically applicable payment moratorium in case of credit, loan and financial leasing agreements.

In this review we are reflecting some selected findings and recommendations of the NBH for the corporate sector.

  1. If the customer does not wish to apply the payment moratorium provided by law, he/she must inform the creditor in order to enable it to deduct the repayment (e.g. by direct debit) in time. It can take several days to process customer statements and set them up in the systems. Please let us know about the NBH’s guidelines for this case.

In the NBH’s view, it is natural due to the institutional operational system that the processing of statements takes some time. It is the interest of all parties to keep this period as short as possible. Therefore the NBH expects the institutions to strive at all times to apply solutions that ensure the processing of the declarations as quick as possible, performed within a maximum of 5 working days. The NBH expects furthermore the institutions to apply the content of the declarations in accordance with the debtor’s intention by that date, too. In addition, the NBH also expects the institutions to draw debtors’ attention to the time-consuming nature of the declarations’ processing in their general prospectuses, as well as immediately after the notice on the debtors’ repayment intention. If the customer repays, even with delay, the instalment due in a given month by bank transfer or cash deposit, the NBH also expects the institutions to consider such action as fulfilment of the repayment obligation and waiver of the moratorium in that month.

  1. How to deal with the case if the debtor has already declared for not applying the moratorium (i.e.: it is in opt-out status) but then it fails to pay when the actual payment becomes due, or, in case of direct debit, there is no enough fund in its bank account?

The relevant government decrees do not contain provisions for this case. Therefore, in the NBH’s view, in case of direct debits the provisions of the contractual environment (business regulations, GTC, etc.) must be followed. In practice, for example, if the institution used to automatically collect the instalment within 10 days after its monthly due date pursuant to these provisions, it shall continue to do so by attempting to debit the given monthly instalment until the due date of the next monthly instalment, at the latest. If this period expires without success, the debtor shall again be considered to fall under the payment moratorium and default interest, fees may not be charged for such instalment during the period of the payment moratorium, either.

If the contractual provisions do not provide guidelines in connection with the above, it is good practice according to the NBH if the institution provides grace period of 1-2, but maximum 5 working days for the payment of monthly instalments, meaning that if the customer pays the monthly instalment within this grace period, the payment obligation shall be considered completed in due time by the institution. According to the NBH’s recommendation, it is also a good practice for the institution to contact the consumer during this period regarding its intention on repayment. In the event of non-performance requiring the customer’s active behaviour (e.g. bank transfer, cash deposit), the contract will automatically fall under the payment moratorium.

  1. What is the situation with the securities (guarantee, pledge/mortgage) under the payment moratorium? Is it an obstacle to requiring additional collateral, if necessary?

The NBH emphasizes that Article 1 (2) of the Government Decree No. 47/2020 on the mitigation of the impact of the coronavirus pandemic on the national economy sets forth that the modification of the maturity for the completion of contractual obligations also modifies the ancillary and non-ancillary obligations, securing the contract. This provision also applies if the guarantee contract expires before the end of the year: its duration is also extended by the moratorium. It also applies mutatis mutandis to inventory/stock financing: the creditor shall not cancel its pledge, redeem a warehouse receipt until the debtor has fulfilled its payment obligation. In addition to the above and in the NBH’s view it is also important that, if the creditor (for reasons independent of the moratorium) determines the need for additional collateral, the moratorium does not prevent it from demanding the same from the debtor.

  1. Is it expected to set forth detailed rules on how to proceed with the determination of non-performance and restructuring in the case of clients falling under the moratorium?

According to the NBH the payment moratorium announced by the Government Decree No. 47/2020. shall not result automatically the reclassification of the relevant exposures into (i) the default category under the CRR, (ii) non-performing and/or restructured debts in accordance with the NBH Decree No. 39/2016 (X. 11.) on prudential requirements for non-performing exposures and restructured receivables, nor (iii) the obligatory determination of increased credit risk in accordance with the IFRS 9 standards, the reclassification into Stage 2. In relation to all these, the need for reclassification for each exposure must be determined individually. This was formulated in the Communication issued by the European Banking Authority on 25 March 2020, as well as, partly, in its Recommendation issued on 2 April 2020. This position will be confirmed in the management circular to be issued by the NBH in the near future, expected by the end of the second quarter of 2020, with further detailed rules.

  1. Do customers who withdraw from the payment deferral during the period of the payment moratorium (i.e.: the opting-out debtors) and fulfil their payment obligation late, bear the legal consequences of the delay?

In the NBH’s view during the period of the payment moratorium customers do not bear the legal consequences of the delay, so there are no legal consequences for late payment either during the so-called grace period or independently thereof.

  1. Can intermittent loans, where drawdowns adjust to the phases of the construction and the stage of completion, be managed in a way that the institution allows the payment moratorium for instalments not yet disbursed at 24:00 on 18 March 2020, too?

Pursuant to the Government Decree No. 47/2020, the payment moratorium shall not apply to loan instalments disbursed following to 24:00, 18 March 2020, nor to payment obligations arising from them. Nevertheless, the NBH considers as good practice if the institution allows payment moratorium to customers in respect of loan instalments not yet disbursed at 24:00 on 18 March 2020, too, thus providing for the uniform and transparent management of the contracts.

  1. In addition to principal and interest payments, does the moratorium apply to fees only, and not costs?

In the NBH’s view, according to the Government Decree No. 47/2020, the moratorium applies to capital, interest or fee payment obligations, arising from credit, loan or financial leasing agreements, therefore payment deferral affects the above-mentioned payment obligations only, stipulated in the contracts, it does not apply to costs passed on to debtors. According to the NBH their interpretation is supported by the fact that Article 17/E of the Act no.: CLXII of 2009 on consumers loans refers and names the costs, incurred in connection with the service provided by third party, which can be passed on to the consumer, separately from fees.

  1. The settlement logic for interests and fees, set forth in Article 2 of Government Decree No. 62/2020, is applicable only in the case of credit transactions with final maturity date, and not for revolving type products with no maturity. In case of these products, neither the extension of maturity, nor the determination of even instalments, or fixing the instalments (due to withdrawal from the available facility in random amounts) can be set. Is it appropriate for interest on overdraft facilities and credit cards, unpaid during the moratorium, to be settled within 12 months from the final maturity date of the moratorium?

The payment moratorium shall apply only to loans already disbursed under contracts existing at 24:00 pm on 18 March 2020. The NBH therefore considers important to emphasize that in case of loans to be disbursed or drawn down in instalments, the amounts disbursed or drawn down after 18 March 2020 shall not fall under the rules of the payment moratorium.

The provisions set forth in Article 2 (2) of the Government Decree No. 62/2020 apply for constructions with duration period only. In case of credits with no duration, the NBH interprets that repayment becomes immediately due after the last day of the moratorium.

Nevertheless, in harmony with the legislator’s approach, the NBH expects in case of products with no maturity also, that the unpaid interests should not be settled in bullet once the moratorium ends. Instead, it should be spread over a longer period in order not to impose disproportionate burden on borrowers. The instalment payment option can be provided for based on Article 279 (16) of the Credit Institutions Act. However, customers must be informed on this non-unfavourable, unilateral amendment of contract in accordance with the applicable legal or contractual provisions. In the NBH’s view it can be considered a good practice for institutions to provide a 12 months instalments payment option for these type of transactions too. The unilaterally determined duration of the repayment option may be shortened by prepayment, or the parties may also deviate from such a period by their mutual agreement.

In addition to the above, the NBH created a separate webpage, dedicated to the measures for economic and financial responses relating to the coronavirus situation. The site’s constantly updated database provides additional and up-to-date information on key regulatory responses affecting the retail, corporate and financial sectors.

 

Competition law in the age of Coronavirus: state-owned venture capital and private equity funds may acquire companies more easily

author: dr. Katinka TÖLGYES

Significant relief was granted to directly or indirectly state-owned venture capital and private equity funds which, individually or jointly with another company, acquire management rights in a company for investment protection purposes. During the period of the emergency, for transactions in which the acquired company was in a difficult situation as a result of the pandemic, there is no need to notify and gain approval from the Hungarian Competition Authority (GVH). The pandemic will result in several changes in the economy and market structure, raising several issues in competition law, such as the prohibition of the abuse of a dominant position or significant market power or the authorization of mergers. Kapolyi Law Firm’s competition law expert summarised the most important information and what measures may be expected from the authorities.

As a result of the pandemic, customer and consumer needs are changing so rapidly and drastically in several sectors, that adapting to them poses serious challenges for most companies. The necessity of the changes affects nearly all economic actors to a certain extent, given the effects of the pandemic, and the legal regulations and amendments aimed at preventing and managing it. Furthermore, with regards to the method of adaptation – taking into account the necessary epidemiological measures – companies are not entirely free to choose and implement their own measures (e.g.: the opening of commercial catering units is restricted, and the holding of certain events is prohibited). Many businesses will therefore not be able to cope with the challenges posed by the pandemic and the ensuing expected economic recession, or will find it far more difficult to do so. Concurrently, there will be some who will be able to prepare for the forthcoming period, by maintaining their previous position or even strengthen it, increasing their market share. According to Dr. Katinka Tölgyes, Kapolyi Law Firm’s competition law expert, this is likely to affect market structures, which will presumably become more concentrated for a while. The market position of a company may change with respect to its competitors or suppliers. This means that with the marginalization or even disappearance of competitors, companies in a weaker position may become dominant, or companies in a dominant position may find themselves in an even more favourable position. Additionally, the market power of companies in relation to suppliers may strengthen, or significant market power may shift to companies that previously did not have any. Kapolyi Law Firm’s competition law expert highlights the fact that neither competition nor commercial law prohibits a dominant position and significant market power, but the laws sanction their abuse. Therefore, businesses which are more successful than others in coping with the current economic crisis must be careful not to violate regulations. As consumers may be more vulnerable to the negative externalities of market abuse in the current pandemic situation and the forthcoming economic recession, the Hungarian Competition Authority can be expected to be more stringent.

Dr. Katinka Tölgyes emphasises that a further consequence of the changes in the market structure, and a presumed concentration is an increase in the number of mergers and acquisitions of companies. This is because businesses in a difficult situation are less likely to be able to maintain their independence, and for more successful enterprises, acquiring a company may entail a new business opportunity. When certain revenue thresholds are met, mergers must be approved by the GVH, in the absence of which the merger may not be executed. The GVH may also make its approval subject to conditions (e.g.: the sale of a certain part of the business within a specified period of time). However, per the Competition Act, it is also possible for the GVH to authorise the execution of a merger prior to the completion of the authorization procedure upon a separate application, if this is necessary to preserve the value of an investment. Given the impending economic recession, it is expected that the number of these applications will likely increase, as maintaining the survival and viability of distressed, therefore acquirable companies, and protecting the investment of acquiring businesses, will justify the submission of applications more frequently than in a prosperous economic period. In an earlier communication, the GVH asked companies to consider postponing the notification of planned mergers. The authority also highlighted that given current circumstances, it is more difficult for the GVH to collect information (e.g.: from competitors, suppliers) that may be necessary to assess the merger, which may result in complications for involved parties.

Dr. Katinka Tölgyes emphasises that concurrently, the Government exempted certain enterprises from their notification and authorisation obligations in view of the emergency situation. Therefore, by derogating from the provisions of the Competition Act, and in accordance with the Government Decree’s provisions for specific credit, capital and warranty products within the framework of the Economic Protection Action Plan, the GVH does not have to be notified about mergers involving, a directly or indirectly state-owned venture capital or a private equity fund which are executed through a financing transaction necessitated by the pandemic, through a capital program set up for that purpose. The same applies for directly or indirectly state-owned venture capital and private equity funds which, individually or jointly with another company, acquire management rights in a company for investment protection purposes. However, this only applies until the cessation of the emergency period.

Coronavirus: companies can receive state aid in these five categories according to the European Commission’s resolution

author: dr. Katinka TÖLGYES

With respect to the economic damage caused by the coronavirus pandemic, the European Commission has mitigated its position related to state aid and has temporarily amended the framework in the light of the crisis. The competition law expert of Kapolyi Law Firm summarized the most important information in this regard and the opportunities available to companies under EU regulations.

Although, under normal economic conditions, the general rule is that the granting of state aid in favour of certain products, services or undertakings is prohibited, the Commission changed its position due to the deteriorating economic situation caused by the coronavirus pandemic. Dr. Katinka Tölgyes, competition law expert of Kapolyi Law Firm, recalls that, usually, only state aids that are compatible with the European Union’s internal market are authorized, such as non-discriminatory social aids granted for a product or aids for repairing damages caused by extraordinary events. Nevertheless, aids to promote the economic development of certain least-developed areas or to promote the development of certain economic activities or certain economic areas, without prejudice the common market and the common interests of the European Union, may also be authorized. Compliance with the rules related to aid is constantly monitored by the Commission, which checks whether they are compatible with the internal market and that they are not being misused in an abusive manner.

The main frameworks have been laid down in the light of normal economic conditions and they are not applicable, or the application thereof is rather difficult to unexpected, negative and eventually long-term processes affecting the economy, such as those caused by the coronavirus pandemic in certain economic sectors (e.g. tourism, hospitality) – said dr. Katinka Tölgyes. Following this logic, the Commission has also taken the view that changes to the application of the framework need to be done, and has defined five categories of aid under which Member States may grant aid to remedy the serious disturbance in the economy if other conditions set forth in the transitional regime are also met.

Five categories of aid defined by the European Commission

  1. Non-refundable direct aids, selective tax incentives and repayable advances

Member States may grant aid up to a maximum of EUR 800 000 (EUR 120 000 for the fisheries and aquaculture sector and EUR 1 000 000 for primary agricultural production) to satisfy the urgent liquidity needs of an undertaking. The aid is conditional on the economic difficulties of the beneficiary company being caused by the coronavirus pandemic or its consequences, and that the company has not been considered to be in difficulty for any other reason before 31 December 2019. Where an undertaking operates in more than one sector and is subject to different maximum amounts, Member States should ensure that the ceilings are met, for example by means of accounting separation.

  1. Providing a loan guarantee

Member States may provide preferential state guarantees to ensure that banks and other financial institutions can continue to provide credit to customers who need it.

  1. Subsidized lending rates

Member States may, as a general rule, grant loans to enterprises at reduced interest rates for a maximum of 6 years. These loans can help to the enterprises to provide immediate working capital and satisfy investment needs.

  1. Guarantees and loans provided through financial institutions and credit institutions

Member States may also grant the aid referred to in points 2 and 3 to help undertakings, in particular small and medium-sized enterprises, through banks or other financial institutions. According to the European Commission, such aid shall be considered as aid granted directly to banks’ customers and not as aid granted to banks.

  1. Short-term export credit insurance

In the event that the hedges of marketable risks are temporarily unavailable in some countries, the European Commission allows short-term export credit insurance for the state.

Dr. Katinka Tölgyes points out that the European Commission specifically mentions aids for relevant research and development, production of products as well as testing and scaling infrastructures aiming to combat the coronavirus pandemic. In these cases, the aids are considered as aids to promote the development of certain economic activities or certain economic areas, without prejudice the common market and the common interests of the European Union. The European Commission also sets a deadline, meaning that aids to remedy the serious disturbance in the economy of a Member State can only be granted until 31 December 2020. The competition law expert of the Kapolyi Law Firm recalls that the elaboration of detailed rules in relation with the provisions set forth by the European Commission has already started in the Hungarian legislation in the meantime.

Force majeure and MAC/MAE clauses during the period of Covid-19 in Hungary

author: dr. Balázs József FERENCZY

  1. What force majeure means?

Force majeure (in the Hungarian legal language: “vis maior”) is a legal institution dating back to Roman law, and “means a force or event that human weakness cannot resist.”[1] The legal literature includes both overwhelming natural forces, such as earthquakes, floods, shipwrecks, other natural disasters, and certain human/social movements, such as wars, revolutions, or other extraordinary social events of extreme force. According to Roman law, “no one is generally liable for force majeure”[2], unless (i) it has been undertaken by someone in a contract (such as in the case of ancient “insurances”, like the pecunia traiectitia or the lex Rhodia de iactu mercium), or, for example, (ii) if the person was liable for (i.e. it was attributable to him) that the asset has been affected by force majeure.

Force majeure – although it has classical roots and a fairly widespread contractual practice – does not have a normative basis in the current Hungarian legal system. This legal institution can be deduced indirectly from certain provisions of the Civil Code and their explanations (cf. the system of exemption from contractual liability according to § 6: 142 of the Civil Code),[3] and in practice, the exact meaning and content thereof are set forth by the parties in their contractual clauses and in the judgments developed by case law.

  1. Can the current epidemiological situation be considered as force majeure and can we invoke it in our contractual relations?

In our contractual relations force majeure may be invoked mainly in cases where the parties have made the vis major cases, and among them the epidemiological situation, part of their contractual agreement. These clauses are most often included in medium- and long-term contractual schemes (e.g. construction and installation contracts, credit line contracts), but it is important to note that the contract must be examined each time (i) to find out if it contains any additional force majeure clause, on the one hand, and if this exist (ii) what is the exact content thereof, on the other hand. These provisions usually provide a clear indication of the contractual obligations the parties are liable to meet in the event of force majeure (e.g. the obligation to notify in writing on the occurrence of force majeure event and the nature thereof), the duration of such a situation (the parties generally allow the application of force majeure event for a transitional period) and what should and/or can be done after this transitional period (withdrawal or termination if the force majeure situation does not cease during the transitional period or resumption of contractual obligations).

The provisions on the payment moratorium set forth in the Government Decree Nr. 47/2020 (III. 18.) on the immediate measures necessary to mitigate the impact of the coronavirus pandemic on the national economy, as well as in the Government Decree Nr. 62/2020. (III. 24.) on the execution of the former one (hereinafter collectively referred to as the “Government Decree”) in Hungary, for example, contain an exemption from the fulfilment of contractual obligations for the debtors of credit, loan and financial leasing contracts disbursed on a commercial basis, which, in fact, prevented the risk of mass insolvency resulting from the epidemiological situation and, therefore, the risk of mass litigation procedures, which was likely to place a heavy burden on the economy as a whole and on the judicial sector, too.

Force majeure may also be applied even without a contractual clause, for example, if the party relying on it can properly prove that he was unable to meet a contractual obligation specifically due to the epidemiological situation or for a reason directly attributable to the epidemiological situation, he did not foresee the occurrence of this event, neither could he be expected to assess/foresee it in advance. In this respect, for example, an important and decisive issue may be the date of conclusion of the contract as well as to what extent and in what manner the given business was affected by the possible shutdown of foreign suppliers around this date, for example.

  1. In which cases could difficulties arise in relation to force majeure event?

Despite the above, there are many systems of contractual relations where reference to force majeure event is likely to cause difficulties, such as, for example, lease contracts for retail units and shops. As our colleague, Mátyás Rada explained in his previous articlesince force majeure in lease contracts usually means events beyond the control of the parties that damage or destroy the building or part of it rendering the leased property unavailable or unusable (such as fire, flood, or even war events), a new interpretation of ‘un-usability (unavailability)’ may emerge in the context of a coronavirus pandemic.”

  1. Is there causing of damage in case of force majeure?

If the defaulting party properly alleges and proves that he was unable to meet his obligation due to force majeure event, therefore his conduct or his omission resulted from a cause beyond his control, he can be relieved of his liability for breach of contract and thus for causing damages.

It is important to note that, on the basis of a regulation developed for this purpose[4], a so-called certification of force majeure can be required from the Hungarian Chamber of Commerce and Industry (HCCI) in respect of non-performance of an obligation (or obligations) specified in a particular contract, which is an institution rather foreign from the until now existing Hungarian legal practice. At the same time, HCCI underlines in its abovementioned regulations that “The concept of “force majeure” has not been defined neither by Hungarian law, nor by EU legislation and judicial practice. The purpose of the Chamber’s certification of force majeure is to avoid possible lawsuits, to promote civilized economic co-operation between enterprises, to simplify the proof in lawsuits that may still be initiated, and to reduce the duration of lawsuits.”

A major question of judicial practice following the coronavirus epidemic is the direction in which the case-law related to force majeure will be further developed, based on a simultaneous examination of the above elements, in a forward-looking manner.

  1. What does MAC/MAE clause mean?

If the contract cannot be terminated due to force majeure, the contracting partner may have to seek other clause(s)/legal grounds for terminating the contract.

As impact of the Anglo-Saxon legal system and international model contracts, the use of the so-called MAC/MAE (that is to say: Material Adverse Change/Material Adverse Effect) clauses is widespread also in Hungarian contractual practice, that can typically be found in credit and loan agreements and in the documentation of M&A transactions. The main source of the MAC clauses – similarly to force majeure – are the provisions mutually agreed upon by the parties in the contract. The legal background for this legal institution does not currently exist in the Hungarian legal system.

For example, in a loan agreement standardized by the LMA, any fact, event, or circumstance, or a series thereof, shall be considered as material adverse effect that has occurred to the borrower which, according to the creditor’s reasonable opinion, have or may have a material adverse effect on

(a) the economic (financial or other) situation of the borrower;

(b) the management and business of the borrower;

(c) the ability of the borrower to meet any obligation under the financing agreement or the collateral contract securing thereof; or

(d) the legality, binding force, validity, enforceability, ranking of any transaction document to which the borrower is a party.

A MAC/MAE’s

  • lack (as expected by the creditor) may, for example, serve as a precondition for the financing party to meet its financing obligation under the credit facility agreement; or
  • occurrence (unauthorized by the creditor) may, for example, result in the breach of the borrower’s obligation undertaken in respect to the lack of MAC/MAE, which may lead to an event for breach of contract; or
  • occurrence/existence (not permitted by the creditor) may also result directly (sui generis) in an event for breach of contract.
  1. When can we speak about the occurrence of a “material adverse effect” under the MAC clause?

In this matter – in lack of Hungarian judicial practice and legal provisions – it is worth relying on the results of Anglo-Saxon legal development. According to them, a material adverse effect, for example,[5]:

  • must continue existing for long-term: the change cannot be only temporary, it must be for long-term and permanent in terms of the company’s ability to generate revenue (“over a commercially reasonable period, measured not in months but years.”);[6]
  • must be quantitatively significant: a waiver based on the MAC clause could be successfully invoked, for example, in the case of a 50% reduction of two consecutive quarterly revenues,[7], in another case the court considered a reduction of 64% of the quarterly revenue to be a close case,[8] while a decrease of 86% of EBITDA was considered as an undoubtedly significant and substantive change („short-term hiccup should not suffice”);[9]
  • externalities affecting the whole industry concerned, given that they affect all participants of that industry, do not normally fall within the scope of the MAC clauses. If a material adverse effect affects the given contracting party only, regardless of the industry concerned, the termination on the basis of the MAC clause may provide an appropriate basis thereof; however, if the effects affect the whole industry in the same way, the contract cannot normally be withdrawn under a MAC clause.

The above only sets the framework for Anglo-Saxon case law (drawn with rather inaccurate lines) and does not mean that minor revenue losses cannot lead to a decision respecting MAC/MAE clauses (with special regard to the existence of other important circumstances), nor they mean that even in the case of a higher loss of revenue, the court could not decide against the application of the MAC/MAE clause. However, it can be stated in general, the courts interpret the MAC/MAE rather strictly and narrowly. They usually exclude the applicability of the MAC/MAE clauses in the event of, for example, war, natural disasters or force majeure, placing the systemic risks on buyers/creditors, essentially. As the pandemic became global, the Covid-19 epidemic also began to appear in MAC clauses as a specific circumstance being an explicit exemption from the causes of withdrawal[10] (a substantially similar trend was observed after the events of 11 September 2001, when the terrorist attack was included among the events of force majeure). However, it is important to underline that specific circumstances referred to in the MAC/MAE clause (including the Covid-19 epidemic, too) can only constitute an exemption if they affect the given industry or activity, including all market participants, in general. If the impact on a given company is (significantly) more severe than on the industry in average (“except to the extent that the target was disproportionality impacted compared to other industry participants”), the systemic risk thesis may be overturned and the application of the MAC/MAE clause against the target company/borrower may legally be founded, taking into account all the factors of the case.

  1. Can the current epidemiological situation justify withdrawal from the contract or refusal to financing by reference to the MAC/MAE clause?

In each case, extensive and thorough contractual interpretation is needed in order to determine whether the epidemiological situation caused by the Covid-19 virus and the resulting economic and legal circumstances fall within the scope of the MAC/MAE clauses set out in the contracts. In our view and in the light of past experience, it can be said in general that the MAC/MAE clauses relate specifically to the individual financial, economic or legal situation of the debtor/contracting partner. The fact that both the world economy and the Hungarian economy have to face a global epidemiological situation as a result of the Covid-19 virus does not in itself provide a sufficient legal basis for the contracting party to exercise its right to terminate the contract under the MAC/MAE clause.[11] Nevertheless, special consideration in the risk analysis should be given to the possible disproportionate impact on a given company caused by the current situation referred to above.

  1. Are there other contractual rules under which a credit institution may, for example, consider terminating a loan agreement?

As we explained in one of our previous articles, the payment moratorium (at least, concerning Hungary) only grants, temporarily and not permanently, exemptions from the rules of the loan agreements related to the repayment of capital and interest. This is a very important, but by no means a single set of borrower obligations. In addition to capital and interest repayment rules, loan agreements commonly used in the legal practice impose obligations on borrowers to comply with certain financial ratios (DSCR, LTV), to provide financial information on an ongoing basis, or to maintain collateral value (listing only the most important ones). Borrowers are obliged to fully comply with these obligations, even during the payment moratorium set out in the Government Decree and the existence of the force majeure situation. Should any of these obligations be breached, these may allow the credit institution to consider the termination of the relevant contract, which is not in the borrower’s interest during the moratorium period, either.

  1. What is the solution?

In the current situation, both (legal) force majeure (Government Decree on the declaration of an emergency and its execution) and the MAC/MAE clauses can provide an appropriate basis for the contracting parties to negotiate and resolve disputed issues reassuringly and for long term. It is clear that in this way parties are primarily facilitating to relaunch the various sectors of the economy after the emergency will cease, which already seems to be a huge, but mutual task, trying and testing people and the market.

_______________

[1] History and Institutions of Roman Law (András Földi and Gábor Hamza), Institute for Educational Research and Development, Budapest 2015. Brósz-Pólay: Roman Law, Textbook Publisher, 1974, p. 351 .: “cui humana infirmitas resistere non potest” – D.44.7 .1.4. – Gaius.

[2] D. 50.17.23. – Ulpianus, 1.

[3] Section 6:142. of the Hungarian Civil Code

[4] https://mkik.hu/vis-maior-igazolas-kiallitasa

[5] https://corpgov.law.harvard.edu/2020/04/04/covid-19-as-a-material-adverse-effect-mac-under-ma-and-financing-agreements/

[6] Akorn, Inc. v. Fresenius Kabi AG https://courts.delaware.gov/Opinions/Download.aspx?id=279250

[7] Raskin v. Birmingham Steel (Del. Ch. 1990)

[8] IBP Shareholders Litig. (Del. Ch. 2001)

[9] Akorn, Inc. v. Fresenius Kabi AG https://courts.delaware.gov/Opinions/Download.aspx?id=279250

[10] Morgan Stanley-E*TRADE merger agreement: https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-morgan-stanley-e-trade-merger-excludes-coronavirus

[11] https://www.ashurst.com/en/news-and-insights/legal-updates/is-coronavirus-covid-19-a-material-adverse-change/

Kapolyi Law firm is among the best Hungarian law firms in 2020 according to Chambers and Partners and The Legal 500 legal guides

We are honoured to have been top ranked among the best Hungarian law firms in the 2020 edition of The Legal500 EMEA and Chambers and Partners legal guides.

The meetings of governing bodies of legal entities during the Coronavirus pandemic

author: dr. Adrienn MILD

Based on Parliament’s authorisation, the Government enacted Decree 102/2020. (IV.10.) on diverging provisions concerning the operation of partnerships and capital companies during the state of emergency (hereinafter: “Decree”). The decree was issued on 11 April 2020 and will remain in effect until the state of emergency ceases according to government Decree 40/2020 (III. 11.).

The Decree set forth special provisions for the operation of legal entities’ corporate bodies (e.g.: members’ meeting, general meeting, board of directors, supervisory committee, etc.) during the emergency period. It is important to note that the Decree’s provisions apply for deadlines already expired before the Decree’s enactment, but after the declaration of the emergency. It also applies to persons whose mandate, appointment or elected office expired after the declaration of the emergency but before the enactment of the Decree and no other person has been appointed or elected to replace them.

This piece summarises provisions on legal entities regulated by the Civil Code. Special provisions for publicly listed companies (plc.) were summarised in our earlier article.

Meetings of a corporation’s governing bodies (members’ meeting, general meeting, etc.) may not be held by attendance in person (this applies to a meeting already convened by the time when the Decree was enacted). If possible, members may attend meetings through electronic communication devices or make a decision without holding a meeting – unless this does not violate any laws and it is initiated by the management -. According to the Decree this is permitted even if the legal entity’s articles of association (hereinafter “Articles of Association”) do not contain any provision for the processes and conditions of decision-making without holding a meeting.

If the Articles of Association contain provisions for holding a meeting through electronic communication devices and for decision-making without holding a meeting, those provisions prevail. If not, the management is entitled to establish them, but certain rules for warranties must be observed:

  • Members must be informed about the agenda, and the proposals for resolutions must also be disclosed to them,
  • In case of attendance the meeting through electronic communication devices, the devices and IT applications must be specified, as well as the means of the process of identification (unless the management of the legal entity personally knows the members or their representatives),
  • In the event of decision-making without holding a meeting: (a) at least 15 days must be allowed for the member to vote. The vote is valid only if it clearly identifies the member (name, address/seat, the name of its representative – in the case of an organization -), the indication of the draft resolution to vote on, its serial number and the vote cast; (b) the decision-making process shall be considered effective if at least as many votes are sent to the management as the number of members with voting right required to attend for a quorum if the meeting was in fact held in session; (c) the management shall determine the outcome of the voting within three days following the last day of the deadline set forth for voting, or, if the votes of all members are received previously, within three days from the day when the last vote is received, and shall convey the results in writing to the members within an additional three days; (d) the member may not propose to convene the governing’s body meeting or to hold it by electronic means; (e) subject to compliance with prescribed formalities, a member may cast its vote through e-mail, too.

The designated executive officer of the legal entity is to chair the meeting of the governing body and record its minutes, indicating the circumstances of the meeting and the personal details of the members participating by electronic means. The minutes shall be signed by the chairman of the meeting and no attendance list is required.

A member of the supervisory board and the permanent auditor may participate in the meeting of the governing body the same way as the members of the legal entity (essentially by electronic means).

If it is not possible for members to participate in the meeting through electronic communication devices or to make a decision without holding a meeting, the management decides on the approval of the annual report, dividends as well as issues belonging to the competence of the governing bodies and necessary to maintain the legal entity’s lawful operation and the management of the emergency situation, as well as on urgent matters unless the majority objects to the proposal. However, the management (i) may not amend the Articles of Association unless required by law; (ii) may not dissolve the company without a legal successor; (iii) may not decide on the transformation, merger or division of the legal entity, nor may it decide on ongoing issues related to transformation, merger or division that belong to the competence of the governing body; (iv) may not decide to reduce the registered capital of limited liability companies and private companies limited by shares; (v) may decide on additional payments or other capital injections only with the prior written consent of the parties obliged to provide them.

In case of limited liability companies and private companies limited by shares, if the convening of the members’/general meeting and the reduction of the share/registered capital is mandatory according to the Civil Code, those companies are obliged to decide on the necessary measures on members’/general meeting to be convened no later than on the 90th days after the cessation of the emergency.

The decisions of the management are considered as a decision of the governing body (meaning that these decisions must be published and submitted to the court of registration) and are enforceable. The management must make every effort to inform members about these decisions. The management is liable for its decisions to the legal entity on the basis of the rules on liability for a breach of contract. The audit of the annual report may be carried out on the basis of the decision of the management, however, the management may only decide on the annual report if it has previously been approved by the supervisory board, in case it operates.

The decision of the management made on the basis of the above rules shall be placed on the agenda of the extraordinary meeting of the governing body to be convened to be convened no later than on the 90th days after the cessation of the emergency. However, if the decision is amended or repealed by the governing body, it does not affect the rights and obligations arising from previous decisions of the management.

The corporate bodies of the legal entity (executive board, supervisory board, audit committee, or further corporate bodies established by law or the Articles of Association) may hold meetings through electronic communication devices, or through other electronic devices which permit the identification of attendees. Alternatively, corporate bodies may conduct written consultations, and make decisions in writing. In lack of relevant, approved procedures for the above, the rules and processes of the meeting and decision-making are determined by the chairman of the body which must be communicated to members involved. Written consultations and decision-making may also take place through electronic messages (i.e.: through e-mail).

A further temporary rule is that shall the term of the appointment of a member in the above corporate body or the appointment of the permanent auditor expire during the emergency period (even if their appointment expired after the announcement of the emergency, but before the publication of the Decree and no other person has been appointed to replace them), their mandate will remain effective until the 90th day after the cessation of the emergency period and they are obliged to continue to perform their duties. Exceptions arise if the appointment of said person ceases due to death, recall, restriction of his legal incapacity or upon the occurrence of an event which provides grounds for exclusion or a conflict of interest.

If during the period of the emergency the number of members in the abovementioned bodies decreases below the number set forth by law or the Articles of Association, or if a member is unable to act due to the coronavirus pandemic, the remaining members are entitled to pass resolutions. In this case, the rules on the quorum of the said body shall be determined by the number of members available to decide. Even in this case, resolutions must be passed by simple majority; however, even one member is entitled to pass resolutions if all the other members of the relevant corporate body are unavailable.