Workers may be replaced from Asia: will there be wage tension and fluctuation in Hungary?

It has become easier to recruit workers from third countries, including from Asia, through certified temporary-work agencies. In addition to the fact that labour shortages in some sectors and the uncertain economic outlook make it increasingly advantageous for employers to hire workers, the new regulation may also have negative consequences for the labour market: wage tension and fluctuation may increase due to third-country workers.

At the end of June, a new government decree[1] came into force which makes it far easier for temporary-work agencies to recruit employers not only from neighbouring countries but also from the Asian region. The new regulation could further stimulate the temporary-work agency market, while employers facing a shortage of human resources will be able to access labour force more easily and flexibly. However, the new regulation may not only provide some relief from labour shortages, but also raise new problems.

Temporary agency work has many advantages, one of the most important is that the various administrative burdens of employment are not borne by the user enterprise (i.e. the „borrowing company”), but by the temporary-work agency. The Regulation sets out the conditions for registration as a certified temporary-work agency, which are stricter than those for „normal” temporary-work agency, nevertheless, the legislation is short again of eliminating or solving a number of problems. A recent case in Curia has once again highlighted that the Labour Code[2], in force since 2012, does not in practice protect temporary agency workers, since it considers the temporary-work agency as the employer, who can dismiss the employee at any time without justification. Therefore, if the temporary agency work is terminated, the temporary-work agency (i.e. the lender of work force) can rely on this circumstance alone to terminate the employment relationship with the temporary agency worker. Nevertheless, it is precisely this possibility that makes temporary agency work attractive for employers.

In the increasingly uncertain economic climate, this type of employment may become even more popular in the future, as the user enterprise (i.e. the hirer of work force) has the flexibility to adapt the number of workers to its current needs and, in the event of redundancies, temporary agency workers will be the first to be laid off. The Hungarian legislation limits the maximum duration of temporary agency work up to 5 years, which is nowadays no longer considered a short period spent in one workplace and is close to the average of 8.9[3] years spent by workplace in Hungary. On this basis, it can be stated that temporary agency work is not tending towards short-term, temporary employment. If the user enterprise (i.e. the hirer of work force) is satisfied with the employer, he can employ him for long term with slight labour law guarantees, while he can dismiss him at any time without giving any reason.

Question marks around wage tension, fluctuation, and collective disputes

While the new legislation could benefit companies in many ways, it also raises many questions about its implications. On the one hand, it could lead to wage tensions between workers due to lower pay requirements by third-country workers. The fluctuation is also a question: in sectors where there has already been high fluctuation of workers, could this problem be solved by hiring third-country nationals or, on the contrary, could the tension between workers in different employment relationships lead to an increase the number of leaving workers employed in employment relationship. Inappropriate use of temporary agency work could therefore lead to more workers leaving by the end of the year than can be replaced by temporary agency workers, while recruitment continues. Another potential source of tension is that third-country workers will obviously not be aware of the cornerstones of national labour law or may simply be dismissed in the event of conspiracy. This in turn could lead to the erosion of the working conditions and labour law guarantees that workers have fought for or that have been established by judicial practice.

When appropriately applied, temporary agency work can not only help employers to reduce the costs of the labour organisation, but also provide great flexibility. However, to make an effective use of all this, employers would need to consider proper preparation, HR management and other factors. At the same time, it is already clear that the current regulation of temporary agency work puts employers in a more advantageous position vis-à-vis workers who are not protected by guarantee-provisions. Thus, currently, both temporary-work agencies and user enterprises face less risk than in the case of a ‘normal’ employment relationship when it comes to the legality of employer’s measures affecting temporary agency workers, such as termination of employment, for example.

[1] Government Decree 226/2022 on the registration and activity of certified temporary-work agencies

[2] Act I of 2012 on the Labour Code – “Labour Code”

[3]statistic of OECD, 2020 (https://stats.oecd.org/Index.aspx?QueryId=29561)

 

The Helikon Terrace on the shores of Lake Balaton is progressing well, Kapolyi Law Firm is the legal advisor of the investor

One of Keszthely’s new high quality residential projects, Helikon Terasz, has reached the construction stage and held a ceremony with the participation of the contracted buyers in mid-May. Work is progressing according to plan, the first phase of the project is expected to be handed over in the first quarter of 2023. As legal advisors of the investor Blue Corso Zrt., we are proud that Kapolyi Law Firm, with the support of our real estate and construction law team, can be part of the 21st century smart home project envisioned for the Balaton shore!

 

New EU regulation will restrict accommodation portals from summer

From 1 June, a new EU regulation will come into force that, among others, restricts online accommodation providers from entering into agreements that require hotels to advertise their rooms at the best price with them. The regulation does not only concern the tourism sector, since it deals with restrictive agreements between suppliers and buyers, in general.

As revealed in the summary provided by Kapolyi Law Firm, a new EU regulation on restrictive agreements between suppliers and buyers will enter into force on 1 June. According to Dr. Zoltán Bánki, attorney-at-law in association with the Law Firm, the new rules confirm that not only companies above the market share threshold of 30 % need to act with due care when entering into agreements restricting competition, but also smaller ones. Under the new rules, irrespective of the market shares, a restriction of sales of services or products of the buyer through its own website is allowed only in exceptional cases. As the summer approaches, the focus of interest will be on large online accommodation portals and their partners (among them on hotels, in particular), Kapolyi Law Firm points out that the Regulation applies not only to the online but also to the offline world. The amendment was necessary mainly because online commerce has undergone significant changes in the recent years and new responses have had to be found to the problems that have arisen. The change is particularly important and forward-looking for the large accommodation intermediary sites as the summer and the peak season in tourism approach and could lead to a significant change in the already established practices between hotels and intermediary sites.

Online sales: own online stores and websites can be restricted only in exceptional cases

Under the new rules, if the buyer is active merely at the retail level, restrictions on the operation of its own website and online store is allowed only in exceptional cases, irrespective of the degree of the parties’ market share. Exceptions may be made if it can be proved that the restriction is proportionate and allow consumers a fair share of the benefits resulting from the enhanced efficiency. The new rules also clarify in which cases agreements may prohibit the buyer’s advertisement from appearing on price comparison sites or search engines. As a general rule, the use of an advertising channel can be restricted if the parties’ market share is below 30% and the agreement does not entirely prohibit the buyer from advertising on a particular online advertising channel (for example, on price comparison sites).

Exceptional exemption from the prohibition

Agreements undesired under the new rules may only be exempted from the prohibition of restrictive agreements if these allow consumers a fair share of the benefits resulting from enhanced efficiency and, the restriction remains proportional, as noted by Dr. Zoltán Bánki, an expert at Kapolyi Law Firm. However, the companies concluding such agreements always need to be able to prove that these conditions are met simultaneously, otherwise the competition authority may find an infringement. This risk requires a high degree of caution also in the case of restrictive agreements between supplier and buyer.

Background: three distribution systems, franchise systems

The new rules take into account the characteristics of each distribution system and, accordingly, distinguish between three systems, namely, between selective distribution system (where the supplier sells only to distributors selected on the basis of specified criteria, and these distributors do not sell to distributors not selected by the supplier within the territory of the selective distribution system ), exclusive distribution system (where the supplier allocates a territory or a group of customers exclusively to itself or to a maximum of five buyers and restricts all its other buyers from targeting this territory or this customer group), and free distribution system (which is neither a selective distribution system nor an exclusive distribution system).

The new rules cover the competition aspects of franchising as well. Accordingly, restrictive clauses in franchise agreements must be assessed on the basis of the rules of the distribution system that most closely corresponds to the franchise agreement in question.

 

Accidents at work while working from home?

  1. Introduction

The spread of working from home (home office) in the light of the pandemic has led to particular attention being paid to the development of legislation and judicial practice related to home office. There are two main directions in the Hungarian legal literature regarding the treatment of home office under Hungarian labour law: one approach is that the rules of the Act I of 2012 on the Hungarian Labour Code on teleworking provide adequate guidance as to the rights and obligations of the parties in practice, while the other approach is that home office is widely used in practice even outside the cases of telework (and under different conditions), and that there is greater uncertainty in legal issues concerning precisely those cases outside of the scope of telework. Real company practices show the validity of the approach that the rules on telework do not cover all cases of home office.

The focus on the legal problems of the home office has been highlighted as well in recent weeks by a highly publicised social security case in Germany. The key issue in the case was the extent to which an accident in home office could be considered as an accident at work (according to Hungarian terminology). In the case of home office, the distinction between journeys on duty, journeys relevant in the context of an accident in commute and journeys outside the scope of accident insurance can become quite complicated, which may have significant consequences on the entitlement to benefits under accident insurance. In addition, it may also raise a question as to what the consequences of the approach taken in this case, if followed in Hungary, might be in terms of occupational safety.

  1. The famous German case

In 2018, a case received considerable press coverage in which an employee working from home office suffered a fracture of the thoracic vertebrae, when he fell down the spiral staircase leading to the third floor of his home, where his workroom was located, immediately after he set off to begin his work from the bathroom on the fourth floor. The employee requested from the social security body to recognize his accident as an accident at work, but the latter refused to do so.

In the subsequent proceedings, the court of first instance emphasized that, in determining whether it was a journey on duty, the most important factor was whether the employee’s activity at the time of the accident were directed towards performing activity for the benefit of his employer and, in this respect, upheld the employee’s claim. The court of appeal, however, concluded that the fact that the employee goes down the stairs from the fourth floor to the third floor of his own apartment cannot be considered as a journey which falls within the scope of an accident in commute. Based on the jurisprudence and legal literature, the court of appeal held that a person employed in home office is never on a journey to and from the place of the insured activity within the house or apartment, the starting point of such a journey is the front door of the building through which the insured person’s home is situated and through which he must pass through in order to be considered an accident in commute. In addition, the court of appeal also found that the journey in question did not constitute a journey on duty. The journey on duty takes place during the performance of the insured activity and as such is part of the insured activity; however, in the present case, at the time of the fall, the employee was on his way to his workplace for the purpose of starting his insured activity, i.e. before he started it. For these reasons, the court of appeal reversed the judgment of the court of first instance and dismissed the claim.

However, the Federal Social Court (Bundessozialgericht, BSG), which ruled on the application for review, confirmed – in agreement with the court of first instance – that, exceptionally, a journey on duty can be established even if the place of residence and the place of work are in the same building. The BSG found that the employee had only taken the stairs in his house to start his daily work in home office and therefore, as a journey on duty, the employee was then performing an activity in the employer’s interest. Therefore, an accident suffered by the employee is considered as an accident at work under the accident insurance rules.

  1. The aftermath of the German social security cases concerning home office

Although the content of the BSG’s judgment is only available up to the extent of the press release[1],the report on the hearing scheduled for the judgment[2] and the first instance judgment is only available from the judgment of the court of appeal, it seems to be clear that the presented German case examined only the social security aspect of the accident. The case did not raise any obligation for the employer to compensate the social security body, nor did it raise any problems of occupational safety or any issue of liability under labour law. This in itself does not mean, of course, that the classification of an accident in the light of social security rules might not entail risks for the employer in a given case.

However, the judgement of the BSG is not without precedent. In a previous case concerning an accident, which occurred during home office, the BSG ruled that a journey begun for the purpose of carrying out an insured activity and forming part of the insured activity is a journey on duty and therefore must be considered the same as work at the business premises. The difference between journeys relevant in the context of an accident in commute and a journey on duty is that the latter is made directly in the interests of the undertaking. The BSG has also confirmed that the rules on journeys on duty should also be applied accordingly for journeys from the area of personal life to the place of work in the same house. However, in the case of working from home, only those premises are considered to be workplaces where a workplace is permanently established within the building on the basis of an individual employment contract and where the employees are regularly engaged in work activities.

As a result of the recent decision, a journey to reach the workroom within the home is considered a journey on duty not only if the employee has already started his daily work before the journey, but also if it is essential for starting the daily work.

In the summer of 2021, the German legislator supplemented the legislation on accident insurance under social security by rules relevant in terms of home office: under the newly introduced rules, if the insured activity is carried out in the home of the insured person or elsewhere, the accident insurance covers in the same extent as for activities carried out in business premises. The statement of reasons points out that accident insurance covers the journey on duty (for example, the way to a printer in another room) equally for work carried out both inside and outside the company premises. In case of home office, the new German rules extend accident insurance to cover those trips during which the insured leaves his workroom in order to meet daily physiological needs in his own household, for which he would temporarily leave the office of company premises as well (in particular to take liquids, food or to use the toilet).

  1. Assessment of the case in the light of the Hungarian legislation in force

In Hungary, the concept of accident at work and, as one of its cases, the concept of accident in commute is currently defined in Section 52 (1) of Act LXXXIII of 1997 on the Services of the Compulsory Health Insurance System: an accident at work is an accident which occurs to the insured person during or in connection with work in the course of his employment. An accident that the insured person suffers while travelling to work or from there to his home (accommodation) is also considered as an accident at work (hereinafter referred to as “accident in commute”).

In the 1980s, the Hungarian courts issued decisions on the concept of an accident in commute which are equivalent to the reasoning of the German court of appeal on the concept of an accident in commute. According to these judgments, if an employee on his way to work slips and falls on the public space when stepping out of the garden gate of his apartment, it qualifies as an accident in commute.[3] However, it is not an accident in commute if the worker slips and falls on the pavement of the plot of his home.[4] In 2017, the Curia[5] also ruled that an accident suffered by an employee on the stairs of the main entrance of a building on the premises of the employer is an accident at work, since the use of the stairs is linked to the taking up of work and the accident occurs in the context of the employment relationship, provided that the employee’s workplace is in the building, the employee arrives at the premises to take up work and the main entrance of the building must be approached by stairs.[6] However, there is no public information available on any Hungarian home office case similar to the German case described above. In case the Hungarian courts would also classify the accidents in home office, that the BSG has classified as accidents at work, as accidents at work, the need to clarify the issues of employer liability may also arise.

According to Article 166 (1) of the Labour Code, the employer is obliged to compensate the employee for the damage caused in connection with the employment relationship. In addition to this, according to Article 67 (1) of the Act on Services of the Compulsory Health Insurance System, the employer is obliged to reimburse health insurance benefits incurred as a result of an accident at work (or occupational disease) if the accident (or disease) is the result of his or his agent’s failure to comply with his obligations under the mandatory occupational safety rules, or if he or his employee (member) intentionally caused the accident.

In the absence of judicial practice, the information notice of the Department of Labour Inspection and the Department of Labour Market Regulation of the Ministry of National Economy dated September 6, 2016 on the assessment of teleworking from the point of view of labour protection and labour law[7] may be of particular importance in Hungary. As the title suggests, the information notice sets out the requirements applicable to teleworking under Hungarian labour law, although in practice there are plenty of examples of the application of home office outside the scope of teleworking. According to this information notice, “if teleworking takes place in the employee’s home, not the whole home is considered as workplace, only that area of about 2-4 m2, where the desk, work chair, computer, filing cabinet etc. are located“. According to the information notice, therefore, if the employee is present in a place where he is not carrying out his work or is not present in connection with his work (for example kitchen, washroom, garden), then there is no (organized) work there, and thus it is not teleworking. Thus, the information notice derived the definition of what constitutes a workplace in case of teleworking pursuant to point 5 of Article 87 of Act XCIII of 1993 on Labor Safety not only from the concept of teleworking.

However, since January 1, 2019, according to Section 86/A. (8) of the Act on Labor Safety, in case of teleworking, the workplace is the place determined by the parties in the employment contract where the employee regularly performs his work using information technology or computer equipment. In view of this, in case of teleworking, the spatial scope of the workplace as described in the Ministry’s information notice should be considered to be outdated.

Nevertheless, from the point of view of occupational safety requirements related to the workplace, the spatial boundaries between the workplace and the premises referred to in the provision cited are a critical issue. It is interesting to note that the legislation introducing the rules on teleworking amended the Act LXXV of 1996 on Labour Inspection in force at the time to the effect that, for the purposes of this act, the term ‘workplace’ shall have the meaning given in point 5 of Article 87 of the Act on Labor Safety, except […] the residence of a teleworker for the purpose of work or other residential premises provided by him for the purpose of work. However, after the repeal of the Act on Labour Inspection in 2021, there is no clear rule on whether an employee’s place of residence (either the whole or just a room) shall be considered as a workplace, so currently only the above-mentioned information notice of 2016 by the Ministry of National Economy (which is not legislation) regulates to some extent the place of work in home office outside the scope of teleworking, which, however, does not talk about “premises” but about “area”.

The definition of “premises” which is a key concept in the light of the new rule of the Act on Labor Safety applicable since 2019, is not defined in the labour law related legislation. It therefore seems reasonable to define the spatial boundaries of the workplace on the basis of construction regulations. Accordingly, a “premise” is defined as a space bounded by a building structure in all directions and having a walkable surface, excluding unbuilt attics.[8] Article 91/A (7) of Act LXXVIII of 1993 on Residential and Commercial Leases also seems to be in line with the definition, which takes in account the premises commonly found in the dwelling. In the light of this, in a typical case of teleworking, the entire area of a workroom, living room, bedroom, dining room or kitchen may be considered as workplace and it is unlikely that the whole home will be considered as a workplace by the legal practitioners

  1. Conclusions

The practice of the BSG has extended the concept of an accident at work as an insured event for the purposes of accident insurance provided under social security covering travel to the workroom (inside the home), therefore Germany provides accident benefits also for victims working in home office outside the workroom for certain accidents.

The current Hungarian regulation governing teleworking is broadly in line with the practice of the BSG, which defined the workplace in case of home office as the workroom set up for this purpose, however the information notice of 2016 of the Ministry of National Economy defined this area more narrowly, as the Ministry’s interpretation does not necessarily consider the entire workroom in the home of the employee as workplace.

If the Hungarian courts adopt the practice of the BSG in interpreting social security rules that undoubtedly have significant similarities, there may be tension between the rule of the Act on Labor Safety defining the workplace in the case of teleworking and the judicial practice in the light of the recent, famous case of the BSG. In this case, the legislator should specify which of the accidents occurring in home office are covered by the scope of an accident at work under the Act on Services of the Compulsory Health Insurance System, other than those occurring at the workplace in the case of teleworking under the Act on Labor Safety. There is also a need for predictable and enforceable rules on the definition of workplace in cases where working in home office does not constitute teleworking. In this context, it should also be asked whether a community space or office (co-working space, café) is a workplace, if the employee does not work in his home, but in such a community space or office? And in relation to this it shall b defined, how far does the employer’s obligation to monitor working conditions extend, and how far does the employer’s right to monitor extend?

Regardless of whether such a modification in the law happens, the relevant policies in company practice regarding home office should be in any case adapted to the situation (e.g. by stating that, in the absence of a clear legal provision, not the employee’s entire home is considered as workplace, but only a single room classified by the employer as a workplace for occupational safety purposes). This may be necessary because, with such an exclusion, the employer is not liable for the accident occurred at the workplace in home office thus defined [which therefore will not be considered as an accident at work (in commute)] and the employee does not become entitled to accident insurance benefits under the social security scheme, so the employer can reduce its risks both in terms of its liability to compensate employees, its compliance with the rules of the Act on Labor Safety and with regard to the possible liability to pay compensation for accident benefits.

 

[1] https://www.bsg.bund.de/SharedDocs/Pressemitteilungen/DE/2021/2021_37.html (day of download: 14/01/2022). It is less fortunate that, despite (certainly) of the best intentions, it is not certain that the content of the decision will be understandable in the light of press reports without knowing the German rules. See: https://www.theguardian.com/world/2021/dec/09/fall-on-walk-from-bed-to-desk-is-workplace-accident-german-court-rules (day of download: 14/01/2022); https://noizz.hu/szines/egy-nemet-birosag-szerint-munkahelyi-balesetnek-szamit-ha-elesel-az-agyad-es-az/2x56bvs (day of download: 14/01/2022); https://24.hu/fn/gazdasag/2021/12/10/home-office-otthoni-munkavegzes-elesik-munkahelyi-baleset-felelosseg-biztositas/ (day of download: 14/01/2022); https://www.portfolio.hu/short/20211210/home-office-megcsuszott-egy-nemet-ferfi-az-agya-es-az-iroasztala-kozott-munkabalesetert-fizet-a-biztosito-515488 (day of download: 14/01/2022); https://www.penzcentrum.hu/karrier/20211210/kimondta-a-birosag-mukahelyi-balesetnek-szamit-ha-home-office-ban-megserul-valaki-1120136 (day of download: 14/01/2022);  https://telex.hu/kulfold/2021/12/10/otthoni-munkavegzes-munkahelyi-baleset-nemetorszag-agytol-az-asztalig-csigolyatores (day of download: 14/01/2022); https://444.hu/2021/12/10/a-nemet-birosag-szerint-az-agya-es-az-iroasztala-kozott-eleso-ferfi-munkahelyi-balesetet-szenvedett (day of download: 14/01/2022)

[2] https://www.bsg.bund.de/SharedDocs/Verhandlungen/DE/2021/2021_12_08_B_02_U_04_21_R.html (day of download: 14/01/2022)

[3] BH1982.118.

[4] BH1986.480.

[5] The Curia of Hungary is the highest judicial authority of Hungary, formerly known as the Supreme Court of Hungary.

[6] Paragraph 43 of the of the Curia’s No. Mfv.I.10.596/2016/4. judgment of 24 May 2017.

[7] http://www.ommf.gov.hu/letoltes.php?d_id=6956 (day of download: 14/01/2022)

[8] Point 48 of Annex No. 1. of the Gov. Decree 253/1997 on national settlement planning and construction requirements

A short study about crowdfunding by dr. Balázs FERENCZY, the Head of our Banking & Finance Team

In the early stages of the lifecycle of modern, mostly technology companies, there is no final product, no organization, no go-to-market strategy, no sales; there is only one idea, and from the scarce resources temporarily provided by families or friends, to business angels (angel investors) or venture capital and, in the more mature stage, bank and institutional financing has somehow to be achieved and reached.[1] In essence, this coercion gave birth to community funding, better known as crowdfunding.[2]

With crowdfunding, fund-seeking bidders have the opportunity in case of exiting from the stage of 3F to gather funds from a large number of previously unidentified potential investors for the financing of the start-up phase of their business. The operator of the platform is separated from the group of those seeking and offering resources, and provides its services as an independent revenue-generating activity.

Among the main business models for crowdfunding developed until now the reward-based crowdfunding (Kickstarter and Indiegogo, USA), donation-based crowdfunding (Crowdrise, GlobalGiving, USA), interpersonal lending (Lending Club, Prosper), equity-based funding (CrowdCube, or Seedrs, UK) or profit-sharing/revenue sharing solutions shall be mentioned. [3]

In order to determine the legal framework for crowdfunding, some countries began to create their own regulations at national level, while others, on the grounds that it falls within the scope of the already existing regime determining the conditions on providing financial activities, have not regulated the activity at all or they regulated it to a minimal extent, only.

The EU’s draft regulation on crowdfunding fits into this line (the “Draft“)[4], which has been preceded by lengthy preparatory work and multiple consultations with market participants. The Draft has been prepared in the form of a regulation, so that once it enters into force it will be applicable in all Member States without any further legislation.

  1. Background
  • The initiative is part of the so-called Capital Market Union (CMU), which aims to broaden access to finance for innovative companies, start-ups and other unlisted firms, which is – due to structural and information asymmetries prior to the expansion of targeted business – still in difficulty. Financing through predominantly short-term bank loans is expensive, coupled with the fact that the SME and start-up sectors, which were particularly affected by the 2008 crisis, are still struggling to return to pre-crisis financing levels: this leads to a lack of capital, which is a key factor in start-ups’ failure. According to the explanatory memorandum of the Draft, these conditions are even more pronounced in the Member States with less developed banking systems and capital markets. EU regulators see crowdfunding as one of the possible solution for the above highlighted situation, also supported by the technology sector. The structure, in the form already outlined above, aims to provide an opportunity for companies seeking capital/funding and their potential investors to find each other effectively, as projects can be identified through a given platform and can be better assessed by financiers according to their own investment criteria.
  • According to the regulator, crowdfunding has clearly defined itself as one of the most important financial escalators for start-ups in the recent past, as it has proven its ability to fill up the gap between the birth of ideas and the first round investment period provided by business angels („angel investors”)/venture capitals, which is the most important but also the most vulnerable stage of these companies. According to the authors of the Draft, crowdfunding could therefore become an important alternative to financing through unsecured bank lending, which has so far been the only source for financing/funding, resulting in economic growth and new jobs.
  • When the legislators began to create the concept, the EU had no idea about regulation. Numerous stakeholder consultations and expert studies since then have shown that Member States’ regulations on crowdfunding differ significantly due to different business constructions and approaches related thereto: while some Member States apply their current (EU and national-wide) legislation on financial services, others allow crowdfunding providers to be exempted under specific provisions for their business model. At the same time, a large number of Member States have established rules specifically for crowdfunding that service providers must apply when carrying out given activity. However, making crowdfunding, as a technology-based matchmaking platform that allows bidders and investors to match each other, depending on geographical location is not at all in line with the industry’s typically cross-border standards. In addition, the linking of the activity to the legal system of the given country(ies) resulted in market concentrations, which also hindered the possibilities of economies of scale.
  • The Draft seeks to enable cross-border operation of crowdfunding structures for investment/profit-sharing and financing purposes in the single EU market. Its explicit objectives include the proportionate management of risk factors and the promotion of the growth of the internal market for community financial services, thus improving access to alternative sources for start-ups, and the SME sector in general. Reward or grant-based crowdfunding is not included in the scope of the Draft: according to the regulator, these business models are not based on financial products and do not address the information asymmetries arising from such products, therefore they would have an undesirable, disproportionate effect. In addition, EU consumer protection rules (eg.: the Consumer Credit Directive and the Mortgage Credit Directive) must be applied to reward-based crowdfunding activities anyway, with strict provisions on consumer safety.
  1. Some important provisions
  • The regulation aims to create uniform set of rules for crowdfunding at EU level. It does not replace or repeal the rules already adopted by a Member State for this activity. According to the solution proposed by the Draft, the crowdfunding service provider may choose to (i) apply for an authorization from ESMA (see below) under the rules of the Draft, or (ii) to provide its service under the applicable national regulations, (or continue it including cases where related Member State orders the application of MIFID II rules to this activity).
  • In the case of an authorization at EU level, the authorization also covers the provision of services on the basis of the single passporting rule in a given Member State or as a cross-border service in all EU Member States. If the service provider decides to apply EU-level rules, the authorization issued under the relevant Member State regulation will be revoked.
  • In addition to the subject of the regulation, Article 1 of the Draft sets out uniform provisions for the operation, organization, licensing/authorisation and continuous supervision of crowdfunding service providers. Article 2 sets forth that the Regulation shall apply to service providers only who chose to seek authorisation in accordance with Article 10 and 11. Activities are also defined here to that the Regulation shall not apply, such as (i) crowdfunding services that are provided to consumers, as defined in Article 3(a) of Directive 2008/48/EC, (ii) crowdfunding services provided by investment firms as legal persons in accordance with Article 7 of Directive 2014/65/EU and (iii) crowdfunding services that are provided by natural or legal persons in accordance with the already approved national law. It also follows from this rule, that all persons who hold authorization issued under the Regulation will lose their license if they no longer wish to pursue their activities within the scope of the Regulation. Persons carrying out investment-based cross-border crowdfunding activities will have to apply for authorization under Directive 2014/65/EU, while their authorization to provide services under the Regulation will have to be revoked.
  • Article 3 of the Regulation provides for the definitions used in the scope of the Regulation, such as “crowdfunding services“, “crowdfunding platform“, “ crowdfunding service provider“, “ crowdfunding offer“, (etc.). Important: the Regulation will empower the Commission, in its regulatory capacity, to adopt delegated acts to add further technical elements to the definitions set out in Article 3 taking into account market as well as technological developments, and experience.
  • Chapter II sets forth the provision of crowdfunding services (Article 4), effective and prudent management (Article 5) and complaints handling (Article 6). Under these rules, crowdfunding service providers must in all circumstances comply with the organizational requirements imposed on them, while natural persons having the power to manage a crowdfunding service provider must have the appropriate professional experience and skill to carry out their activity.
  • In order to eliminate conflicts of interest (Article 7), crowdfunding service providers, by maintaining and operating effective organizational and administrative arrangements, shall take all reasonable steps to avoid that potential conflicts of interest adversely affect the interests of their clients. The service providers are also required to take all necessary steps to identify and prevent conflicts of interest within the organization, including potential conflicts between managers and employees and the persons linked to them by way of exercising control, as well as between customers, in the course of providing services. The rules on outsourcing and safekeeping of clients’ assets are set out in Articles 8 and 9.
  • Chapter III. sets forth the rules for authorization and ongoing supervision. The European Securities and Markets Authority (ESMA) is the supervisory body for crowdfunding service providers in the EU. In particular, Article 10 sets out the obligation related to the authorization of crowdfunding service providers and the conditions for obtaining authorization issued by ESMA. The Article also sets forth the procedure for obtaining the authorization and the cases in which an application may be rejected. Pursuant to Article 11, ESMA shall establish a register of all crowdfunding service providers which shall be updated on a regular basis. Article 12 provides for ongoing supervision of the conduct of the activity by ESMA, while Article 13 sets out the conditions for the withdrawal of an authorisation. ESMA’s additional supervisory powers and competencies are set out in Chapter VI. in detail.
  • Chapter IV. contains provisions on investor protection as well as transparency. For the purposes of Article 14, all information, including marketing communications, from crowdfunding service providers to potential investors and offerors, shall be clear, complete and correct. Article 15 contains, as an important rule, provisions for the prior assessment of the ability of potential customers to bear loss. According to them, the platform is obliged to provide investors with the possibility to simulate their ability to bear loss. Article 16 contains detailed rules in this regard and makes the use of the so-called Key Investment Information Sheet (KIIS) mandatory. Articles 17 and 18 set forth rules on the so called bulletin board and the right of investors to access internal records.
  • Crowdfunding, like any other financial service, can provide space for money laundering and terrorist financing activities. The Regulation therefore provides for appropriate safeguards to prevent and minimize the possibility of such activities. These include, inter alia, the requirement in Article 9 that transfers related to crowdfunding transactions, whether carried out by the platform providers themselves or by third parties, shall be made exclusively through payment service providers authorized under the Payment Service Directive (PSD), as a result of which these transactions fall under the scope of the 4th Anti-Money Laundering Directive (4th AMLD). Crowdfunding service providers are also required to ensure that project owners can accept funding offers or any other payments only through payment service providers authorized under the PSD. Article 10 lays down additional rules on the criminal record of the management in relation to good reputation and anti-money laundering legislation. Article 38 provides that, in order to further reduce the risks related to money laundering and terrorist financing, the Commission shall assess the need for and the extent of involving crowdfunding service providers under the scope of legislations implementing Directive 2015/849 (EU) into the national legislation of each Member State and providing rules on anti-money laundering and terrorist financing, including the definition of such service providers as obliged entities under the Directive.
  1. Domestic panorama
  • The National Bank of Hungary (NBH) issued a number of resolutions on crowdfunding in 2015 and 2016, taking into account EBA’s opinion on lending-type crowdfunding published in February 2015. In the NBH’s view, the various versions of crowdfunding are very similar to the currently regulated financial activities. In the case of crowdfunding, the funding of private and legal persons, the transfer of money and the investment of money may correspond to the activities regulated by the Credit Institutions Act, the Act on investment firms and commodity exchange service providers and on activities they may execute, as well as the Act on collective investment schemes, which can only be pursued with the permission of the central bank or on the basis of a notification. In addition, on 25 October 2019, the MNB’s own fintech strategy was published (https://www.mnb.hu/letoltes/mnb-fintech-strategia-final.pdf), in which the supervision, in view of the fact that the worldwide growing alternative financing solutions are not regulated in Hungary, – proposes the creation of a specific regulatory framework for crowdfunding.
  • Hungary’s Fintech Strategy (https://digitalisjoletprogram.hu/hu/tartalom/magyarorszag-fintech-strategiaja) also treats the development of domestic regulations on crowdfunding as a priority goal. We agree with the statement published in the article „Crowdfunding, or how could Hungarian start-ups get funds in an innovative way?” of Péter Fáykiss – Dr. Ágnes Hajzer – Benjámin Nagy (the authors are employees of the National Bank of Hungary) according to which the creation of a legal framework for crowdfunding at national level would make a significant contribution to supporting the funding of the SME sector and facilitating access to finance for FinTech companies, and to strengthening investor confidence in alternative forms of financing.
  • The Regulation is expected to enter into force in Q4 2021, Q1 2022, and it would be worth for Hungary to consider joining the leading group until then. The statistics from France might serve as good example for the growth of this market: while in 2011 these type of sources amounted up to 7,9M EUR only, in 2015 this figure was already 169M EUR, and in 2019 it reached 1,4Bln EUR. Based on these figures it is obvious, that a licensed crowdfunding site, which functions well since years, intending to step under the scope of the Regulation in order to operate on the EU level for economies of scale purposes holds mile advantage compared to those who are in their wings trial and error phase. A local Hungarian crowdfunding legislation could therefore become an important station in the journey to join the EU crowdfunding market.

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[1]Source: Péter Fáykiss – Dr. Ágnes Hajzer – Benjámin Nagy (the authors are experts of the National Bank of Hungary): Crowdfunding, or how could Hungarian start-ups get funds in an innovative way?

[2] Figure: The New Ways to Raise Capital: An Exploratory Study of Crowdfunding by Matteo Rossi (DEMM Department, University of Sannio, Benevento, Italy)(International Journal of Financial Research Vol. 5. No. 2; 2014)

[3]Source: Dr. Andrea Szikora (Regulatory expert of the National Bank of Hungary): Development of financial technology and Crowdfunding (National Bank of Hungary)

[4] https://eur-lex.europa.eu/legal-content/HU/TXT/HTML/?uri=CELEX:52018PC0113&from=HU

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).

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.

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[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/

Advertisements and cartells during the coronavirus pandemic: competition law principles to consider

author: dr. Katinka TÖLGYES

As a result of the coronavirus pandemic, the number of advertisements for health-related products and services has exponentially increased. In addition to existing ones, new players also entered the market and began selling products or services that do not fit their main profile. It is important however, that everyone utilises new business opportunities fairly, as authorities are closely scrutinising commercial communications. Kapolyi Law Firm’s expert examined the most important competition law provisions on advertisements and the cooperation of corporations.

Products and services related to the pandemic primarily address health concerns and the needs of customers who have to stay home as a result of the quarantine measures. Kapolyi Law Firm’s competition law expert, Dr. Katinka Tölgyes emphasises that companies which began selling a new product or service in response to the pandemic, which has not been produced or offered so far, or companies who have paid less attention to competition compliance should consider soliciting the services of a legal adviser.

Advertisements: not everything may be sold citing protection against Covid-19

According to Kapolyi Law Firm’s expert, defining the product category is the first step when designing advertisements and slogans, since different advertising statements are permitted for food, medicinal products, food supplements, prescription and non-prescription medicines, and cosmetics. For example, no disease-preventing or curative effect can be attributed to foods (even if for instance, several varieties of onions are known in the vernacular for their healing effects). A statement like this is in itself infringing the law (there is no possibility to prove otherwise) and may result in sanctions. As a general rule, prescribed medicines and non-prescribed medicines supported by the social security cannot be advertised at all. In case of medical products for which advertising is permitted, commercial communication content may be prepared within a rigorous framework and in strict compliance with the contents of the package leaflet only. Any reference to the recommendation of professionals or known persons should be avoided. A product may only be labelled medicinal if it has a truly meaningful, health-restoring effect, which can be substantiated by appropriate research (the personal experiences of the consumers of the product is not acceptable). It is also important to ensure that indirect statements also comply with the requirements, such as statements on the active substance or its ingredients in the product.

Dr. Katinka Tölgyes emphasized that the Hungarian Competition Authority (GVH) always examines commercial communication from the consumer’s point of view, therefore what matters is how consumers interpret an advertising statement and not what the manufacturer or distributor intended to mean, or what goal they wanted to achieve. Additionally, communications intended for vulnerable consumers are subject to increased scrutiny and stricter consequences applied by the GVH. The GVH considers a group of consumers to be vulnerable if they are more susceptible to a given product or service due to their age or state of health. During the current pandemic situation, for certain products (such as disinfectants, hand sanitizers, masks, etc.) even the society as a whole may be considered to be vulnerable consumer, therefore it is particularly important that communication complies with the law.

Cooperation: authorities may be more permissible, but not without limits

In addition to commercial communication, the application of laws concerning business-to-business cooperation between undertakings is expected to slightly differ during the coronavirus pandemic. In the current situation, serving consumers with essential products (i.e.: hand sanitizers, face masks) bears key importance, and may require increased cooperation between the involved parties. This may include allocating scarce available raw materials or solving challenges related to transport and storage issues. Kapolyi Law Firm’s competition law expert states that the GVH may consider society’s wider interests, and is therefore expected to treat cooperation with permissive approach. Dr. Katinka Tölgyes highlights the position of the European Competition Network, which clearly states that members of the network will not oppose necessary and temporary measures applied by companies to avoid supply shortages. Nevertheless, undertakings must be aware of the fact that “permitting” cooperation does not apply to every area and does not mean that there are no limits in terms of the degree and length of the cooperation. “Hardcore cartels”, i.e. price-fixing, market-sharing agreements restricting competition remain prohibited – if, for example, there is no shortage of a specific raw material, the undertakings concerned may not refer to cooperation during the competition authority’s investigation. The guidelines issued by the European Commission set forth similar principles. Therefore, it can be expected that the GVH will dedicate prior attention to the examination of the extent of cooperation and the necessity thereof. Dr. Katinka Tölgyes emphasises that if an undertaking (especially in the health sector) has questions about the nature and extent of the cooperation, it is advisable to consult with a legal adviser or contacting the GVH itself for guidance. It is important to note, however, that the competition authority is not bound by its guidance in any subsequent investigation.