HOW TO RING THE BSE BELL – NOW IS THE TIME FOR HUNGARY’S SMES AND STARTUPS TO GO BIG AND GO PUBLIC!

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Ringing the bse opening bell could be within reach through XTEND MARKET, Budapest Stock Exchange’S new trading platform launched in 2017 that aims to help promising companies go public.

author: dr. Roland KARSA

On January 10th of this year CyBERG Corp’s Chairman of the Board Balazs Rozsa and Deputy Chief Executive Officer Erik Szabo rang the bell to open the day’s trading session on Budapest Stock Exchange (BSE). At BSE the opening bell marks an event worth celebrating, like an initial public offering (IPO) when a company goes public and offers its shares to the general public for the first time. Usually the company’s chief executives are given the honor to ring in their company’s first day of public trading. Although it is not quite like hitting a Chinese gong as was the case in the late 1800’s and early 1900’s at the New York Stock Exchange (NYSE), it is still a very ceremonious and honorable moment, as well as a major milestone for any company.

CyBERG Corp – a Hungarian startup founded in 2015 – is the second company to have benefited from the new trading platform Xtend. Xtend market is commonly referred to as a multilateral trading facility (MTF) and is indeed an alternative trading platform to Hungary’s traditional stock exchange BSE. It differs from other MTFs in Europe in that its declared purpose is to help small to medium-sized enterprises (SMEs) smoothly and gradually transition into public trading. By default, it is also an appealing option for Startups, such as CyBERG, that are hungry for increased capital, wish to get better financially established and are determined to bring their ideas to life.

Xtend is part of Hungary’s recent strategy to increase activity on capital markets by making it possible for new companies to go public. And BSE is doing everything in its power to make it a success story including reshaping its listing category system to further strengthen Xtend’s position on BSE and to better emulate international stock exchange standards and practices. These changes have been underway since January 2019 and one of the most significant changes is that the infamous category T, known for unreliable and penny stocks, is being phased out leaving only the Prime and Standard categories. Therefore, companies that would have gone public through category T are now invited to enter through Xtend and the phasing out of category T should be fully completed by January 2020.

Companies entering the Standard category must have a minimum market capitalization of HUF 250 mln, and at least 10% public float (stocks that are in the hands of public investors), and at least one closed business year.

By boosting its capital markets which have traditionally been neglected, Hungary hopes to encourage increased investment in bonds and shares and enjoy a healthier balance between corporate and banking finance. This would ideally lead to a more diversified, and therefore, more competitive and stable economy: more diverse because of the entry of new and different kinds of companies into public trading through internal funding mechanisms, and more stable because of internally available funding even when banks slow down lending.

What does Xtend have to offer?

The advantages that Xtend offers are significant and mitigate the risk involved when a company attempts to go public. Xtend therefore acts as an “anteroom” of the bourse by offering lower costs, financial incentives, as well as exemptions and other forms of reliefs from otherwise onerous reporting and financial obligations.

  1. Reliefs

Xtend offers reliefs from onerous reporting requirements. First of all, Xtend-listed companies are not obliged to comply with the burdensome International Financial Reporting Standards (IFRS). Second of all, companies with stock issuance under the amount of EUR 5 mln are not required to prepare a prospectus for approval by the National Bank of Hungary (the general authorization and regulation authority of financial and capital markets institutions and market operators). They are only required to draft an informational document which is much less complex and resource-intensive and only needs BSE’s approval.

Because Xtend market wants to attract and help promising companies with ambitious goals to eventually enter the BSE market, there is no minimum stock issuance requirement. This is significant given the HUF 5 bln and HUF 250 mln respective market capitalization (the total HUF market value of a company’s outstanding shares) requirements of the Prime and Standard markets.

Xtend also makes its stocks more attractive to investors by providing an opportunity to place them in long term investment accounts. If investors choose a minimum five-year investment account, they can collect interest, dividends and capital gains tax free.

2. Financial incentives

A number of financial incentives are offered to companies wishing to enter the Xtend market. A company may apply for partial funding from BSE. This funding is available thanks to an agreement concluded between BSE and the Ministry of Finance and has been made possible through the EU Economic Development and Innovation Operational Program.

The National Stock Exchange Development Fund is another funding source which was recently launched in the first quarter of 2018. It provides capital and private investors to companies wishing to list on Xtend and prepare for future public offerings. Investors typically invest HUF 1 Bln and in exchange they acquire a minority stake in the given company.

Listing on Xtend can be a great alternative to taking out traditional bank loans when a company needs external financial aid for expanding and growing business and in some cases it may be the only option for increasing capital.

3. Public image

One of the main reasons that companies wish to go public is to gain more exposure, power and build up their reputation. Xtend provides companies the opportunity for an easier conversion into a public limited company (PLC). The PLC legal designation is instantly indicative of the company’s size and reputation. As such, it is good for marketing, it improves public and corporate image and constitutes a quantifiable asset which is calculated as part of the company value.

What does entering and trading on Xtend market entail?

The first thing a company needs before jumping on the Xtend bandwagon is a good lawyer, preferably a capital markets expert with interest and knowledge of Xtend and its twists and turns. In addition to this, an advisor is required for companies getting listed on the Xtend platform and will be assigned by BSE. The advisor’s task is to support the company during the listing and ultimately the trading process. The advisor also protects the investors’ interests by regularly monitoring the issuing company’s financial status

In order to enter Xtend, a company must undergo a formal change from private limited company to a PLC. The conversion occurs in two partially overlapping parts: first deciding to become a PLC and preparing the necessary internal changes by the effective date, and second, registering the stocks on Xtend.

i) Conversion into a PLC

In order to be eligible for conversion into a PLC, a company must be a private limited company and it must meet the requirements for PLCs prescribed by laws. Most significantly there is a minimum registered capital requirement of HUF 20mln. In addition, the company must make a series of internal changes including appointing a Board of Directors and a Supervisory Board, or the company can opt to appoint a Board of Management which is a mix of the two and drafting new bylaws for the PLC.

All corporate documents related to the conversion (e.g. shareholders’ resolutions, bylaws, etc.) have to be submitted to the Court of Registry for registration. Once this steps has been fulfilled to the satisfaction of the Court of Registry, it will issue a conversion order. In order to initiate the process of stock registration, the conversion order must be submitted to BSE who will make a final decision on whether to grant an effective date, the date as of which the PLC officially comes into existence and trading can begin. During the transitional period, up until the effective date, the company continues to exist and operate as a Private Limited Company.

ii) Stock registration

BSE’s decision to grant an effective date for the registration of a company’s stocks on Xtend, thereby concluding the its conversion into a PLC, is conditional upon receipt of either an information document or a prospectus according to the company’s stock issuance.

In the case of companies with a stock issuance under EUR 5 mln, the submission of an information document for BSE’s approval is sufficient. The information document should include the company’s basic information and should be drafted with the assistance of the designated advisor.

In the case of companies with a stock issuance above EUR 5 mln, a prospectus must be prepared which is much more complex than the information document and requires knowledge and experience in corporate and capital markets, as well as knowledge and understanding of accounting and finance. It should include a brief history of the company, a due diligence report outlining the company’s major contracts in effect, the company’s future plans and prospects as well as a description of the offering, description of the underwriting, financial information, risk to buyers, etc.

The transition from being a private company to a public one is a challenging one. Despite the reliefs and exemptions Xtend provides to facilitate a smoother transition, there still remain numerous obligations that are not imposed on non-listed companies. These can include annual and biannual reporting and submitting corporate governance reports. A company might also be required to prepare extraordinary publications or disclosures under circumstances such as when price-sensitive information arises which could directly or indirectly affect the value of or the yield on the issuer’s securities or could be relevant to for the market participants’ investment decisions.

Public companies are also obliged to comply with European Union laws on market abuse, which do not apply to private companies. Market abuse encompasses issues such as insider trading, unlawful disclosure of inside information, and market manipulation. On the plus side, complying with these laws provides and ensures greater transparency.

Xtend-listed companies have the opportunity to gradually warm up to the changes and newly imposed obligations by not taking them all on at once. As they get comfortable enough or sufficiently increase their capital, they can decide to “go the whole hog” and upgrade to BSE’s Standard bourse category – which ultimately is the intented purpose of Xtend and would contribute to boosting the capital markets. Nevertheless, there is no obligation to upgrade, nor is there a limit to the amount of time a that a company can remain listed on Xtend. In addition, companies that decided to test the waters of public trading through Xtend but end up drowning can leave the platform voluntarily through the delisting process.

As of today, there are two companies listed on Xtend with a third oneon the way. GOPD Zrt. has already registered its stocks on Xtend, but the bell has yet to be run to launch its public trading. And hopefully others will have the opportunity to ring the BSE opening bell too. It is an opportune moment for eager and hopeful companies to take advantage of the unique opportunity that Xtend is offering. Without Xtend, CyBERG might not have been able to go public at all let alone so quickly. By ringing the BSE bell, you might just be part of the ringing in of a new and hopefully a buoyant chapter in Hungary’s economy. BSE is Xtending a helping hand, so grab a hold and enjoy the ride!

Legal challenges of the construction industry boom_Part 2

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Author: dr. György BOROS-GYÖMBÉR

In our last article on the construction boom’s legal challenges, we considered three cases where an appropriately drafted construction contract helps projects be executed in a timely, cost-effective manner. This paper considers two further instances, where poor drafting may result in legal disputes or even delays in the project.

Contract Price and Additional Works

There are two ways in which parties generally set the contract price: as a lump sum, or through an itemised final statement. If the latter is used, it is usually clear from the statement how the contractor would like to receive payment for the material costs and the works carried out. However, the use of a lump sum contract price – which is mainly used in large-scale, multi-phased construction projects – may lead to disputes over the contract price and additional works.

The first issue arises when defining the two concepts. ‘Contract price’ and ‘additional works’ are defined differently in the Hungarian Civil Code and in the sectoral construction regulation. It is therefore strongly recommended that parties explicitly define what they mean by these terms in the construction agreement. The Civil Code may serve as a good basis of the definition, but it has to be modified to fit the needs of the parties and the project itself.

At the beginning of a construction project, if parties agree upon a lump sum contract price, they usually must not contest that the project or a given phase of the project has to be executed at the price set in the contract. The use of ‘additional works’ further supports this agreement by listing those works, which were not considered when calculating the contract price, but still has to be carried out to satisfy technical specifications, or for the sake of using the property for its intended purpose, at no extra cost or fee. It is worth mentioning that the contractor may still claim payment for additional works which were not foreseeable at the time of signing the contract. However, it is also possible for a contract to explicitly exclude payments for unforeseeable costs.

To balance the effects caused by the use of ‘additional works’, ‘extra works’ serves to address demands made by the contractor to modify the contract price. The concept of ‘extra works’ is that if the employer demands new works to be undertaken by the contractor, or the employer modifies works during the execution phase, then it has to pay for those works.

As we discussed in the previous articles, alterations are inevitable and regularly happen during constructions. It is therefore essential to define the timeframe and means by which the contractor can claim payment for extra works and/or request an extension, and list the documents required for submission. The timeframe and method for the evaluation of requests by the employer should also be defined. In order to avoid a later dispute, it is crucial to document the order of extra works, given that it will form a part of the original contract. It is important to stipulate in the contract that the contractor may only perform the extra works, once the price and the technical specifications have been agreed upon by the parties. It is inadvisable to demand payment for extra works from the employer without prior negotiations, after the works have been finished, as in this event, the contractor’s invoice may be at risk of being rejected.

Guarantees

The means of provision (such as: bank guarantees, withholding of payments by the employer etc.) and the size of different securities form a central part of the construction contracts. Often, the enforceable claims against a security are not defined in sufficient detail in the contract. The lack of precise definitions may even legally invalidate the exercise of a guarantee, in which case the full amount may be recovered by the employer from the contractor. For instance, this may be the case if the employer uses the performance guarantee as security against penalty payments, and/or compensation claims, without an express permission provided in the contract.

Recently, bank guarantees became one of the most widely used means of providing securities in the Hungarian construction industry. When using a bank guarantee, aside from a few exceptions, the guarantor bank is obliged to pay without examining the underlying legal relationship of the parties. It is often the case, however, that while the bank guarantee was exercised, the conditions set out in the contract are not satisfied. Even if the payment is made by the guarantor, this may justify a claim for fully recovering the amount of the bank guarantee from the contractor, including accrued interest and the costs of court proceedings. The same goes for cases when payments are unduly withheld or even used by the employer. Therefore, it is crucial to not only define the claims enforceable against the guarantee, but also the means of exercising it, relevant deadlines, and to lay down the contractual method for the making a formal written request for contractual performance.

Bond Funding for Growth Scheme = Growing Capital Market?

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Sorry, this entry is only available in Hungarian.

Legal challenges of the construction industry boom Part 1

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The legal challenges of the construction industry boom – The construction contracts PART 1.

According to the most recent data published by the Hungarian Central Statistical Office, the volume of domestic construction production increased by 67,6 % in March 2019 compared to the same period of previous year. The recent record growth, along with the shortage of labour in the construction sector and the shrinking capacities, leads to fierce competition among real estate developers.

It is not widely known that a properly prepared construction contract may provide a significant advantage over the competitors, even with the same pricing. In the followings, we provide an overview about three areas, where a properly detailed contract may result significant savings for the contracting parties.

Planning

In the preparatory phase of a new construction investment, the first question is whether the preparation of the design documentation should be the duty of the client or the (general) contractor. It seems to be obvious that the contractor is supposed to be exclusively responsible for the content of the design documentation. However, even in this case, it is important to clarify in the contract to what extent does the contractor have to examine the technical feasibility of the client’s expectations in connection with the investment.

It is even more important to regulate the responsibilities and liabilities in connection with the design documentation, if the documentation is provided by the client. In such cases, it is recommended to define and determine thoroughly the scope of the contractor’s inspection and reporting obligations in order to prevent subsequent legal disputes. It is very common that the contractor refers to the deficiencies in the documentation provided by the client and bills more for additional/supplementary work. In order to avoid this, a sufficiently detailed contractual arrangement may protect the client’s best interests and provide him with the opportunity to reject the contractor’s bill for additional/supplementary work referring to the contractor’s due diligence obligation.

Managing the requests for changes during the construction

It is equally important, but often neglected, to address the requests for changes during construction. Such requests typically concern the technical content of the project (requests for additional/supplementary work), but they can also affect the deadlines and the price as well.

„The changes are inherent and usually inevitable parts of construction investments. Therefore, it is advisable to stipulate an adequate mechanism in the contracts, which can effectively handle any kind of changes, even without negotiating and signing a separate contract amendment” – highlights dr. György Boros-Gyömbér.

FIDIC contracts – which generally devote a separate chapter or article to address the changes and requests for additional/supplementary work and reflect the international experience accumulated over the past decades – may provide a good basis for creating a proper change mechanism. These provisions with the assistance of a legal expert may be transposed to non-FIDIC based contracts as well.

Technical handover

Although, the relevant domestic construction laws regulate in a detailed and binding manner the tasks to be performed during the completion of a construction project (technical handover, performance certificate, handover of the construction site), several issues may still arise that may lead to legal disputes between the parties.

It usually happens that the contractor considers the construction as completed, however an inspection reveals – or it is already apparent – that the constructed facility suffers from serious deficiencies. In this case there may have been several technical handovers between the parties, which may lead to disputes as to when and to what extent be the contractor entitled to issue an invoice and obtain the certificate of performance from the client. At the end of the handover process, due to settlement disputes, the contractor may also refuse to hand over the construction site, which may obstruct the permitting procedure for occupancy permit, significantly delaying the completion of the project.

Due to the uncertainties in the handover, the commencement of the warranty period and the date of the provision of securities may be also contested.

“These risks can be well managed by stipulating the handover process in the construction contracts with respect to the relevant laws, furthermore by determining properly the date and conditions regarding the issuance of performance certificate and the invoicing procedure– closed the expert of Kapolyi Law Firm.

Which data will be reported on you by hotels exactly?

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What specific kind of data will hotels present about you?

In the near future, reporting obligations of accommodation providers will increase. It is advised to prepare for this change in advance because the non-compliance with reporting obligations may result in fine or temporary closure, furthermore repeated violations of these obligations may trigger permanent closure as well. An expert of Kapolyi Law Firm presents the relevant new regulations below.

Reporting obligations before the new regulations:

The obligation of providing data is not unknown to service providers operating in this sector, as according to the rules applicable until the end of 2018, certain data had to be transmitted monthly to the Hungarian Central Statistical Office (KSH). The transmitted data concerned information on the number of guests, capacity, revenue and employees. In addition, the so-called “other accommodation providers” had an additional obligation to provide data to the notaries on an annual basis, on the number of guests and number of the spent nights separately in case of residents and non-residents of Hungary.

Who are subject of the new regulations?

„First and foremost, it is worth to clarify who an accommodation provider is” – says dr. Marta Gecsényi, lawyer of Kapolyi Law Firm. According to the regulations in force, an accommodation provider is any person or organization who provides non-permanent accommodation and directly related services for business purposes. As a consequence, the persons operating hotel, guesthouse or camping and even the Airbnb service providers are considered to be accommodation providers.

“We draw attention to the fact that previously applicable sanctions still apply in the event of non-compliance with the new reporting obligations. Thus, in the event of repeated non-compliance with the above obligations, the Hungarian Tourism Agency shall initiate official control of the competent notary responsible for the supervision of the concerned accommodation provider” – reminds the expert. The applicable legal consequences according to statutory or regulatory requirements regarding accommodation include the imposition of fines and the decision on temporary closure of the accommodation. The most severe sanction may be applied if the notary notices that the accommodation provider has not remedied the violation of the regulations or he has repeatedly conducted unlawful behavior within a year. In case of the latter the notary may even order the closure of the accommodation.

What does the accommodation provider has to do?

The first step to comply with the regulations is to register electronically at the National Tourism Data Supply Centre. After the registration the data providing can be fulfilled via the so-called “accommodation management software”. It is the responsibility of the accommodation provider to acquire the accommodation management software; however, the accommodation providers providing maximum eight rooms and 16 beds per accommodation can use this software free of charge. After registration the data providing shall be performed on a daily and monthly basis in accordance with the relevant regulations.

“Compliance with data protection rules must also be considered. In order to protect the rights of data subjects, it will be necessary to review and supplement the privacy policy and data protection descriptions of the accommodation providers with regard to the implementation of the new type of data processing” – adds the expert of Kapolyi Law Firm.

While the scope of the information to be provided is not defined in the recent regulations, from 1 January 2020 the obligation of data storage and reporting will include personal data such as name, place and date of birth, details of identity documents and date of accommodation usage. These data will be processed by the accommodation provider for a period of one year from the date of registration, and only the accommodation provider and any person or body authorized by law shall have the right to know them. Another new regulation on data processing is that during the period indicated above, the police may search in the accommodation provider’s register for the person they are seeking and then it may request access to data as well.

In case of an already operating accommodation, depending on the type of the accommodation, a preparation time was ensured to comply with the new regulations. The already operating accommodation had to register between 1 and 30 June 2019. Guesthouse service providers were required to register during September 2019, while hostel, holiday home and other accommodation providers are required to register during December 2019.

In order to fully meet the legal requirements, the information about the parameters of the software may be found on the website of Hungarian Tourism Agency. The obligation for hotels to provide the required data started on 1 July 2019.

Expectable amendment of the Act on the Labour Code due to data protection

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It could be read and heard in the media that in the future the usage of IT devices provided by the employer for work purposes is going to be prohibited for private use following the amendment of the Hungarian Labour Code (Mt.). However, the proposed amendment is not limited to the employer’s control of the use of IT equipment. In mid-March the Parliament will consider a proposed legislation which will amend or supplement the provisions of Mt. concerning data processing. Dr. Mónika Kapetz, lawyer of Kapolyi Law Firm provides a brief summary about the most important things on this matter.

In legal areas covered by GDPR (General Data Protection Regulation), the provisions of GDPR concerning data processing have direct effect and became directly applicable in Hungarian law. However, in order to ensure the necessary legal coherence for the application and enforcement of GDPR, it became necessary for the Hungarian Parliament to adopt amending statutory provisions affecting certain sectorial laws.

The employee’s individual rights

The protection of individual rights in labor law is considered to be as priority, particularly because of the subordinate nature of the employment relationship. The protection of individual rights is not absolute. In order to operate properly, the employer shall take certain actions and create internal regulations that may concern some segment of the employee’s individual rights. These include a part of the control measures, the handling of employee data or even ordering tasks from the employee other than specified in the contract. Mt. lays down two important conditions in connection with the employer’s procedure in order to protect the individual rights. This procedure shall be solely and directly related to the proper operation of the employer, and the proper operation of the employer must also be strictly interpreted. The employer may only decide to initiate the procedure if it is strictly necessary, ie. objectively necessary. In addition, Mt. sets out the general requirement of proportionality.

“However, if the amendment will pass, the employer must also inform the employee in advance, in writing, about the circumstances justifying the necessity and proportionality of the limitation. It will give an opportunity to the employee to check the compliance with Mt.’s requirements and the lawfulness of the procedure and to take effective actions protecting his individual rights in case of a breach.” – said dr. Mónika Kapetz.

The new data processing requirements will be defined in a new subchapter of Mt., namely under “Data processing”. The amendment makes it clear, not only the employer but both the work council and trade union are entitled to request a statement or disclosure of data in order to exercise their rights or fulfill their obligations under Mt., furthermore they may request the disclosure of documents as well.

The amendment also makes it clear that the employer may manage health data generated during the occupational medical examination. About this kind of data processing the employee needs to be informed in writing.

Biometric Data Processing

The amendment makes it possible as well that in certain cases the employer may also process the employee’s biometric data in accordance with the requirements of enhanced protection of biometric data. This shall be done only to prevent unauthorized access to a thing or data in case the unlawful access would threat the life, physical safety, health, or any other interest of the employee or others protected by law. Mt. will contain an exemplary list about the values protected by law in case of which the processing of biometrics will be permitted. These such highly protected values could be the protection of classified information at confidential level, custody of firearms, ammunition, explosives, safe storage of toxic or dangerous chemicals, biological and nuclear materials and protection of property of qualified, at least particularly high value under the Criminal Code ie the protection of property worth over fifty million HUF. In accordance with the principle of accountability set out in the Regulation, the employer has to prove that the requirements of the processing of biometric data are met.

What about the certificate of criminal record?

Obtaining the certificate of criminal record by the employer was usually a difficult demand. After the amendment, Mt. will regulate those cases when the certificate might be lawfully processed. Employee’s criminal records may be processed for the purpose of investigating whether the employment of an employee or a candidate in the given job is restricted or excluded by law or by the employer. Limiting or excluding condition may be imposed by the employer if the employment of the person concerned in the given job would result in danger of damaging the employer’s significant financial interests, legally protected secrets, firearms, ammunition, explosives, toxic or dangerous chemical, biological materials or nuclear materials.

The control – usage of IT equipment

The rules on data processing arising from employer’s control powers will also be amended. Within the framework of the amendment will come into effect a rule which entitles the employee to use an information technology, computer tool or system (collectively a computer tool) provided by his employer for the sole purpose of performing his employment, unless otherwise agreed between the employer and the employee. It practically means that the focus of the regulations has been shifted from the exclusion of privacy control to prohibiting private use.

“During the inspection the employer is entitled to check the data stored on the computer tool until he can decide whether or not the data is private. The data required to verify compliance with the above limitation shall be qualified as employment related data. The same apply if the employee uses his own IT device to carry out his tasks as it is agreed between the Parties,” – the lawyer recalls.

In cases where GDPR provides the possibility of collective regulations, regulations of collective agreements may only cover issues not regulated by labor law, since collective agreements may not deviate from the provisions of Mt described above.

 

Hungary is Back on the Local and International Investment Map

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Thanks to our Real Estate team’s expertise, it is a great privilege that the editorial team of CEE Legal Matters magazine entrusted dr. Zita ORBÁN, Senior Lawyer and Head of Real Estate at Kapolyi Law Firm to talk to CEE Legal Matters about the present state of commercial, industrial, tourism and residential property markets in Hungary. The article was first published in  CEE Legal Matters  in February.

http://www.ceelegalmatters.com/index.php/hungary/6268-real-estate-hungary-is-on-track-sic-itur-ad-astra