From 26 May 2020, new rules are applicable for foreign investments in relation to strategic companies in Hungary. Similar rules have been also introduced last year regarding foreign investments in companies operating in the “traditional strategic sectors” (e.g. ammunition, arms and military equipment manufacturing, production of dual-use items and intelligence service equipment, electricity services etc.). However, according to the Government Decree (Government Decree No 227/2020 (V 25), until the end of 2020, a wider notification and acknowledgment regime (to be exercised by the Minister for innovation and technology) is applicable to foreign investors intending to invest in strategic companies in Hungary.
Who is a foreign investor?
Pursuant to the Government Decree, individuals, companies and other entities domiciled in countries outside the EU, EEA and Switzerland qualify as foreign investors. Furthermore, entities seated in any EU, EEA member state or Switzerland are also considered as foreign investor if an entity outside of these locations holds a majority influence in such entities.
Nevertheless, the wording of the Government Decree might be interpreted in a way that it also applicable to “true” EU investors (i.e. those companies or other entities located in an EU, EEA member state other than Hungary or in Switzerland) in certain transactions regardless whether such entity outside the EU, EEA or Switzerland holds a majority influence in them.
What is a strategic company?
Strategic company is defined as a company registered in Hungary and operating in any of the following forms: a limited liability company (in Hungarian: “korlátolt felelősségű társaság”), a private company limited by shares (in Hungarian: “zártkörűen működő részvénytársaság”) or a public company limited by shares (Hungarian: “nyilvánosan működő részvénytársaság”) provided that such company pursues activities in certain strategic sectors listed in the annex of the Government Decree.
Due to the incoherent use of its terms, the Government Decree’s definition on strategic company definition might be interpreted very broadly. Strategic sectors seems to include not only “traditional strategic sectors” such as energy, transportation, communication, defence, nuclear sector, but somewhat unconventional and new strategic sectors as well, such as tourism, finance, pharma, construction, food industry etc.
What transactions fall within the scope of the Government Decree?
Relevant transactions including the (i) transfer of shareholdings (entirely or partly), (ii) capital increase, (iii) transformation, merger or demerger, (iv) issuance of certain type of bonds or (v) establishment of usufruct right over shares need to be notified to the Minister (similar like in respect of the anti-trust approval), if such transactions result in that a foreign investor in relation to a strategic company:
- (directly or indirectly) would acquire a majority influence;
- (directly or indirectly) would acquire at least 10% of shareholding and the total value of the investment reaches or exceeds a HUF 350 million threshold;
- would acquire individually a 15%, 20% or 50% shareholding or if the joint shareholding of the foreign investors relating to a strategic company would exceed 25%; or
- would acquire the right to use or operate infrastructure that is necessary for pursuing activities in the strategic sectors (including using such strategic infrastructure as a collateral).
If a transaction must be notified to the Minister, in absence of an acknowledgment by the Minister, the new shareholder cannot be registered in the company registry and into the register of shareholders/members.
What is the respective proceeding?
If the transaction is subject to notification, a 10 days notification deadline applies after the execution of the relevant transaction documentation in relation to the investment. Upon receipt of the notification, the Minister examines – among others – whether the transaction is likely to jeopardize the interest of the Hungarian state, the public security or the public order in Hungary. The Minister has 45 days to decide whether it prohibits or acknowledges the transaction. Such deadline might be extended with an additional 15 days.
Legal representation is mandatory in proceedings before the Minister. The language of the proceeding (including the notification) is Hungarian.
It is also possible to challenge the prohibiting decision before the Metropolitan Court.
What are the legal consequences of breaching the Government Decree?
The Minister is entitled to monitor the compliance with the Government Decree and in case of breaching the decree it may also impose fines in the maximum amount of equalling twice the value of the transaction.
Any data registered in the company register without an acknowledgment by the Minister or despite a prohibiting decision will be deleted by the court of registration.
Furthermore, a contract concluded in contradiction of the Government Decree or a closing carried out without the decision of the Minister shall deemed to be invalid from a Hungarian law perspective.
What is the effective date of the Government Decree?
The Government Decree is effective as of 26 May 2020 and, for the time being, it shall remain in effect until 31 December 2020.
In 2020, it is recommended to assess whether a contemplated foreign investment concerns strategic companies in Hungary and thus, the completion of the transaction could be subject to these notification requirements. Note that this is a new legislation and as a next step further clarifications are expected.
Please contact us in case of any questions in relation to this legislation in Hungary.