Restrictions for acquisitions of strategic companies incorporated in Hungary

As part of the “economic protection plan” introduced by the Hungarian Government as an answer to the COVID-19 epidemic the Government Decree Nr. 227/2020. (V. 25.) (hereinafter: “Decree“) established temporary measures for special transactions related to strategic companies incorporated in Hungary. On the 16th June 2020 the Government ended the state of emergency, however, the protection rules of strategic companies remained in force as part of the Act LVIII of 2020 (hereinafter: “Act“).

According to the Act, strategic companies are limited liability companies and public or private companies limited by shares incorporated in Hungary that conduct activities (as main or other activity) listed in Annex 1 of the Governmental Decree 289/2020, such as:

a) chemical sector: production of pharmaceuticals and other chemicals, manufacture of petroleum products;

b) telecommunications;

c) trade and repair of motor vehicles and motorcycles;

d) retail and wholesale trade;

e) critical industrial sector: manufacture of electronic equipment, electric equipment, vehicles, machines, metal products;

f) defense sector: manufacture of arms and military vehicles;

g) construction of dams and water facilities;

h) energy sector: production, transmission, distribution, and trade of electricity; manufacture, distribution, and trade of gas; steam and air conditioning supply;

i)  services related to the current emergency;

j)  financial sector: financial intermediating, insurance, pension funds, fund management, ancillary financial activities;

k) transport industry;

l) manufacture of food products and agriculture;

m) IT services;

n)  construction: construction of buildings and other infrastructure;

o)  hotel services; etc.

within the sectors energy, transport, communication and the sectors listed in Article 4 (1) of Regulation (EU) 2019/452 of the European Parliament as strategically important (referred to as “Strategic Company and “Strategic Activities” respectively).

According the Regulation (EU) 2019/452 the following sectors are concerned:

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

b) critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/2009 (15), including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;

c) supply of critical inputs, including energy or raw materials, as well as food security;

d) access to sensitive information, including personal data, or the ability to control such information; or

e) the freedom and pluralism of the media.

The Act defines the foreign investor as:

a)  any company registered in Hungary, the EU, the EEA or in Switzerland pursuing a Strategic Activity if their controlling owner is a citizen of or is incorporated in a country other than the areas mentioned above (hereinafter: “Foreign European Investor“); or

b)  any natural person being citizen of or entity incorporated in a country other than specified above (hereinafter: “Foreign Third Country Investor“).

Furthermore, without being covered by any definition, also entities incorporated in any other (than Hungary) member state of the EU or the EEA, or in Switzerland are subject of the Act (“European Investor”).

The acknowledgment of the Minister of Innovation and Technology must be requested if any Foreign European Investor, European Investor would acquire (directly or indirectly) the majority ownership in a Strategic Company through:

i) acquiring shares or quota;

ii) increasing registered capital;

iii) transformation, merger, demerger;

iv) acquiring convertible bonds;

v)  acquiring usufruct right over shares or quota.

All the above transactions will be referred together as “Strategic Acquisitions“.

Until 31 December 2020 an acknowledgement of the Strategic Acquisition by the Minister of Innovation and Technology must be requested, if as a result of an Strategic Acquisition:

a) a Foreign European Investor or a European Investor would acquire controlling share in a Strategic Company;

b) a Foreign European Investor or a Foreign Third Country Investor would directly or indirectly acquire at least 10% of the shares or quota of a Strategic Company, provided that the relating cumulated investment value reaches HUF 350 million; or

c) a Foreign European Investor or a Foreign Third Country Investor would own 15%, 20%, or 50% of the shares or quota of a Strategic Company; or

d) a Foreign European Investor or a Foreign Third Country Investor – together with any other foreign investor in the Strategic Company – would hold at least 25% of the shares or quota of the Strategic Company.

Furthermore, an acknowledgement of the Minister of Innovation and Technology must be also requested if the ownership or right of use or operation of infrastructures and assets inevitable for pursuing Strategic Activities are transferred, or such infrastructures or assets are provided as security if such rights are acquired by a Foreign European Investor or a Foreign Third Country Investor or any other entity in which such investors have a controlling interest (hereinafter referred as “Operative Transactions“).

Operative Transactions and Strategic Acquisitions will be referred together as “Transactions“.

The Foreign European Investor or a Foreign Third Country Investor must submit the application electronically via its legal representative to the Minister within ten days upon the execution of the Transaction (i.e. singing the respective agreement, unilateral statement or corporate resolution).

The Minister may prohibit the Transaction if:

i) it potentially infringes or endangers the public interest, public order, public safety of Hungary or the basic social needs of the citizens of Hungary;

ii) based on its ownership structure or its financing, the applicant is not controlled by an authority of an EU member states;

iii) the applicant has pursued activities related to public order or public safety of a member state of the EU; or

iv) there is a significant risk that the applicant may pursue illegal activities.

The Minister shall issue its decision within 45 days upon the submission of the application and the necessary documentation; this deadline may be prolonged by 15 days. The order prohibiting the Transaction may be challenged in court.

The applicant may request its registration in the book of shares or members list of a Strategic Company only after the Minister has acknowledged the Transaction. This acknowledgment should also be submitted to the court of registration together with the documentation of the respective Transaction and a declaration on the strategic status of the company.

If the Foreign European Investor or a Foreign Third Country Investor breaches its reporting obligation(s), an administrative fine amounting to at least HUF 100,000 in case of natural persons and at least 1% of the net turnover of the respective Strategic Company and in both cases up to twice the amount of the Transaction may be issued. Additionally, the legal statement or corporate resolution, which infringes the provisions of this Act is void.

Any and all agreements, unilateral declarations or company resolutions not complying with the provisions of the regulation shall be void. The Minister should investigate the unreported Transaction afterwards, and if no obstacles occurred, which would result the prohibition of the Transaction, the Transaction should become (retroactively) valid.

Since the language of the Act is unclear, it is highly disputed whether companies conducting the listed activities outside the listed sectors are concerned by the regulation or not.

The same apply for the acquisition of assets inevitable for pursuing Strategic Activities. It is highly confusing that the definition of Foreign European Investor requires the conduct of Strategic Activities that, furthermore, only relate to share deals, therefore we take the view that Foreign European Investors may acquire strategic assets without the acknowledgement of the Minister of Innovation and Technology since asset acquisition does not qualify as Strategic Activity.

Since the regulation is very complex, we recommend the review of every planned transaction individually whether it shall be reported to the Minister or not. Please also note that the wording of the Decree is very unclear and highly disputed, see the article published by Portfolio: https://www.portfolio.hu/uzlet/20200531/hatalmas-kerdojelek-a-kulfoldiek-cegvasarlasanak-korlatozasarol-szolo-rendelet-korul-434712

 

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