05.06.2020

New reporting obligation for foreign investors

Hungarian Minister for Domestic Economy can prohibit share acquisitions in strategic companies

New reporting obligation for foreign investors

Government Decree 227/2020 (V.25) “on measures of economic protection for business entities with a registered office in Hungary” was published in the 25 May 2020 edition of the Hungarian Gazette. According to the government decree, the direct or indirect acquisition of shares in “strategic” companies by foreign investors must be reported to and acknowledged by the Minister for Domestic Economy. The validity of such legal transactions is subject to the acknowledgement of the Ministry of Domestic Economy.

Foreign investor

In line with the government decree, a foreign investor is:

  • a citizen, legal entity or other organisation registered outside the European Union, the European Economic Area, and the Swiss Confederation, or
  • a legal entity or other organisation registered in Hungary, in another Member State of the European Union and the European Economic Area or the Swiss Confederation, in which a legal entity or organisation registered in a state outside the European Union, the European Economic Area or the Swiss Confederation has a majority interest.
Strategic company

Any limited liability company or company limited by shares with a registered office in Hungary is considered a strategic company if it conducts any of the activities specified in the government decree. The scope of activities considered “strategic” is quite broad: including, but not restricted to, the energy sector (supply of electricity, gas and steam), chemical industry, telecommunication, defence industry, various machine production sectors, agriculture (plant production, animal husbandry, wildlife management), also including food and beverage manufacturing, healthcare and construction, but the decree also lists the financial sector and retail and wholesale trade as well as tourism.

Legal transactions subject to reporting

Essentially, the following types of transaction affecting companies deemed to conduct strategic activities are classified as legal transactions subject to reporting:

  • transfer of ownership on any legal grounds,
  • capital increase,
  • transformation, merger, demerger,
  • issuance of convertible bonds, bonds with subscription rights, equity bonds
  • establishing a usufruct right on the shares or partnership shares of a strategic company.

The related conditions are rather complicated, but the above legal transactions basically result in the following outcomes:

  • acquisition of controlling interest;
  • the foreign share acquired directly or indirectly in the strategic company is at least 10%, and the total amount of investment reaches or exceeds HUF 350 million (roughly EUR 1 million);
  • foreign share acquisition of 15%, 20% or 50%;
  • the share of foreign investors in the strategic company reaches or exceeds 25% as a result; or
  • the foreign investor acquires the operating right following the transfer of the infrastructure and equipment essential to carry out the strategic activity and the granting of rights of use and operation for assets, or the allocation of such assets as collateral.
Reporting

Reporting to the Minister of Domestic Economy shall take place electronically with the mandatory use of a legal representative, within 10 days of the establishment of the legal transaction, detailing essentially the entire legal transaction and attaching the documents created.

The minister has 45 days to acknowledge or deny the transaction. The reasons for denying the transaction must be provided, which may include state interests, public safety and public order being violated or jeopardised– with particular regard to the safety of providing basic social needs – an audit by a public administration body of an EU Member State underway, the risk of an illegal activity or criminal act, or a previous act violating EU security or public order. It is possible to lodge an appeal against the decision in court.

If no acknowledgment is forthcoming or the request is denied, the legal transaction is deemed null and void. The reported transaction must be acknowledged before the change can be registered in the company registry and in the strategic company’s documents. Data registered in spite of the lack of acknowledgement or a denial from the minister shall be deleted from the company registry in a regulatory supervision procedure.

Sanctions

Any person violating the reporting obligation may be further penalised with a fine. The amount of the fine may be up to twice the value of the transaction, but it must exceed

  • HUF 100,000 (roughly EUR 290) in the case of a natural person,
  • 1% of the net sales revenue generated in the last financial year by the strategic company involved in the acquisition of ownership, in the case of a legal entity or other organisation.

The government decree is effective until 31 December 2020. Although the legal regulation was adopted with reference to protecting strategically important Hungarian companies from being acquired by “foreign investors”, it is important to bear in mind that the government decree also contains a provision that prescribes the reporting of any controlling interest acquired directly or indirectly by legal entities or organisations registered in the European Union, the European Economic Area or Switzerland.

The new reporting obligation may raise a number of issues for managers of Hungarian companies as well as foreign companies wishing to invest. The legal experts of WTS Klient Hungary have been dealing with the Hungarian legal obligations of international clients for decades, and have thus acquired significant professional expertise and wide-ranging experience which are at your disposal, should you have any questions about how to interpret the government decree.

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