FOREIGN INVESTMENT IN STRATEGIC HUNGARIAN COMPANIES SHOULD BE NOTIFIED
The investment of foreigners in Hungarian strategic companies between May 26, 2020 and December 31, 2020 should be notified to the Minister of Innovation and Technology. Legal representation is mandatory through such procedure.
The applicable Government Decree No. 227/2020. (V. 25) (the “Government Decree”) covers transactions related to strategic companies and that qualify as investment. Such limited liability companies (Kft.) and joint strock companies (Zrt. and Nyrt.) are considered as strategic companies, whose seat is located in Hungary and whose main activity or other activities fall under strategic sectors.
The relevant sectors are: chemical industry, commercial establishments, communication sector, critical industrial sector (electronics, machine industry, steel production, vehicles), defence industry (production of weapon or ammunition), dams, energy sector (electricity and gas supply), services connecting to state of emergency, financial sector (including insurance), food industry and agriculture, government establishments, healthcare, IT, nuclear sector, construction industry, water supply and wastewater service, waste management, construction material industry, transport, shipping, logistics, medical device manufacture and tourism.
Notion of foreign investor
The personal scope of the Government Decree covers citizens of states excluding the European Union, the European Economic Area and the Swiss Confederation, i.e. “foreign” states and legal and other entities registered in such states so long as they obtain a specific interest or control in a strategic company having seat in Hungary. According to the Government Decree, a legal entity already registered in Hungary or in any member states of the EU or the EEA or in the Swiss Confederation may also be considered as a foreign investor and therefore be subject to the notification obligation even if a citizen of a foreign state or an organization registered in such state is a member of the given legal person with a majority influence.
The Government Decree is also applicable on legal persons and organizations having seat outside Hungary but within the EU or the EEA or in the Swiss Confederation obtaining majority control in a strategic company through acquisition, obtaining bonds, establishment of a usufruct right on shares or on quota.
Transactions that must be notified
The notification obligation shall apply in the case of acquisition of ownership reaching majority control pursuant to the Hungarian Civil by direct or in indirect manner in a LLC, LTD or PLC having seat in Hungary carrying out any of the above listed activities through acquisition (including capital increase, company transformation, mergers and divisions as well), obtaining bonds, establishment of a usufruct right on shares or on quota, or if such investor acquires at least 10 % of ownership in the concerning company and the total value of the investment reaches or exceeds an amount of HUF 350 million.
The notification obligation also stands if the foreign investor acquires a 15-20- or 50% of ownership in the given company, or the ownership of foreign investors jointly exceeds 25% concerning the company through any of the above transactions.
The acquisition of operation right concerning infrastructures essential to the performance of activities in the sectors indicated above is also subject to the submission of notification, if the operation right is being acquired by a foreign investor or by a legal person or organization in which a foreign investor has, direct or indirect controlling interest.
The Government Decree does not differentiate between unrelated transactions and intra-group transactions. Therefore, even a simple capital increase or intra-group reconstruction might give rise to a notification obligation.
A notification containing the details of the transaction must be made within 10 days from the relevant transaction. Legal representation is obligatory during the notification procedure.
If the foreign investor has made the notification the minister shall inform the notifier about the reception of the notification and subsequently examines whether the acquisition of ownership or influence violates the security interests of Hungary.
The minister has 45 days from the reception of the notification to make a decision about the acknowledgement of the notification that can be extended by 15 days in particularly justified cases. If there is no circumstance violating the security interests of Hungary the minister confirms the acknowledgment of the notification in writing to the notifier, however, if such circumstance (detailed list is contained in the Government Decree) may exist the minister prohibits the acquisition of influence or operation right.
Consequences of lack of notification and of prohibition of the transaction
Any violation of the Government Decree may have serious consequences.
Upon the breach of the notification obligation, the minister may impose a fine up to the double of the value of the transaction (investment) – but in the case of a natural person foreign investor at least in an amount exceeding HUF 100.000 while in case of a legal entity foreign investor at least in an amount exceeding 1% of the target company’s net revenue in the last business year.
In lack of acknowledgement of the minister the foreign investor shall not be registered into the stock-register or be marked in the members’ list. In addition, the foreign investor shall not be entitled to exercise any of its rights vis-á-vis the company in respect of their shares or quota. Moreover, every contract, unilateral declaration, or company resolution (investment) which has been made in violation of the provisions of the Government Decree or in disregard of the prohibiting decision of the minister shall be deemed null and void.