Hungary issues decree requiring ministerial approval for certain foreign investments

The Hungarian government has issued a new decree, No. 227/2020 that introduces temporary measures for special transactions related to strategic companies incorporated in Hungary. These measures entered into force on 26 May 2020 and will remain in force until 31 December 2020.

• According to the Decree, strategic companies are limited liability companies and public or private companies limited by shares incorporated in Hungary that pursue activities listed in the Decree, such as:
  • chemical sector: production of pharmaceuticals and other chemicals, manufacture of petroleum products;
  • telecommunications;
  • trade and repair of motor vehicles and motorcycles;
  • retail and wholesale trade;
  • critical industrial sector: manufacture of electronic equipment, electric equipment, vehicles, machines, metal products;
  • defence sector: manufacture of arms and military vehicles;
  • construction of dams and water facilities;
  • energy sector: production, transmission, distribution, and trade of electricity; manufacture, distribution, and trade of gas; steam and air conditioning supply;
  • services related to the current emergency;
  • financial sector: financial intermediating, insurance, pension funds, fund management, ancillary financial activities;
  • transport industry;
  • manufacture of food products and agriculture;
  • IT services;
  • construction: construction of buildings and other infrastructure;
  • hotel services; etc.

within the sectors of energy, transportation, communication, finance, credit, and insurance, and others listed in Article 4 (1) of Regulation (EU) 2019/452 of the European Parliament as strategically important (e.g. critical infrastructure, critical technologies, supply of critical input like energy or raw materials, food security, access to sensitive information, media, etc., referred to as Strategic Company and Strategic Activities respectively).

Since the determination of whether an entity would fall into the category of strategic company is rather complex, each potential investment should be examined carefully.

A foreign investor is defined as:

• any company registered in Hungary, the EU, the EEA or in Switzerland pursuing a Strategic Activity if their majority owner is a citizen of or is incorporated in a country other than the areas mentioned above (Foreign European Investor); or
• any citizen of or entity incorporated in a country other than specified above (Foreign Third Country Investor). Note that only the second category includes investors who are natural persons.

An acknowledgement of the Minister of Innovation and Technology must be requested, if any Foreign European Investor, or any entity incorporated in the EU, the EEA, or Switzerland would acquire (directly or indirectly) the majority ownership in a Strategic Company through:

• acquiring shares or quota;
• increasing registered capital;
• transformation, merger, demerger;
• acquiring convertible bonds;
• acquiring usufruct right over shares or quota.

Such acts are referred together as Acquiring Transactions.

An acknowledgement of the Acquiring Transaction of the Minister of Innovation and Technology must be requested, if pursuant to a Transaction:

• 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
• 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
• 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; or
• 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 (Operational Transactions and when Operational Transactions and Acquiring Transactions are together: Transactions).

The Foreign European Investor or a Foreign Third Country Investor must submit the application electronically to the Minister within ten days upon the creation of the Transaction (i.e. executing the respective agreement, unilateral statement or corporate resolution). Legal representation is obligatory in the proceeding.

The Minister may prohibit the Transaction if:

• it potentially infringes or endangers the public interest, public order, public safety of Hungary or the basic social needs of the citizens of Hungary;
• based on its ownership structure or its financing, the applicant is not controlled by an authority of an EU member states;
• the applicant has pursued activities related to public order or public safety of a member state of the EU; or
• there is a significant risk that the applicant may pursue illegal activities.

The Minister will issue its decision within 45 days upon the submission of the application and the necessary documentation, which is a deadline that 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 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 respective Transaction is not duly reported to the Minister, an administrative fine amounting to at least HUF 100,00 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 Decree is 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 valid.

For more information on this Decree and how it could affect your Hungarian business, contact your regular CMS advisor or local CMS experts.

Article co-authored by István Tamás Rigó.