As of 1 January 2019 foreign investors are required to notify the competent minister of any acquisitions made in Hungary in regulated sectors. Under the new rules, the Hungarian government may be able block foreign investments which they believe are in conflict with Hungary’s national security. This is a significant change as compared to the previous legislation, where no such rule existed. Investors and businesses need to familiarize themselves with the new legislation and consider thresholds and preconditions that are triggering the notification. In this article we provide insight on what the affected sectors are, the trigger points and possible sanctions.
Act LVII of 2018 on the supervision of foreign investments breaching the national security interests of Hungary (the "Act") defines the regulated sectors as follows:
(i) production of firearms, ammunition, dual-use items, intelligence equipment or military equipment requiring a license;
(ii) offering financial services and operation of payment systems;
(iii) offering electricity services, natural gas services, public water services, or services falling under the scope of the Act on electronic communications networks;
(iv) establishment, development or operation of electronic information systems falling under the scope of the Act on electronic information security of public and local governmental bodies.
The exact activities and services within the above regulated sectors will be defined by a Government decree. The Act only sets forth the main provisions on supervising foreign investors making acquisitions in the regulated sectors. Further details, including the designation of the competent minister, the exact activities within the regulated sectors, the rules of the notification procedure, imposing fines, etc. will be regulated in detail by a Government decree, which has not been published in the Hungarian Official Gazette yet.
Foreign investors and the notification obligation
The Act defines foreign investors as:
(i) non-EEA nationals and legal entities and organizations registered outside the EEA (Swiss nationals, legal entities and organizations are not classified as foreign investors under the Act); and
(ii) legal entities registered in the EEA that acquire ownership as defined by the Act in a business association registered in Hungary that conducts business in the regulated sectors, provided that the qualifying holding (as defined by the Hungarian Civil Code) of such legal entity is held by non-EEA nationals or legal entities or organizations registered outside the EEA.
A notification to the minister is required, where a foreign investor acquires ownership in a target company in a regulated sector, either by establishing a new company or acquiring shares of an existing company, where it acquires:
(i) directly or indirectly more than 25% of the business quotas or shares of a business association or, in case of a public limited company, more than 10% of the shares; or
(ii) a qualifying holding, as defined by the Hungarian Civil Code, which means that (a) the shareholder has the right to appoint or recall the majority of the target company’s managing directors or board members or members’ of the supervisory board or (b) based on an agreement, the remaining shareholders of the target company vote on identical terms with the shareholder holding a qualifying holding or that the remaining shareholders of the target company exercise their rights through the shareholder holding a qualifying holding, provided that together they hold more than half of the voting rights in the target company.
A notification to the minister is also required where a foreign investor acquires not more than a 25% ownership stake in the target company and therefore the overall ownership stake of the foreign investors in the target company exceeds 25%.
Furthermore, the establishment of a local branch by a foreign investor for the purposes of conducting activities in one of the regulated sectors also falls under the scope of the Act and therefore this also falls under the notification obligation.
The Act further specifies that foreign investors may only acquire the right to operate and use the infrastructure, equipment and tools necessary for the provisions of services in the regulated sectors following the confirmation of the notification in writing by the minister (the "Right to Operate"). Additionally, the Act specifies that the target company in which foreign investors acquired the above ownership stakes or in which foreign investors hold a qualifying holding may begin offering services in the regulated sectors following the confirmation of the notification in writing by the minister (the "New Activity").
In order to obtain the competent minister’s confirmation, foreign investors need to submit several documents, including those that present the ownership structure, beneficial owners and economic activities of the foreign investor. The minister shall resolve on the submission within 60 days after the receipt of the notification by the foreign investor, however the deadline may be extended under extraordinary circumstances with an additional 60 days. Additionally, foreign investors need to notify the minister of any changes of the submitted data even after the submission has been resolved.
During the procedure, the minister examines whether the acquisition breaches the national security interests of Hungary. If not, the minister confirms the notification in writing; otherwise the minister declines the notification. The decision of the minister cannot be appealed, however foreign investors may challenge it before the Metropolitan Tribunal (Budapest) in case of a breach of essential procedural requirements or if the minister qualified the contemplated investment of the foreign investor as breaching the national security interests of Hungary.
Administrative fines and other legal consequences
Failure to notify the minister of an acquisition or a change in the foreign investor’s data with regard to the notification may result in fines being imposed by the minister. The fine is capped at a maximum of HUF 1,000,000 (approx. EUR 3,100) in the case of individuals and HUF 10,000,000 (approx. EUR 31,200) in the case of legal entities.
In addition to imposing administrative fines, lack of notification triggers further legal consequences. If the minister concludes that a foreign investor failed to comply with the notification obligation and qualifies the acquisition, the Right to Operate or the New Activity, as breaching the national security interests of Hungary, the minister:
(i) provides a deadline of maximum 3 months for the foreign investor to sell its ownership stake or terminate its qualifying holding in the target company (the Hungarian State has pre-emption rights during the procedure), to modify the scope of operation of the target company or to terminate the established Hungarian branch;
(ii) submits a claim to the competent court to establish the nullity of a relevant contract pursuant to which the acquisition has been implemented if the foreign investment conflicts with Hungary’s national security; or
(iii) provides a deadline of 30 days for the foreign investor to have the New Activity removed from the target company’s scope of business.
The Act also specifies that the request to modify the target company’s members’ list or the record of shareholders may only be submitted after obtaining the confirmation of the notification in writing by the minister. The foreign investor may not exercise its rights in the target company before the minister confirms the notification in writing.
The contract concluded to obtain the Right to Operate may enter into force only as of the day on which the minister confirms the notification in writing (unless otherwise regulated by the applicable laws). In any other case, the contract shall not enter into force.
Furthermore, the target company is required to have the New Activity removed from the Hungarian company register if the minister declines the notification.