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COVID-19 New mandatory notification of foreign investments in Hungarian companies engaged in certain strategic industries

  • Hungary
  • General

11-06-2020

COVID-19 New mandatory notification of foreign investments in Hungarian companies engaged in certain strategic industries

11 June 2020

On 25 May 2020 Government Decree No. 227/2020. (V. 25.) was adopted, which prescribes notification obligation for foreign investments in Hungarian companies engaged in certain strategic industries to prevent the consequences of a human epidemic causing a mass illness.

The government decree is in force from 26 May 2020 to 31 December 2020.

The most important provisions of the Government Decree are described below.
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1.    Scope of the Government Decree
The government decree is applied to Hungarian companies engaged in certain strategic industries (“strategic company”). Companies are considered strategic if they are limited liability companies, or private or public limited companies domiciled in Hungary with a main activity or additional activity belonging to a sector of strategic importance listed in the Annex 1 of the Government Decree. Annex 1 defines 21 strategic sectors, including chemical sector, commercial establishments (trade and repair of motor vehicles and motorcycles, retail and wholesale trade), communications sector, critical industrial sector (electronics, mechanical engineering, etc.), defence industry, dams, energy sector, emergency services (defence, fire protection), financial sector, food sector and agriculture, government facilities, healthcare, information technology, nuclear sector, construction, water supply and wastewater services, waste management, building materials industry, transportation, medical device manufacturing, tourism.

With regard to a strategic company, in the case of legal transactions specified in the government decree, the foreign investor is obliged to notify, and for the legal transaction to take effect an acknowledgment of the notification is required.

2.    Who qualifies as a foreign investor?

2.1.    A legal person or other entity established domestically, in another Member State of the European Union, in another Member State of the European Economic Area and in the Swiss Confederation, if the citizen, legal person or entity described in point 2.2 has a majority influence in the legal person or entity.

2.2.    A citizen of a state outside the European Union, the European Economic Area and the Swiss Confederation, or a legal person or other entity registered in such a state.

2.3.    Although the Government Decree does not classify it as a foreign investor, the obligation to notify also extends to a legal person or other entity registered in the Member States of the European Union, a Member State of the European Economic Area and the Swiss Confederation if it acquires a majority stake in a strategic company.

3.    What legal transactions are subject to the notification obligation?

a)    transfer of ownership in a strategic company,
b)    capital increase in a strategic company,
c)    transformation, merger, division of a strategic company,
d)    issuance of a bond by a strategic company,
e)    the establishment of a usufruct right on the shares or quotas of a strategic company.

4.    When does the notification obligation arise?

4.1.    If a foreign investor described under clause 2.1 and an investor registered in the European Union, the European Economic Area and the Swiss Confederation by directly or indirectly acquiring ownership or acquiring ownership of a bond under a legal transaction under clauses 3. a)-c), furthermore acquiring a usufruct right under clause 3. e) secures a majority influence in the strategic company;

4.2.    If a foreign investor (clauses 2.1 and 2.2) acquires, directly or indirectly, at least 10% of the shares in the strategic company through the legal transaction under clauses 3 a)-e) and the total value of the investment reaches or exceeds HUF 350 million;

4.3.    If a foreign investor (clauses 2.1 and 2.2) acquires a 15%, 20% or 50% share in the strategic company through a legal transaction under clauses 3. a)-e), or if through a legal transaction under clause 3 the combined share of foreign investors’ in the company exceeds 25%;

4.4.    Notification and acknowledgment is required even in the case of the transfer of infrastructure, equipment and the transfer of the right to use or operate assets, or the provision as security of such assets, which are essential for the pursuit of activities (hereinafter together: right of operation) in the sectors specified in Annex 1 of the Government Decree, if the right of operation is acquired by a foreign investor, or a legal person or entity in which a foreign investor has, directly or indirectly, a controlling interest.

5.    Who is required to submit the notification?
The foreign investor is required to submit the notification.

6.    Deadline for notification
The notification must be submitted to the competent minister within 10 days of the legal transaction. The Minister shall take a decision no later than 45 days after receipt of the notification: confirm the acknowledgment in writing or take a prohibiting decision.

7.    Notification procedure
The notification shall be made to the Minister responsible for the national economy. Legal representation is mandatory in the proceedings.

The notification signed by the applicant must be submitted to the Ministry in writing, electronically. In connection with the notification, the Minister shall communicate with the legal representative electronically.

The Government Decree sets out in detail the mandatory content of the notification. It must contain, inter alia, the data of the foreign investor and the acting legal representative, the notification must be accompanied by a detailed description of the legal transaction, documents generated in connection with the legal transaction, including all documents from which the ownership structure of the foreign investor or legal entities can be established, etc. The Minister may request the provision of additional data and information or the rectification of deficiencies.

In the course of the proceedings, the Minister shall examine whether in connection with the legal transaction

-    there is a violation or threat to the state interest, public security, public order of Hungary, or threat of their occurrence, in particular the security of supply of basic social needs, in accordance with the provisions of the Treaty on the Functioning of the EU,
-    the notifier is directly or indirectly controlled by an administrative authority of an EU Member State,
-    the notifier was involved in a public security or public order activity in an EU Member State,
-    there is a serious risk that they will engage in illegal or criminal activity.
The Minister shall make a decision within 45 days of receipt of the notification. In particularly justified cases, the time limit may be extended by a maximum of 15 days.

The Minister states in the decision that the above circumstance

-    does not exist and acknowledges the notification, or
-    finds that it exists and prohibits the transaction (prohibitive decision). Reasons must be given for any prohibitive decision.

8.    Remedies
The notifier may challenge the prohibition decision in an administrative non-contentious proceeding. The Metropolitan Court of Budapest has exclusive jurisdiction over the proceedings. If the court finds an infringement, the decision is set aside, and the minister is ordered to conduct new proceedings.

9.    Fines
A person who breaches the notification obligation may be subject to an administrative fine of up to twice the value of the transaction, which

a)    in the case of a natural person foreign investor exceeds at least HUF 100,000,
b)    in the case of a legal person or other entity foreign investor, an amount exceeding 1% of the net turnover of the strategic company concerned in the last business year.

10.     Sanctions

10.1.    The legal transaction is null and void if it is

a)    contrary to the provisions of the Government Decree, or
b)    was made in disregard of a prohibition decision of the Minister.

10.2.    An application for entry in the share register or members’ list of a strategic company may be submitted only in the possession of a certificate of the acknowledgment of the notification.

10.3.    In company proceedings related to the legal transaction specified in clause 3, a statement shall be attached to the court of registration as to whether the company qualifies as a strategic company and a certificate of ministerial acknowledgment pursuant to a government decree shall be attached.

The Government Decree contains a number of detailed rules regarding the notification obligation. When deciding on transactions covered by the Government Decree, the relevant legal requirements are to be carefully studied.


Contact
For more information please contact your usual contact at Sándor Szegedi Szent-Ivány Komáromi Eversheds Sutherland Attorneys at Law.

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Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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