NEW LAW CONTROLLING FOREIGN INVESTMENTS IN HUNGARY

09 January 2019

On 1st January 2019 the Act on the Control of Investments Detrimental to the Interests of Hungarian National Security entered into force. On the basis of the new law investors who are considered as “foreign” have to report their newly acquired interest in Hungarian companies. Pursuant to the Act, the Minister of the Interior may prohibit the acquisition or may withdraw the right of the company to pursue a certain activity. In our article, we summarize the most important information regarding the new law.

-Which sectors are covered by the law?

It is important that the Act is not of general scope, the notification obligation applies only to some priority sectors of the national economy, such as:

- manufacturing of arms, military technology and secret service equipment;

- provision of certain gas, water and electricity supply services

- provision of certain financial services and;

- provision of electronic communication services; maintenance of electronic information systems

Who are Foreign Investors?

According to the law, “Foreign Investor” means any natural or legal person who is a national of/established in a state outside the European Economic Area and Switzerland.

To prevent the law from being circumvented, Hungarian or EEA-based companies that have interest in a Hungarian-based company are also considered to be Foreign Investors, if their majority shareholder is a Foreign Investor

What are the cases to be notified?

- acquisition of ownership or influence

It shall be reported if a Foreign Investor intends to acquire more than a 25% interest (10 % in the case of PLCs) in an existing or yet to be established company; or to acquire decisive influence in a Hungarian Company pursuant to the Hungarian Civil Code. In addition, the acquisition is subject to notification if the combined share of Foreign Investors exceeds 25%.

- establishment of a branch office

Branch offices - for the purpose of pursuing the activities covered by the Act- may only be established with the prior approval of the Minister.

-Taking up new activity

In order to close a legal loophole, existing companies shall also report if they intend to take over the sensitive activities mentioned in our article, if the interest of Foreign Investors in the company exceeds the aforementioned scale or has decisive influence.

Evaluation of the notification

The notification must be made in writing, addressed to the Minister of the Interior within 10 days of the acquisition of the right or the taking-up of the activity. In the course of the approval procedure the Foreign Investors' entire ownership structure and its ultimate beneficial owner must be disclosed.

The Minister then examines whether the acquisition of the interest or the right to operate or use sensitive infrastructure or assets or the pursue of the new activity infringes Hungary's security interests and then makes a decision within 60 days (which can be extended by up to 60 days in justified cases). It should be mentioned that the law does not specify what acts violate national security, on the ground of which the investment or the pursue of the activity can be prohibited.

As a result of the investigation, the Minister either acknowledges and confirms the notification or prohibits the acquisition of the investor, the acquisition of the right to operate or the pursue of the activity (prohibition decision).

The investor may challenge the decision in case of violation of the rules of the procedure in front of the Regional Court of Budapest. If the violation is established, the Court commits the Minister to a new procedure.

Consequences of the prohibition decision

In case of acquisition of interest, registration in the list of shareholders/list of members can only take place with the approval. If this is not the case, the Foreign Investor may not exercise his membership rights in the company, i.e. he may not take part in the decision making, he is not entitled to dividends, etc.

Furthermore, the Foreign Investor must sell its interests or eliminate its influence within 3 months, while the newly listed activity must be removed from the Company Register in the case of a prohibition decision.

After the deadline, the State is entitled to sell the Foreign Investor's share, which will be encumbered by an ex lege pre-emption right in favour of the Hungarian State throughout the sale.

What are the Sanctions?

If a Foreign Investor fails to comply with its reporting obligations, the Minister may impose a fine on the Foreign Investor. The amount of the fine in case of a natural person is up to EUR 3100, in case of a legal person, up to EUR 31.000.

Summary

With the introduction of the law, Hungary wanted to take action to control the participation and influence of the –often untraceable- foreign investors in the strategically important sectors. The practical effectiveness of the law may be negatively affected if the scope of the activities under investigation proves to be narrow or the notification can be circumvented. In addition, the law leaves open the definition of the cases when prohibition can be established, making the law obscure in its substance.