RESTRICTIONS TO SHARE TRANSFERS IN HUNGARY

05 December 2016

The transfer of business shares in Hungarian Limited Liability Companies is an under-regulated domain of Hungarian company law, however there are some “opt-out” and “opt-in” restrictions that shareholders should bear in mind if they want to set up a working shareholders’ structure. We summarise the must-knows of this topic in this article.

Restrictions to share transfer
The Civil Code offers a wide range of restrictions on share transfer in order to prevent third parties to enter into the limited liability company.
The most important restrictions are
1) the right of pre-emption (default)
2) the consent to sale (optional)
3) the “succession clauses” (optional)
4) excluded legal titles (optional)

Right of pre-emption
Business shares may be freely transferred among shareholders of the company, but if a shareholder wishes to sell his business share to a third person, then the following persons have right of pre-emption in this order of priority:
1) the other shareholders (proportionally)
2) the company itself, or
3) a person appointed by the shareholders' meeting

The right of pre-emption is a restriction by “default” in the Civil Code, but shareholders are entitled to “opt-out” from the application of this instrument it in the articles of association
Consent to sale
While the shareholders must “opt-out” to avoid the right of pre-emption regime, when it comes to the consent to sale, they have to “opt-in”.
It means that this restriction applies only if the shareholders decide to adopt a special clause in the articles of association, conferring the right of consent to the share transfer on the general meeting.
In this case the general meeting has 30 days to consent to the sale, in the absence of which, there is a presumption by law that the consent is given. It must be noted, that the articles of association cannot lengthen this 30 days’ deadline.

Succession clause
Another “opt-in” restriction to the share transfer is the so-called “succession clause”.
In case of the death of a natural person shareholder, or the transformation of a  legal entity shareholder, the articles of associations may grant a right for other shareholders to prevent that the successor enters into the company and becomes shareholder. In this case the shareholders shall “buy” the business share of the deceased shareholder for market price, within 30 days at the latest.

Excluded legal titles
Shareholders are free to exclude certain legal titles of share transfers in the articles of association in order prevent other shareholders from circumventing the right of pre-emption, or other restrictions. In this case the shareholder cannot conclude a valid contract with the excluded legal title (e.g. “donation”) for the alienation of business share to third party.
It must be noted that the “purchase” as legal title, cannot be excluded by the articles of association.
General rules of share transfer
The Civil Code lays down only the basic rules relating to share transfer in Hungarian Limited Liability Companies.
The share purchase contract shall be in writing, but the modification of articles of association of the company because of the share transfer is not necessary.

The purchaser of the business share shall notify in writing the managing director of the company about the share acquisition within 8 (eight) days, by sending him the share purchase agreement. The purchaser shall also confirm in the notification, which shall be in a notarized document or at least in a private document having full evidentiary force, that he accepts the provisions of articles of association as binding.
Based on the share purchase, the shareholders’ rights and obligations transferred to the purchaser as new shareholder. The new shareholder shall be registered by the managing director into the registry of shareholders, but he can exercise his shareholders rights and obligation from the notification.
While the share transfer among shareholders is free, there are some restrictions when third party wishes to acquire the business shares.