17 June 2020

After the bill, passed in 2018 on restrictions of foreign investments, Hungary further limits the domestic investments of the foreigners because of the COVID-19. The new decree extends the scope of the investments to be notified and introduces fines, too. We explain the most important provisions of the decree in this article.

1. Introduction

The main goal of the Governmental Decree No. 227 of 2020 (“Decree”) adopted on 25th May 2020 and entered into force on the following day, is to prevent the selling of those Hungarian companies to foreign investors, which have difficulties due to the coronavirus.

Indeed, like the previous Act LVII of 2018 on the screening of foreign investments, the Decree imposes a notification obligation in case of investment by foreigners in sectors classified as strategic. The Decree has to be applied until 31th December 2020.

2. Who considered as a foreign investor pursuant to the Decree?

The citizen of, or a legal person or other organisation registered in a state outside the European Union, the European Economic Area and the Swiss Confederation are considered as foreign investor.

3. Which sectors and companies are covered by the scope of the Decree?

The Decree covers the energy, traffic, tourism and the financial, credit and insurance sectors among others. In these sectors a given company is covered by the scope of the Decree, if it pursues the activity specified by the Decree.

Only limited liability companies, private and public companies limited by shares, which are in the concerned sectors and pursue the specified activities, are considered as strategic companies (“Strategic Companies”) by the Decree, which does not apply in case of a general or limited partnerships.

4. What legal transactions are covered by the notification obligation under the Decree?

The following legal transactions are covered by the Decree, be they in the form of contract, unilateral act, or corporate resolutions:

a) transfer, for or without consideration, of an ownership share in a Strategic Company in full or in part, based on any legal title for transfer of ownership, including in-kind contribution,

b) increasing the capital of a Strategic Company,

c) the transformation, merger or division of a Strategic Company,

d) issuing convertible bonds, bonds with subscription rights or converting bonds by a Strategic Company

e) establishing a right of usufruct over a share or business share of a Strategic Company,

provided that, the foreign investor acquires majority control over a Strategic Company by the acquiring the ownership share or the ownership of a bond or the right of usufruct on the basis of a legal transaction or acquires at least 10 % share provided that the total value of acquisition reaches or exceeds 350 million forints.

Furthermore, in certain sector specified by the Decree, the notification obligation shall also apply if the foreign investor acquires 15-50 % ownership of a Strategic Company or if the total share of foreign investors in the Strategic Company exceeds 25 %.

The Decree also requires the notification of the Minister and the acknowledgment of such notification for transferring the right to operate of the infrastructure or equipment essential for pursuing any activity in the specified sectors.

5. Exceptions

The Decree does not apply to certain transactions: the transfer of ownership in enforcement or liquidation proceedings or the transfer of ownership of shares to the creditor that are subject to collateral security do not fall within the scope of this Decree.

6. The notification procedure

The notification shall be submitted to the Minister within 10 days after the conclusion of the legal transaction.

The notification shall contain, inter alia, the details of the legal transaction and the documents of the legal transaction shall be attached, too. The legal representation is mandatory in the notification procedure.

The Minister examines whether the acknowledgment of the transaction would violate or compromise the State interest, public security or public policy of Hungary, especially the security of meeting fundamental social needs.

The Minister decides on the notification no later than 45 days after the receipt of notification, or in case of the extension of the deadline, no later than 60 days, and either “confirms” or “prohibits” the legal transaction.

7. Legal remedy

If the Minister  prohibits the transaction, the foreign investor can challenge the decision in front of court in a so-called non-contentious proceeding.

The Budapest-Capital Regional Court shall pass a decision on the application in accelerated procedure, within 30 days of receipt. There lies no appeal against the decision.

8. Sanctions

In case of failure to comply with the notification obligation, the Minister imposes a fine and may confirm or prohibit the legal transaction.

The fine may be of up to two times the value of the transaction, but

a) at least exceeding 100 000 forints in case a foreign investor who is a natural person,

b) at least exceeding 1 % of the net turnover in the last business year of the Strategic Company affected by the legal transaction in case a foreign investor who is a legal person or another organisation.

Obviously, in the absence of a confirmation of the acknowledgement of the notification, or if the Minister passed a prohibiting decision, the foreign investor shall not be registered in the register of shareholders or the register of members and may not exercise any rights in the Strategic Company.

The company registration court shall delete, any data registered in the company register in the absence of a confirmation of the acknowledgement of the notification or in violation of a prohibiting decision by the Minister.

Furthermore, the legal transactions adopted in violation of the provisions of the Decree or ignoring a prohibiting decision by the Minister shall be null and void.

9. Summary

The notification obligation causes uncertainty for foreign investors because the Decree contains such blanket rules, which grant almost a discretionary power to the Minister when it comes to the approval of a transaction.

In addition, the too rigid application of the Decree may backfire in the long term. Although the Decree restricts the acquisition of a retail or tourism company because of the coronavirus, it can cause negative effects after the end of the pandemic period, too.