Hungary: New foreign investment rules

On 1 January 2019, new legislation entered into force which set out significant restrictions on foreign investors intending to make direct or indirect investments in certain strategic sectors in Hungary (Act LVII of 2018 on the Supervision of Foreign Investments Violating the Security Interests of Hungary (‘SFI’)). This will have an impact on a considerable number of transactions in Hungary in the future.

The SFI applies to ‘foreign investors’, which are defined as natural persons and legal entities from outside the EU, EEA and Switzerland, or as EU/EEA-based or Switzerland-based legal entities in which such third-country investors have a majority control (as defined in the Hungarian Civil Code).

Some activities are traditionally considered sensitive by the SFI, e.g. manufacturing of arms, dual-use items and secret service equipment, and some indispensable services to meet society’s basic needs such as the supply of electricity, gas, and water; telecommunication services; financial and payment services, etc.

Before carrying out a transaction, the foreign investor must notify the Minister of the Interior if it intends to acquire directly or indirectly over 25% (10% in the case of publicly listed companies) of the shares or majority control of a company operating in any of the strategic sectors in Hungary. The notification obligation also applies if a foreign investor plans to establish a branch in Hungary for the purpose of performing strategic activities.

The Minister of the Interior has 60 days (extendable by up to another 60 days) to decide whether or not to approve the foreign investor’s request, and can also block a transaction if it ‘harms security interests of Hungary’. In the course of the procedure, the foreign investor’s ownership structure and its beneficial owner must be disclosed. If the Minister refuses the request, the foreign investor has a very limited right to appeal (i.e. only in the case of a serious procedural breach) and the Minister’s decision may not be challenged on substantive grounds, e.g. simply by stating that the transaction would not in fact ‘harm security interests of Hungary’.

Since the SFI and the phrase ‘harm security interests of Hungary’ are surrounded by considerable legal uncertainty, before commencing a transaction aimed at investment in a Hungarian company, foreign investors are advised to involve a Hungarian licensed lawyer.

Furthermore, the SFI seems to coincide with European trends: the European Parliament, the Council and the Commission reached a political agreement on a new legal framework for screening foreign direct investments in November 2018. Therefore the next question is whether the new Hungarian and the planned European control of foreign investments will be compatible with each other.