Hungary: Stricter rules on foreign investments in strategic sectors

Based on the emergency authorization, the Hungarian Government has taken several actions aiming to ease the economic consequences of the Covid-19 epidemic. In Government Decree 227/2020 (V.25.) (the “Government Decree”) stricter rules – including prior notification obligations – were introduced on business transactions by foreign investors in strategically important sectors. The Government Decree has entered into force on 26 May 2020 and will be applicable until 31 December 2020.

Similar rules have been already introduced in 2018 regarding foreign investments in companies operating in the “traditional strategic sectors” (e.g. ammunition, arms and military equipment manufacturing, production of dual-use items and intelligence service equipment, electricity services etc.). The Government Decree, however, goes beyond the prior rules, extending the scope of transactions covered and introducing further procedural rules and sanctions.

Hereby we summarize the most important changes introduced by the Government Decree.

Which persons/entities are affected?

According to the Government Decree, natural persons and legal entities domiciled outside the EU/EEA and Switzerland qualify as foreign investors. Furthermore, entities established in any EU/EEA member state or Switzerland are also considered as foreign investor if a third-country investor holds a majority control in such entities.

The Government Decree requires foreign companies to file a prior notification to the Minister of Innovation and Technology (“Minister”) and obtain an acknowledgement of such notification from the Minister, that is a pre-condition to the investment into a strategic company in Hungary.

Strategic companies are limited liability companies, private companies limited by shares and public companies limited by shares (in Hungarian: “kft.”, “zrt.” and “nyrt.”) established in Hungary, carrying out business activities in strategic sectors defined in the annex of the Government Decree. The strategic sectors include: (i) chemicals sector; (ii) trade sector; (iii) telecommunication; (iv) electronics and machinery industry, steel production, manufacture of transport equipment; (v) defence industry; (vi) construction of water projects; (vii) energy sector; (viii) emergency services; (ix) financial and insurance sector; (x) manufacture of food products and agriculture; (xi) government facilities; (xii) healthcare; (xiii) information technology; (xiv) nuclear sector; (xv) construction; (xvi) water supply, sewerage; (xvii) waste management; (xviii) building materials industry; (xix) traffic, transport, logistics; (xx) manufacture of medical devices; and (xxi) tourism.

Which transactions fall within the scope of the Government Decree?

The Minister shall be notified of the following transactions:

(A) Corporate transactions including the (i) transfer of shareholdings (entirely or partly), (ii) capital increase, (iii) transformation, merger or demerger, (iv) issuance of certain type of bonds or (v) establishment of usufruct right over shares, if the result of such a transaction is that

• a foreign investor or an EU/EEA or Switzerland-based investor acquires majority control;
• a foreign investor acquires 10% control and the investment value reaches HUF 350 million threshold;
• a foreign investor acquires 15%, 20% or 50% shareholding;
• joint shareholding of foreign investors in the strategic company exceeds 25%;

and

(B) Transfer of ownership, obtaining right of use or right of operation, or establishing a collateral/security regarding any infrastructure, equipment or assets essential for carrying out activities in the strategic sectors.

What procedural rules should be followed?

Foreign investors shall notify the Minister within 10 days as of the date of the transaction. Legal representation is mandatory in the proceedings. Notifications shall be submitted by electronic means. The Minister decides on the acknowledgement or the prohibition of the transaction within 45 days (extendable up to 60 days). 

The Minister investigates whether (i) the transaction harms security interests of Hungary; and/or (ii) the foreign investor is directly or indirectly under the control of an EU State administration; and/or (iii) has been involved in an activity affecting security and public order in an EU Member State; and/or (iv) there is a serious risk that the foreign investor will engage in illegal or criminal activities. In case of a prohibition the Minister is obliged to justify his decision, however, the foreign investor has a very limited right to appeal.

What sanctions and consequences should be considered?

A contract, unilateral declaration or corporate resolution concluded or made contrary to the provisions of the Government Decree or disregarding the prohibition of the Minister is to be considered null and void under Hungarian law. Any data registered in the company register without the acknowledgment of the Minister or despite its prohibition will be deleted by the company court.

Non-compliance with notification obligation may result in an administrative fine amounting up to the double of the transaction value.