A new draft bill in Hungary proposes ministerial approval for certain foreign direct investments into specific sectors. If adopted, the law may apply relatively soon – it may affect transactions set to close after 1 October 2018. Therefore, investors may already need to keep this bill in mind in transactions currently being negotiated.

While a proposal for an EU legislation on security vetting of non-EEA purchasers is underway in the EU, the Hungarian Government also introduced a similar bill to the national Parliament. The bill would require ministerial approval for all investments by non-EEA investors, if:

• the investment results in a ‘direct or indirect’ ownership stake exceeding 25% in a Hungarian company (10% in case of a publicly listed company);
• the investor acquires a ‘dominant influence’ in the Hungarian company, within the meaning of the Hungarian Civil Code;
• a branch office is registered in Hungary; or
• an investor acquires a right to operate or use sensitive infrastructure or assets.

There are a number of detailed rules designed to prevent circumvention of the legislation’s objectives. For example, a transaction is subject to the minister’s approval even if a non-EEA investor only acquires a de minimis ownership stake (below 25%), but, as a result, non-EEA investors’ ownership stakes jointly would exceed 25%. Other rules are designed to prevent non-EEA investors from circumventing the legislation by acquiring Hungarian assets through SPVs registered in the EEA.

The vetting regime is proposed to apply only in the following sensitive sectors: defence, dual use products, cryptography and wire-tapping products, financial services, energy, government registries and the telecommunications sector. Even within these sectors, a ministerial approval will not be universally required; but only if the target company is engaged in certain specific activities. However, these specific activities are not listed in the bill. Instead, they will be subject to an implementing government regulation.

At this stage, it is not clear which minister will exercise the power to block or approve transactions under the new legislation. The relevant minister will only be appointed later, in the implementing government regulation (we expect this will be the Minister of Interior).

During the approval process, the minister can block transactions if they “harm Hungary’s national security interests”. The minister must issue a decision within 30 days from the receipt of a notification (this may be extended to 90 days). Meanwhile, affected transactions will be subject to a standstill obligation, ie, they cannot be closed before the approval. The bill is extremely restrictive in terms of a right to appeal: although foreign investors may challenge the minister’s blocking decisions, they are only allowed to rely on procedural grounds.

The bill may be amended while it goes through the legislative process. However, if adopted in its current form, then it will apply very soon: transactions that close after 1 October 2018 will be affected, and may be subject to notification.

The bill’s reference number is T/628. Its text and any further amendments that may be proposed are available in Hungarian on the Parliament’s website.