On 2 October 2018, the Hungarian Parliament adopted a new law, which will require ministerial approval for foreign direct investment into specific sectors. The law, currently awaiting sign-off from the President and then publication, applies to transactions set to close after 1 January 2019.
Whether or not a certain transaction is subject to the new vetting regime depends on a number of factors, in particular: (i) whether it relates to certain sensitive sectors; (ii) whether the relevant transaction qualifies as a triggering event; and (iii) whether the investor qualifies as a foreign investor.
Affected sectors The vetting regime only applies to the following sensitive sectors: defence, dual use products, cryptography and wire-tapping products, financial services, energy, government registries and the electronic communications sector.
Even within these sectors, ministerial approval will not be universally required. Instead, it will be required only if the target company is engaged in certain specific activities. A list of such activities will be set out in the applicable government regulations (the Sensitive Activities). Such regulations will designate which minister may exercise the power to block or approve (currently it is expected that this will be the Minister of Interior Affairs).
Triggering events
A notification must be made to the relevant ministry, if a foreign investor (the
Triggering Events):
• acquires influence, over a Hungarian entity that is carrying out Sensitive Activities, by:
◦ acquiring a ‘direct or indirect’ ownership stake exceeding 25% in a Hungarian company (10% in the case of a publicly listed company);
◦ acquiring, within the meaning of the Hungarian Civil Code, a ‘dominant influence’ in a Hungarian company; or
◦ registering a branch office in Hungary;
• extends to Sensitive Activities the activities of its branch office or a Hungarian company over which it already has influence as a result of a 25% ownership stake (10% in case of publicly listed companies); or
• acquires a right to operate or use infrastructure or assets that are indispensable for carrying out Sensitive Activities.
Foreign investors
The new law only applies to entities registered outside the EU, EEA or Switzerland (Foreign Investors).
In addition, there are a number of rules designed to prevent circumvention of the Triggering Events. For example, a transaction is subject to the minister’s approval even if a Foreign Investor only acquires a de minimis ownership stake (below 25%), but, as a result, various Foreign Investors’ combined ownership stakes in the target company would exceed 25%.
However, as a general rule, the minister does not have the power to block transactions where a Foreign Investor acquires influence through an entity registered in the EU, EEA or Switzerland. Although these transactions are also subject to mandatory notification, the minister can only prohibit these transactions if it finds that the EU, EEA or Swiss entity was set up for the purpose of circumventing the minister’s approval procedure or to hide the fact that the transaction harms Hungary’s security interests.
Procedure and substantive test
The minister has the power to block transactions if they “harm Hungary’s security interests”. This test is not explained further in the new law, and therefore it leaves the minister with a relatively large degree of freedom in making their decision. The minister must issue a decision to accept or block the transaction within 60 days from the receipt of a notification. But the parties may need to allow for even more time in the transaction documentation, as this deadline may be extended to 120 days. The new law is very restrictive in terms of a right to appeal. Although Foreign Investors may challenge the minister’s blocking decisions before Hungarian administrative courts, they are only allowed to rely on: (i) procedural violations; and (ii) a challenge against the minister’s finding that an EU, EEA or Swiss entity was set up merely to circumvent the vetting rules or to hide the risks to Hungary’s security interests. However, the new law does not allow companies to challenge the minister’s conclusions on substantive grounds, i.e., on the basis that transaction would not “harm Hungary’s security interests”.
Standstill obligation
The new law imposes a standstill obligation that applies until receiving the minister’s approval. This means, for example, that ownership rights cannot be exercised or registered with the target company, or the company cannot proceed with the relevant Sensitive Activity in Hungary.
If transactions are implemented before receiving an approval or contrary to the minister’s prohibition, they are unenforceable and may be ordered to be rescinded. In addition, a fine of up to HUF 10m (approx. EUR 30k) may be imposed for a failure to notify a transaction (HUF 1m / EUR 3k in case of private individuals).
Entry into force
The legislation will enter into force on 1 January 2019, thus transactions that close after 1 January 2019 will be affected, and may be subject to notification. The legislation was adopted by the Parliament on 2 October 2018, and is currently awaiting signoff by the President of Hungary and then publication. Meanwhile, its text is available in Hungarian on the Parliament’s website, at
http://www.parlament.hu/irom41/00628/00628- 0012.pdf. If you have any questions, please refer to Allen & Overy’s M&A and Antitrust teams in Budapest. UPDATE: since the publication of this alert, the final text of the law has been published in the Official Gazette as Act LVII of 2018 on Control over Foreign Investments Harming Hungary’s Security Interests, available at
http://www.kozlonyok.hu/nkonline/MKPDF/hiteles/MK18157.pdf
