Prolongation of foreign investment control, change in the merger practice

Prolongation of foreign investment control

During the state of emergency introduced by the Hungarian Government with respect to the COVID-19 pandemic in May 2020, the Hungarian Government implemented new rules for purposes to screen foreign investments in Hungarian companies.

The new regulation set out in Act LVIII of 2020 requires the approval of the Minister of Innovation and Technology as a precondition to the implementation of foreign investments into Hungarian companies carrying out certain activities important to the management of the pandemic situation.

According to the recent changes of the relevant legislation, the term of the above defined notification obligation is extended until 30 June 2021 (originally it was applicable until 31 December 2020).

Furthermore, the recent changes amended the laws in a way that the provisions described above shall no longer be applicable to to intra-group transactions.

Change in the merger practice of the Hungarian Competition Authority

According to Act LVII of 1996 on the Prohibition of Unfair Trading Practices and Unfair Competition (“Competition Act”), a transaction has to be notified to the Gazdasági Versenyhivatal (Hungarian Competition Authority, “GVH”) if it is qualified as a “concentration” and certain notification thresholds are met. A concentration arise, if there is a change of control in the company’s governance. Therefore, it is always very important to determine who has control over the target before and after the transaction.

The Competition Act lists four cases when a company has direct control over another company, but the decisive factor in all of these cases is whether who has the right to accept the company’s business plan. The logic behind this GVH statement is that the strategy of the company is determined by the business plan, so those persons who are able to decide on the business plan of the company are also controlling the company’s business behavior.

It is very easy to determine the control of governance, if the articles of association expressly regulates which body has the right to accept the business plan of the company. But often, the articles of association is silent on this matter. Until now, in these cases the GVH applied a presumption according to which the supreme body has the right to accept the business plan of the company. Therefore, as a main rule, that member of the company had control over the undertaking who had more than 50% share in the company.

This practice of the GVH seems to be changed recently, because the GVH stated in a last week’s decision that if the articles of association is silent on the business plan of the company, the GVH presumes that the acceptance of the business plan is in the competence of one or more executive officers (in accordance with Article 3:21 of the Act V of 2013 on the Civil Code). On the basis of this logic, the GVH presumes in these cases that someone has controlling right over the company, if it has the power to designate, appoint or dismiss the majority of the executive officers of the target company.

The above change in the GVH’s decisional practice makes it clear that it is really important to be conscious about how the acceptance of the business plan or similar documents is regulated in the company’s articles of association, because it might be a decisive factor in the control of governance and therefore it could substantially influence the necessity of GVH notification of transactions.