More than two years ago as a transitional rule, the acquisition of ownership interest in Hungarian companies by foreigners became subject to authorisation. The rule seems to have become permanent in the meantime, though many questions of legal interpretation remain unanswered. Some market players are following the process with resignation, others with serious reservations.
Transitional or permanent?
The rule requiring parties to obtain the “approval and acknowledgment” – basically, the authorisation – of the Ministry of Innovation and Technology (ITM) (now Ministry of Technology and Industry, or TIM) for the acquisition of ownership interests by foreigners in Hungarian companies above a certain threshold was introduced on a temporary basis, during the first wave of the Covid epidemic. The rule was linked to the emergency [in official Hungarian terminology: “state of danger”] caused by Covid and was originally intended to apply until the end of the emergency. However, as the emergency was continuously extended, the original expiry date of the rule was extended as well. In the meantime, although the Covid emergency has already been lifted, a new law passed a few months ago has “smuggled” the regulation through and made it indefinite, independent of the emergency. As it stands now, it looks like the authorisation requirement could be with us forever.
Uncertainties in the regulation
At the same time, the difficulties of interpretation surrounding the legislation have not diminished. Perhaps not coincidentally, the legislation on the authorisation requirement was drafted in such a way that parties are left to their own interpretation as to whether a particular transaction falls within its scope or not. Given that failure to obtain authorisation can lead to the invalidity of the transaction and heavy fines, lawyers acting on a transaction most often recommend applying for ministry approval even if the industry in question would not otherwise logically be a key sector from a national security or public health perspective.
Several legal interpretation difficulties that have accompanied the authorisation requirement since its inception have not been resolved, either. For example, there is still no clear ministerial confirmation that where assets rather than an ownership interest in a company are the subject of the transaction, there is indeed no need for authorisation between European parties. There are also many uncertainties surrounding intra-group transactions as to when an official authorisation is required and when it is not. The authority's position is also unclear as to what happens if a call option was created before the rule entered into force but is exercised afterwards. Nor is it clear whether the authorisation is required at the time of the creation of the option or its exercise.
The ministry’s practice
Although no official statistics are available, current experience suggests that the ministry intervenes in the autonomy of the parties in exceptional cases. There are only a few known cases where the ministry has not given its approval. However, the war situation and the related, impending economic crisis could perceptibly increase the number of rejected transactions.
One should also bear in mind the administrative burden that the authorisation process places on the parties. Furthermore, the procedure also significantly delays the closing of transactions.
My way or the highway?
Although almost all EU member states impose similar authorisation requirements, the Hungarian system is one of the most (if not the most) restrictive of all EU regulations – not to mention the interpretative dilemmas and the vague scope referred to above. While most market players have reluctantly come to terms with the regulatory regime, others still see the authorisation requirement as a gross state interference in private autonomy and find it difficult to live with.
For those in the latter category, good news may come from a rule that entered into force in September, under which a Hungarian company can now be transformed into a foreign company and thus escape the scope of the authorisation requirement. It is a different matter that such a cross-border move involves considerable administration, costs and time – but some market players are already saying that the move is worth it.