The new Civil Code that came into force a couple of years ago broadened the autonomy of companies, which are now free to shape their internal organisation and operation to their own needs. Nevertheless, there are still several lesser-known, rigid company-law rules that, if ignored, can entail severe legal and financial consequences.

Ownership interest in a Kft. – when can you sell it?

Often it can be important to complete corporate transactions quickly after one another, especially if the parties have a deadline to meet. An example was the deadline by which monies kept abroad could be brought home in a tax efficient manner.

In one such case, in the first step, a company registered in a tax haven increased the registered capital of a Hungarian limited liability company, and then the Hungarian individuals behind the structure bought the ownership interest created by the capital increase. The capital increase and the purchase of the ownership interest took place on two consecutive days, so that the transaction could be completed by the statutory deadline for claiming the tax benefit.

The court of registration, however, did not register the purchase of the ownership interest. The court argued that the ownership interest created by the capital increase came into existence on the day the capital increase was registered, and was only transferable after that. The court of registration made this decision despite the fact that the new member (the foreign company) paid the amount of the capital contribution on the day of the capital increase, and was entered into the company’s members’ list on the day of the capital increase. As the position of the court of registration was upheld by the higher instance during the appeal procedure, the ownership interest could only be acquired after the statutory deadline, and the transaction was thus subject to tax.

When do you become a shareholder?

Under the rules on securities, any right related to securities may only be exercised if a person is in possession of the securities. This rule also applies to the holders of shares: contrary to popular belief, which is that a shareholder may exercise his rights once he has been entered in the share register, a shareholder cannot in fact exercise his membership rights until his shares are printed out or otherwise created. The related consequences can be serious.

In the case in question, an investor became a shareholder in a private company limited by shares as a result of a capital increase. Out of carelessness, the parties did not pay enough attention to creating the shares of the investor, and consequently, this did not in fact happen. Over time the relationship among the shareholders soured and they began to have conflicting interests. The company’s earlier shareholders had a short-term outlook and wanted to take substantial dividends at the end of the year, which the new investor opposed and could have stopped using the votes associated with his shareholding. However, at the general meeting that decided on the dividends it became clear that the investor’s shares had not been created, and thus the investor could not exercise his voting rights at the meeting. Therefore, the company’s original shareholders used their own votes to pass the resolution on the dividends. Although the investor went to court against challenging the resolution, he lost the lawsuit.

One of the lessons to be drawn from this decision is that even with a thorough procedure, a new shareholder of a company limited by shares runs the risk of having limited voting rights until his shares acquired in a capital increase are issued (which can take months). Therefore, it may be reasonable to deal with this matter in a shareholder’s agreement among the parties.

Joint signature: bound at the hip

Companies may decide to grant joint signing rights to their executives. In such cases all contracts entered into on the company’s behalf must be signed by two directors having signing rights, otherwise no valid legal statement can be made on the company’s behalf. The question is, can the company still be represented by its senior officers individually? For instance, if the given company exercises ownership rights in another business (e.g. by attending a general meeting), is it necessary for the two representatives to jointly attend that general meeting?

The issue recently assumed critical significance at the general meeting of a group of companies contemplating a demerger. At the meeting, the shareholders decided in favour of the demerger and approved the related documentation. One of the shareholders, however, was only represented by one of its senior officers with joint signing rights. The court of registration found that the general meeting could not pass valid resolutions as the shareholder in question was not lawfully represented. The law states that a company’s written and verbal representation cannot be separated; representation rights can only be exercised in the same manner both verbally and in writing. Therefore, if the officers have joint signing rights, they also have to attend the general meeting jointly. In this particular case this irregularity meant that the court of registration could not register the demerger at the date planned by the company, which resulted in a significant loss and additional expenses.

Conclusion

There may be a new Civil Code in force, but when planning a corporate transaction, the parties still need to concentrate on even the smallest details. Otherwise they may be in for some nasty surprises.