Since COVID, we have been living with a rule that makes the acquisition of ownership by foreigners in certain Hungarian companies operating in strategic sectors subject to government approval. Although we can no longer speak of a state of emergency, the rule is expected to stay with us for long – albeit with several modifications along the way, as happened in January this year.
According to the basic concept, if a foreign person (whether from the EU or a third country) intends to acquire a certain level of ownership in a Hungarian strategic company, they are required to notify (essentially to obtain approval) from the Ministry for National Economy, responsible for domestic economic matters. The threshold above which approval is needed depends on the origin of the investor. For a third-country investor, it can be as low as 3%, while for an EU/EEA party, majority control is generally required. The obligation for approval applies only to companies engaged in activities specified by law in certain strategic sectors. However, the list of these sectors in the relevant regulation is so broad that the approval requirement may arise even in seemingly straightforward transactions involving foreign buyers.
Furthermore, for several years, we have been living with an additional set of rules requiring approval from another authority, currently the Prime Minister's Cabinet Office, for acquiring stakes in certain highly strategic sectors (e.g., telecommunications, energy supply, or the financial sector). This means that for the completion of a given transaction, approval from two state authorities may be necessary.
The M&A profession has not been overly enthusiastic about this regulatory framework from the beginning. A foreign investor often thinks twice before entering into an acquisition process that ultimately depends on state approval. This is especially true considering the risk that they may not be able to later sell the acquired company to another foreign buyer. Moreover, in recent times, there has been an increase in negative responses from ministries – sometimes in transactions that seemingly do not violate national security interests.
In this situation, a recent legal amendment has come, clarifying the interpretation of certain detailed rules.
Foreign transactions do not, but intra-group deals do need approval
For a long time, there has been a debate about whether a transaction is subject to approval in Hungary if it only indirectly involves a Hungarian company. For example, if there is a change in ownership affecting an international corporate group, and the group includes a Hungarian entity, does the transaction trigger the approval requirement in Hungary? While neither the legislator nor the authorities previously provided a clear answer to this question, it now seems to crystallize that the sale of a foreign company does not trigger the approval requirement – even if the foreign company has ownership in a Hungarian entity in a strategic sector.
At first glance, it seems that a new loophole has opened. If a Hungarian company is sold through a foreign parent company, the approval process could be bypassed. However, two things need to be considered with caution. First, it cannot be excluded that the ministry will interpret this rule not formally, but according to its purpose. If, for example, a Luxembourg parent company is sold, and the Hungarian subsidiary is the only asset of the Luxembourg company, that Hungarian authorities may attempt to bring such a sale under the approval requirement (applying the principle of legitimate exercise of rights), even if it may lead to serious legal disputes. Second, the amendment that came into effect in January explicitly states that the approval requirement still applies, regardless of whether the transaction occurs within the corporate group. This means that if someone directly owns a Hungarian company and wants to transfer it to a Luxembourg parent company within the corporate group, such a sale is now clearly subject to approval. The question is how permissive a Hungarian authority will be in the case of an intra-group restructuring, considering that the current Hungarian corporate assets will inevitably become part of a foreign company.
Relocation still works
The law still does not contain restrictions or approval requirements regarding a Hungarian company "moving" out of Hungary – even if it relocates its registered office outside Hungary. In such cases, by becoming foreign, the Hungarian company falls outside the scope of the law, and a subsequent sale of such company is no longer subject to Hungarian approval requirements. The practice also shows that the emigration of certain Hungarian companies has already begun.
However, such a transformation can be cumbersome in many respects, and the practicalities need to be considered before embarking on it. First, in itself, this is a lengthy process that can take up to 9-10 months. Second, if, despite being registered and headquartered abroad, the company wishes to continue its activities in Hungary, suitable legal forms and tax solutions must be found. Thus, it may even be the case that the company jumps from the frying pan into the fire. Approval requirements are not contained only in Hungarian laws. It is possible that the company may escape the Hungarian regime but fall under the approval requirements of another country with a similar nature.