Since 2014, the “new” Civil Code has allowed companies to deviate from statutory rules in terms of their operation and organization. Up until now, however, it wasn’t clear what was included and what wasn’t: what they could actually deviate from and what they had to adhere to. A new amendment expected to enter into force in January next year will clear the rules up while also easing them off at the same time, thus increasing Hungary’s competitiveness in terms of company law as well.
Quotas, shares – bringing down former taboos
Some of the new rules taking effect in January go against previous judicial practice. For example, the Civil Code amendment stipulates that a single member of a Hungarian limited liability company can own multiple business quotas. Previously, the courts permitted no deviation from the “one member – one quota” rule. (A quota is not a share, so this possibility is precluded by definition.) The new amendment may solve several problems previously thought to be insoluble for both capital investments and limited liability companies in general. For instance, it will allow members to encumber only part of their business quotas. It will also allow founding quotaholders to become co-investors in the course of an additional capital investment, and thus to wear multiple hats at the same time. In this case, one can acquire a business quota with additional rights as a co-investor even if one does not enjoy benefits of the kind as a founder. Another good example is the case when a quotaholder acquires a quota that bears different rights. From January, this quotaholder will be entitled to keep these rights and does not have to consolidate the two quotas.
In the case of companies limited by shares, the law has previously set up restrictions for the minimum extent of ordinary shares (they had to exceed half of the registered capital), while it determined the maximum extent of employee shares and interest-bearing shares in 15% and 10% of the registered capital respectively. The judicial practice never ventured to allow deviations from these provisions. The amendment will lift these restrictions, thus leaving more room for creating a more flexible registered capital structure.
Easing off and clarifications in corporate governance
The organizational structure of corporations will become more flexible as well. This way, it will be possible to elect a legal person as a supervisory board member. Only a few have dared to experiment with this until now, even though there has been a demand for it.
Previously, it posed a lot of problems that the law prescribed a minimum three-day interval for the earliest holding of the general meeting repeated due to the absence of a quorum and specifically prohibited any deviations from this rule. From next year, however, it will be possible to hold the repeated meeting of the company’s supreme body even on the very same day if the majority required for decision-making is not present.
The ease off also appears in the decision-making of the Board of Directors. The Civil Code currently allows no deviation from the rule that the Board of Directors shall pass its resolutions by simple majority of those present. This way, in principle, the solution of having the chairman’s vote decide in the event of a tie vote could not be applied either, even though it is applied quite frequently in practice. This facilitation may help resolve disputes and standoffs within the Board of Directors.
Simpler supplementary contribution
Supplementary contribution (when a quotaholder pays into the company’s capital reserve without capital increase) offers flexible solutions for corporate financing. Previously, the law only permitted this solution in the case of limited liability companies. Therefore, there was uncertainty whether a company limited by share could apply this method, taking advantage of the permissive provision. The new amendment will explicitly permit it and it will also clarify that supplementary contribution cannot only be made in cash, but also in kind (for example by assigning claims).
As a general rule, supplementary contribution may only be applied if the company’s provide for it. This rule, however, added unnecessary complications to administration in the case of single-member companies. What’s the point if there’s no need for the consent of the other members? The new rules will clear this up, too, and it will no longer be mandatory to incorporate these provisions into the establishing document or the articles of incorporation, the founding member will be able to freely decide on supplementary contribution.
Competitiveness grows – but there’s still a lot to do
An obvious aim of the new rules is to further improve the country’s ability to attract capital. Yet, looking at the new provisions, we still don’t feel like everything is fully covered. For example, the rule setting the minimum amount of a business quota in a limited liability company in HUF 100 000 continues to cause many problems. Case law is obvious: no deviations allowed. This means that if one wishes to make a capital contribution of HUF 1000 in a Hungarian company, he still needs to establish a company limited by shares or settle for a joint business interest. But as we know, sharing might not equal caring in this case...