The global pandemic has impacted all markets, with subsequent ramifications for M&A. Investors are now seeking greater protection against general lock-downs and supply-chain disruptions, while governments aim to protect critical supplies and services by imposing new regulations on foreign investment in crucial or strategic industries. If you are considering investment opportunities in Hungary, take a look at this overview to get insight into the regulations on foreign investment in strategic industries.
The following overview is an extract from the Foreign Direct Investment in Central Europe publication, which gives insight into the regulations on foreign investment in strategic industries in the region.
Have FDI screening rules been implemented (or will they be implemented) in the country?
Yes. The Hungarian Parliament adopted Act LVIII of 2020 on the Transitional Regulation Related to The Cessation of The State of Emergency and The Epidemiological Preparedness (hereinafter “the Act”), applicable as of 18 June 2020, provides, inter alia, special provisions regarding the FDI, which shall apply until 31 December 2021.
Definition of FDI
For the purposes of the Act, any of the following type of transactions qualify as an investment:
transfer of shares or quotas of strategic companies;
transfer of essential assets of strategic companies;
capital increase in strategic companies;
transformation, merger or demerger of strategic companies;
issuing bonds in strategic companies;
establishment of usufruct rights on shares or quotas of strategic
Definition of foreign investor
According to the Act, a foreign investor is a citizen of / a legal person established in:
a Member State of the European Union,
a country of the European Economic Area,
the Swiss Confederation or
a third country,
who intends to make a transaction, which falls under the scope of the Act.
Do the following scenarios trigger the screening?
1. Acquisition of 10% or more of voting rights in the company: Yes
2. Establishment of a new branch: No
3. The production of new products: No
4. Establishment of a new company in which foreign investor will have more than 10% voting rights: No
5. The transfer of use or operational rights in infrastructure or assets that are indispensable for the operation of strategic companies: Yes
6. Other screening triggers: N.A
Deadline for notification of the relevant screening body
The official language of the procedure is Hungarian and the notification needs to be filed with the Minister of Innovation and Technology within 10 days of the date of the transaction. During the whole process legal representation by a Hungarian attorney at law is mandatory. The notification shall contain certain data of the foreign investor, the detailed description of the transaction with the relevant circumstances and the complete set of documentation regarding the referred transaction.
The Minister of Innovation and Technology reviews the transaction. The decision on the review is limited to whether the FDI poses a threat to state interest, public security or order of Hungary, in cases where it affects strategic companies. Government Decree No. 289/2020. (VI. 17.) (including, but not limited to,: the chemical sector; the communication sector; the energy sector; the financial sector; transportation and logistics) and points a)-e) of para. 1 of Article 4 of the Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (including, but not limited to,: critical infrastructure, physical or virtual, including infrastructure in the fields of energy, transport, water, health, communications, media, data processing or data storage, the aerospace sector, and defense, electoral or financial infrastructure and sensitive facilities, as well as land and real estate, which are essential for the use of such infrastructure or land and real estate located in the vicinity of such infrastructure; the supply of critical resources, including energy or raw materials, food safety, medical and protective equipment; and freedom and pluralism of the media, but excluding financial infrastructure) determines the scope of strategic companies.
In determining whether a FDI may affect state interest, public safety order, the Minister takes into account, in particular:
whether the foreign investor is directly or indirectly under the control of the government, including state authorities or the armed forces of a third country, including through an ownership structure or significant funding;
whether the foreign investor has already been involved in activities that affect security or public order in a Member State;
whether there is a serious risk that the foreign investor is engaged in illegal or criminal
The Minister shall, no later than 30 working days after the receipt of the notification - if the specified circumstances do not apply - acknowledge the receipt of the notification in writing. If the specified circumstances exist, the Minister prohibits the transactions, which decision the Minister is obligated to argue. Under special circumstances, the Minister can extend the deadline with 15 days. The applicant can contest the prohibition decision.
Are fines or other penalties prescribed due to failure to notify the FDI?
Yes. If an investor fails to notify the Minister of a transaction, which would fall under the effect of the Act, the Minister can impose a penalty. In case of natural person foreign investors, min. 100 000 HUF, and in the case of a legal persons or other organizations, the amount of the penalty is the minimum of the 1% of the last business year's net sales' of the strategic company involved in the transaction. In both cases, the maximum amount of the penalty is up to twice the value of the transaction. Moreover, as specified by the Act, the transaction will be deemed as null and void.
Additional comments on FDI review aspects (e.g. any peculiarities, exemptions, broader definitions etc.).
No inspection or infringement proceedings may be instituted for failure to notify, if 6 months have passed since the Minister became aware of the transaction, but at the latest 5 years after the circumstances. According to recent changes, the provisions described above shall no longer be applicable to intra-group transactions.
By Peter Gondocz, Partner, Deloitte Legal Gondocz and Partners