Monitoring of foreign investments in strategic sectors in Hungary

On 11th October 2018, Act LVII of 2018 on the control of foreign investments conflicting with Hungary’s security interest was published in the Hungarian Gazette. The act provides for significant restrictions on foreign investors intending to invest in certain strategic sectors in Hungary, as defined by the new act. Pursuant to the new act, entering into force on 1st January 2019, the implementation of an investment will be subject to a notification addressed to the appointed minister and the minister’s acknowledgement of such notification in the following cases. Notification will be required if a foreign investor wishes to acquire an equity interest exceeding certain thresholds, in a company incorporated in Hungary and manufacturing weapons and ammunition, dual-use products or secret service instruments, or engaged in electricity, natural gas, water utility or telecommunication services, or in the development or operation of state and municipality IT systems, or pursuing certain financial service activities.

We emphasize though that a separate government decree will specify the specific activities within the aforementioned areas of activities, in respect of which a notification will indeed have to be made to the minister. As far as electricity, natural gas, water utility and telecommunication services are concerned, the government decree is permitted to determine activities only that directly affect critical system element of Hungary or the European Union.

In general, the new law affects investors, that are not citizens of or incorporated in the European Union, the European Economic Area or the Swiss Confederation. However, it is important to point out that the scope of the new act also covers legal entities, that are registered in one of the aforementioned states, but a person not resident in the above-mentioned states is exercising dominant influence over them.

The notification obligation will apply to foreign investors only if they intend to acquire a decisive influence or a direct or indirect equity interest of more than 25% (or more than 10% in case of public company limited by shares) in a company performing any of the strategic activities defined above. Furthermore, the notification will also have to be made in the event the acquisition at hand would result in the increase of the total share of all foreign investors in the company concerned above the applicable thresholds.

In addition, a notification will be required if the foreign investor intends to establish a Hungarian company with its decisive influence or with its more than 25% equity interest (or with its more than 10% shareholding in case of public company limited by shares). The establishment of a branch office in the strategic sectors concerned will be subject to a notification. Also, a notification will have to be made if a foreign investor wishes to obtain the operation right of infrastructure, equipment and assets critical to carry out the affected strategic activities.

The new act specifically applies if a company – in which a foreign investor has a decisive influence or an equity interest in excess of the abovementioned thresholds – subsequently subscribes for any of the affected strategic activities. The newly subscribed activity may only be commenced after the minister has issued its acknowledgement of the notification.

A government decree to be issued according to the authorization included in the act will appoint the acting minister, who will (i) either acknowledge the notification and confirm the acknowledgement to the applicant in writing, or (ii) prohibit the acquisition of the share or the operation right, the establishment of the branch office, or the commencement of the new activity, if it violates the security interest of Hungary. The new act allows for legal remedy against the minister’s prohibitive decision to very limited extent; such decision may be challenged before court primarily on grounds of breach of procedural legal provisions.

Any request for the registration in the share register or the quotaholders’ list may be submitted to the management of the company falling under the scope of the new act after the minister has issued its acknowledgment of the notification. Furthermore, contracts aiming at the acquisition of operation right will enter into effect upon the minister’s acknowledgement. In addition, the minister’s acknowledgement will be a condition precedent to passing decisions in procedures pertaining to the approval of the acquisition of shareholdings, or the licensing of activities in strategic sectors. This means that the confirmation containing the minister’s acknowledgement will have to be attached in advance in the relevant company registration procedures and licensing procedures.

According to the act an authority will be appointed to inspect compliance with the provisions of the act. If it is established during the inspection that the notification obligation has not been complied with, natural persons may be fined up to HUF 1,000,000, whereas legal persons may be fined up to HUF 10,000,000. In addition, it will be examined whether the acquisition of the equity interest or the operation right, the establishment of a branch office, or the pursue of the new activity conflicts with Hungary’s security interest. If not, the minister will confirm the acknowledgement of the notification, otherwise it will issue a prohibitive decision and – in case of acquisition of equity interest and branch office establishment – call the foreign investor to sell its equity interest, terminate the branch office, or amend its activity within a three-month deadline.

The new legal provisions will be applicable to transactions entered into, and official procedures and inspections commenced after the entry into force of the new act.