It’s been almost a year since the obligation to report certain acquisitions of property by foreigners in Hungary was introduced. Since May last year, foreign persons can only acquire interest of a value exceeding one million EUR in strategic companies subject to reporting and the Ministry’s acknowledgement. Though at first, many had reservations regarding this authorisation obligation, which is based on the Italian practice and is one of the strictest regulations in Europe, by now it has become a concept integrated into the company acquisition market. We have summarised the experiences of the past one year.
The authority’s approach
At first, many were apprehensive of the authorisation obligation, as its rules, vague in several respects, essentially gave discretionary powers to the Minister for Innovation and Technology to intervene into the business intentions of the operators of the company acquisition market. Fortunately, however, the first experiences made these fears appear misplaced.
As far as we are aware, the authority has only prevented acquisitions on a couple of occasions, and the majority of requests went through the screening easily. Moreover, in a number of cases the authority concluded that the given transaction was not even subject to the authorisation obligation.
Over time, however, the process of authorisation changed significantly. While at first, market operators encountered a quick procedure that was more or less just a formality, the authority’s approach seems to be getting more cautious lately. Several transactions saw the authority interviewing the parties separately in order to learn about the conditions of the deal and assess the parties’ intentions with the transaction. On occasion, the authority also examined conditions of the transaction (e.g. the fate of certain state subsidies) that were not related to the subject-matter of the authorisation in the narrow sense. This, obviously slowed down the process of authorisation, and market operators had to wait months for the Ministry’s approval in several cases.
What we have learned over time
Both the subsequent legislative changes and authority interpretations helped clarify the rules of authorisation. For example, the law replacing the original Government Decree in October pronounced that a transaction didn’t need to be reported if only an indirect change of ownership is carried out (i.e. the transaction takes place with regard to the parent of the company).
In the meantime, it has become clear which interest acquisitions the restriction applies to. Accordingly, a transaction is only subject to the authorisation obligation if the company concerned by the transaction fits a dual system of criteria. On the one hand, the company has to operate within one of the so-called “strategic sectors” (such as the energy, transportation, healthcare or communications sector), and on the other hand, it has to conduct one of the activities listed in a separate Decree. The rules still carry certain uncertainties within them, however. Does a company qualify as “strategic” if it manufactures or sells parts for the car industry (which is, strictly speaking, a part of the transportation infrastructure)? Authorities believe that the answer to this question Is affirmative, even if such interpretation expands the scope of the authorisation obligation.
And what we haven’t as yet
Grey areas still remain with regard to the interpretation of the rules, however. For example, it still remains unclear whether the transaction has to be reported when it takes place between related parties, i.e. where the ultimate owner doesn’t change. A transaction between related parties would not fit the purpose for which the regulation was created, but no official confirmation has been received so far in this matter.
How much longer still?
It is also possible that the authority’s position will never be clarified as, based on the present text of the legislation, the authorisation obligation will cease at the end of June. This final deadline, however, should be taken with a grain of salt. The end date of the authorisation obligation has already been extended twice, compared to the original date of 31 December 2020. As such, there is still no guarantee that we will be discharged from facing the Ministry in the short term.
Fortunately, however, it is clear that the authorisation obligation did not result in any serious hurdles for company acquisition transactions. The exceptionally high activity of M&A markets shows that by now, the authorisation obligation and its timing has become something that the decision-makers take into consideration when launching their Hungarian deals.