According to the law passed upon the end of the state of danger, until 31 December this year, a foreign direct investment (FDI) to a company operating in a strategic industry will require prior approval of the Ministry for Innovation and Technology (ITM).
The concept of the law is that the foreign investor performing an FDI related to a strategic company as defined in the law shall report the transaction within 10 days upon signing the agreement to the ITM. The Minister then examines the notification within 30 business days and if such examination proves that
- the transaction violates or jeopardizes Hungary’s state interest, public security or public order;
- the investor is controlled by a state outside the EU;
- the investor has already been involved in an EU Member State in an activity related to public security or public order;
- there is a risk that the investor will carry out illegal activity
then the transaction will be forbidden, otherwise the Minister will pass a written resolution on the acknowledgement of the transaction.
A strategic company is a Hungarian limited liability company (kft) or company limited by shares (both private [zrt] and public [nyrt]) whose activity belongs to the energy, transport or communication industry or to a strategic industry defined by Article 4 Paragraph 1 of the EU Regulation 2019/452 (save for financial infrastructures) and, on the other hand, one of its registered activities is listed in the Government Decree implementing the new law. This Decree lists many categories according to NACE (e.g. manufacturing pharmaceuticals, retail trade, telecommunication, manufacture of machinery, manufacture of food products, IT services, construction of buildings, storage, food service and temporary employment agency activities) but if one of the registered activities of the company is on the list then it does not mean that it qualifies as a strategic company: it is necessary also that the activities of the company belong to a strategic industry which is specified by the law and the aforesaid EU Regulation. For instance, a webshop operator, though performing IT services, will not necessarily qualify as a strategic company but if it processes sensitive health data then it will enjoy protection based on the EU Regulation. Similarly, not all food manufacturers will be strategic companies but if the cease of production at a company would imply a risk of food insecurity then it shall be considered a strategic company. Therefore, careful consideration and analysis shall be carried out when answering the first question.
A foreign investor is a citizen of, or an organization registered outside a member state of the EU or the EEA or Switzerland or a company registered in Hungary, the EU or EEA or Switzerland whose majority owner is one of the foregoing.
According to the law, an FDI may be realized by:
- transferring ownership (including providing contribution in kind);
- increase of capital;
- transformation, merger or split;
- issuing convertible bonds or bonds providing pre-emption rights;
- creating usufruct right on a share or a quota.
It shall be noted that the law is not applicable to investments made by the foreign investor to its Hungarian subsidiary.
According to the general rule, only FDI exceeding 350 million HUF that result in the investor acquiring at least 10% of (direct or indirect) interest are subject to the screening regime. However, irrespective of their value, investments by foreign investors acquiring an interest exceeding 15 %, 20% and 50% or 25 % if acquired by more than one foreign investor, also require the approval of the Minister. As you can see, in case of investments in multiple stages, it is possible that several consecutive notifications will be necessary. Moreover, all FDI exceeding HUF 350 million shall be reported when (direct or indirect) dominant influence is acquired by:
- a company registered in Hungary, a member state of the EU or the EEA or Switzerland that is controlled by an organization registered outside the aforesaid countries or a citizen of such third country; or
- an organization registered in a member state of the EU or the EEA or Switzerland; or
- a citizen of a member state of the EU or the EEA or Switzerland.
It shall be noted that even EU investors, related to a limited range of investments, are subject to the reporting procedure.
The reporting obligation is applicable also to the transfer of assets, rights of use or rights to operate essential for activities belonging to a strategic industry provided that the acquiror is a foreign investor or an organization where the foreign investor has (directly or indirectly) dominant influence.
During the process, it is obligatory to be represented by a lawyer and all communication shall be performed electronically. The decision of the Minister that forbids the investment may be challenged before the Metropolitan Court of Appeal (Fővárosi Törvényszék) and the court shall resolve on the case within 30 days upon submission.
An investor failing to notify the Minister may be fined up to twice the value of the transaction. Even in such a case, the ITM will perform the analysis of the transaction and eventually may subsequently forbid it. This is relevant because an agreement or a company resolution against the law or concerned by the forbidding resolution shall be deemed null and void, thus, an investor who intends to conceal a strategic investment must pay a huge price for it. Consequently, the investor may be registered in the book of shares or the list of quota holders of the strategic company only upon acknowledgement of the notification by the Minister and without such confirmation he may not carry out membership rights.