National security screening introduced for foreign investors in Hungary
The Hungarian Parliament has adopted new rules on the national security review of foreign investments, which are highly relevant for all investors in Hungary coming from outside the European Economic Area or Switzerland. The new rules will enter into force on 1 January 2019 and are applicable for transactions established (typically: where signing occurred) on or after that date.

1. Which transactions fall under the scope of the new rules?

The following transactions require ministerial approval (and thus may not be implemented before such approval is granted) under Act LVII of 2018, the Security Review Act – SRA):

  • the investor qualifies as a foreign investor; and
  • the relevant transaction relates to certain specific sectors as listed in the SRA; and
  • the relevant transaction qualifies as a triggering event.

 

  1. Foreign investor

The SRA only applies to foreign investors, which are defined as any natural person or legal entity resident/registered in a country outside of the EU, EEA or Switzerland (Foreign Investor).

In addition, even a “non-foreign” legal entity wishing to engage in a relevant transaction can fall under the scope of the SRA, if a Foreign Investor has majority control (under Hungarian civil law) over that “non-foreign” legal entity (Indirect Foreign Investor).

  1. Relevant sectors

The SRA only applies if the current or planned activities of the Hungarian target company relate to certain strategic activities as listed in the SRA (Strategic Activities). These are activities typically relevant to national security, such as defence, dual use products, cryptography and wire-tapping products, financial services, energy, government registries and electronic communications.

  1. Triggering events

The SRA becomes applicable if case any of the following triggering events under a), b) or c) occur.

A Foreign Investor

  1. in an existing Hungarian company
  • acquires solely or together with other Foreign Investor(s) a ‘direct or indirect’ ownership share exceeding 25% (10% in the case of a publicly listed company); or
  • acquires a ‘dominant influence’ within the meaning of the Hungarian civil law rules; or
  • the ownership share of the Foreign Investor already exceeds the 25% and wishes to extend the scope of activities of this Hungarian company to Strategic Activities or wishes to obtain a right to operate or use infrastructure/assets that are indispensable for carrying out Strategic Activities;

 

  1. founds a new  Hungarian company where the ownership stake of the Foreign Investor will exceed 25 % (10% for publicly listed companies); or

 

  1. registers a branch office in Hungary for the purpose of carrying out Strategic Activities.

 

2. What is the procedure and the substantive basis for a decision?

A transaction where the above three criteria are met has to be notified to the competent minister before implementation.

The notification shall be reviewed by the competent minister within 60 days (extendable by 60 days) from the date of filing. The minister has the power to block a transaction provided that it “harms Hungary’s security interests”. In case of Indirect Foreign Investors, a blocking decision can only be made, however, if it can be established that the transaction aims to obscure or prevent the possibility to inspect the possible harm to Hungary’s security (i.e. to circumvent the screening rules). This could be the case, in particular, if the “non-foreign” entity can be considered as a mere “vehicle” or “shell”, ie where it does not carry out any actual economic activities.

The blocking decision may only be challenged in front of courts either on procedural grounds or in case of the special blocking decision for Indirect Foreign Investors. As a result, the SRA does not allow companies to challenge the minister’s conclusions on substantive grounds, i.e., on the basis that transaction would not “harm Hungary’s security interests”.

 

3. Are there any sanctions non-compliance?

If an otherwise notifiable transaction is implemented in the lack of or contrary to a ministerial decision, a fine shall be imposed. The amount of the fine may be up to HUF 10 million (approx. EUR 30.000) for legal entities and HUF 1 million (approx. EUR 3.000) in case of private individuals.

In addition, if no prior screening was made, the competent minister shall also make a decision on the merits of the transaction. This entails that even if the transaction was not notified, it may still receive an approval if the relevant national security criteria are met.

If, however, the transaction is rejected after implementation, the minister has the right to impose remedies on the Foreign Investor, which may include the forced selling of the relevant shareholding, the liquidation of the target and a modification of the scope of activities. If the Foreign Investor is obliged to sell the shareholding, the Hungarian State has a pre-emption right.

Importantly, there is also a time-limit for intervention: the right for intervention lapses if the case if not pursued by the minister within 6 months of becoming aware of the breach or if 5 years have passed since the transaction has been implemented.


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