Foreign investment screening regimes in Hungary (consolidated / updated october 2020)

Within the framework of emergency measures stemming from the COVID-19 epidemic, the Hungarian Government introduced sweeping changes to the foreign investment screening rules (Decree no. 227/2020 concerning the necessary measures for the protection of companies seated in Hungary – the “Government Decree” – and the subsequent Act No. LVIII of 2020 – the “Act” – which Act transplanted the provisions of the Government Decree into the legislation applicable in the post state of emergency period, i.e. from 18 June 2020). The Government Decree and the Act are hereinafter jointly referred to as the “FDI Legislation”.

There have been already similar measures introduced in January 2019 in Hungary (see our blogpost for details). The new FDI Legislation however, now significantly broadens the material scope of the relevant transactions ("triggering events") and allocates the approval procedure to the Ministry for Innovation and Technology (as opposed to the Ministry of the Interior). The measures are effective from 26 May 2020 (for all transactions concluded from that date) and are currently scheduled to last only temporarily, until 31 December 2020.

According to the new FDI Legislation, those transactions require ministerial approval (and thus shall not be implemented before such approval is granted) where

1. the investor qualifies as a (non-EU / non-EEA / non-Swiss) “foreign investor” or an investor from the EU, the EEA or Switzerland,
2. the relevant transaction qualifies as a triggering event, and
3. the triggering event concerns a strategic company.

The scope of “foreign investors” includes both all individuals, companies and other legal entities from countries outside the EU, the EEA and Switzerland, as well as entities seated within the EU / EEA or Switzerland if they are “majority influenced” by entities outside of such territories.

Importantly, the FDI Legislation includes in its scope entities from the EU, the EEA and Switzerland (even in the absence of foreign majority influence), however, ministerial approval is required only for a narrower scope of transactions if the acquirer is from these territories. 

A transaction qualifies as a triggering event (and thus is subject to obligatory notification as per below), if, as a result of the transaction:

• an EU / EEA / Swiss investor (in which no foreign investor has a majority influence) would acquire (directly or indirectly through another Hungarian entity) a majority influence in a strategic company, provided that the overall value of the investment reaches or exceeds HUF 350 million (approx. EUR 1 million),
• a foreign investor would acquire (directly or indirectly through another Hungarian entity) at least 10% of all shares, provided that the overall value of the investment reaches or exceeds HUF 350 million (approx. EUR 1 million),
• the foreign investor increase its shareholding in a strategic company to 15%, 20% or 50% or if the joint shareholding of all the foreign investors would exceed 25% in a strategic company, or
• the foreign investor would acquire the right of operation (including transfer, assignment or encumbrance) in any indispensable infrastructure. This last provision pertains to asset deal type of transactions.

The Act - very importantly - introduced one substantial change compared to the Government Decree by excluding from the scope of triggering events those transactions in which the foreign parent company of a Hungarian strategic company is the target. This means that no ministerial approval is required if a foreign investor or an investor from the EU / EEA / Switzerland acquires the above explained percentage of shares in a Hungarian strategic company in an indirect manner, i.e. by performing any of the transactions qualifying as a triggering event with respect to a foreign parent company.

Strategic companies are defined in a very broad manner from the perspective of the activities they perform. The scope of strategic companies includes companies having activities in energy, transport and communications (but also chemical, finance, pharma, construction, certain IT etc.). The list of the relevant activities that are covered are contained in a separate government decree.

If a transaction fulfils the above criteria and qualifies as a triggering transaction, the transaction has to be notified to the Minister within 10 days from the occurrence of the triggering event (eg the signing of the contract forming the basis of the acquisition of majority influence). In the absence of an acknowledgement from the Minister, the new shareholder cannot be registered in the company registry and for any breaches of the Government Decree, the Minister may also impose fines (up to twice the transaction value).

Upon notification, the Minister examines the transaction from a substantive perspective. Under the Government Decree the Minister is obliged to prohibit the transaction, if:

• the triggering event is likely to jeopardise or harm the interests of the Hungarian state, the public security or the public order, or
• the applicant is (directly or indirectly) under the scrutiny and control of any administrative entity of a state outside of the EU, the EEA or Switzerland, or
• the applicant already participated in activities concerning public security or public order of any EU member state, or
• there is a high risk that the applicant will undertake illegal or criminal activities.

The prohibition decision must be reasoned and has to be brought within 30 days from the date of notification (which deadline can be prolonged once with 15 days). There is a possibility of a (rather limited) judicial review against a prohibition decision by the Minister to the Metropolitan Court.