Exits from family-owned small and medium-sized enterprises (SMEs) have been on the rise in recent years due to the fact that the senior generations building up their companies are close to retire. Oppenheim has advised numerous domestic and international investors with respect to their investment in Hungarian family-owned small and medium-sized enterprises, also in the course of full acquisitions and also establishing some form of joint venture structures.
Drawing upon our extensive experience in this sector, Zoltán Kolodzey (Counsel, M&A Practice Group) and Helga Lieszkovszky (Senior Associate, M&A Practice Group) provide a comprehensive summary of the key legal and commercial takeaways from these joint-venture transactions, offering practical guidance for investors and founders alike.
Considering a W&I Insurance
When investing in a family business to create a joint venture, both parties’ primary objective is to establish a long-term, mutually beneficial and seamless cooperation that minimises the risk of disputes. Negotiating the warranties section of the share purchase agreement and the mechanism for claims for the breach of such warranties can be particularly complex, as any potential warranty claims will typically arise after the parties have already become joint venture partners. In this context, it is important to note that, under Hungarian law, warranty obligations address defective performance and are intended to compensate the non-defaulting party for any resulting loss in value due to the defective performance.
In order to avoid a lengthy dispute in connection with a warranty claim that could potentially harm the parties’ cooperation, we strongly recommend that the parties consider obtaining a warranty and indemnity insurance (W&I Insurance) to cover the investor’s potential claims. The costs of W&I Insurance considerably decreased in the past few years, making W&I Insurance an accessible and effective tool in managing liability claims. Furthermore, W&I Insurance provides comfort to founders who may be reluctant to accept extensive warranty exposure, whilst simultaneously providing investors with recourse to a creditworthy counterparty. Splitting the costs of the W&I Insurance could mean that the parties’ costs in connection with liability claims are foreseeable. Additionally, the claims process under a W&I Insurance policy is typically handled by experienced insurance professionals, which can help preserve the commercial relationship between the joint venture partners.
Should the parties wish to obtain a W&I Insurance, Oppenheim has experience in advising clients throughout the entire process: obtaining offers, coordinating communication with insurance brokers, managing the underwriting process and providing advice in the course of concluding the insurance policy.
Control over the joint venture’s decisions
Decision-making is one of the hardest - if not the hardest - topics to negotiate regarding joint ventures. This tension is particularly pronounced in family-owned SMEs, where founders have often built the business over decades and have strong emotional attachments to maintaining influence over strategic direction. While the founders, who are often family members, wish to keep some control over decisions, the investor wants control to safeguard its investment. From our experience, investors often seek to consolidate the joint venture for accounting and reporting purposes; and therefore, certain requirements with respect to control must be met, which requires a careful analysis and advice from a financial / tax perspective as well.
From a control perspective, the founders usually require visibility over the decisions of the management of the joint venture; therefore, a board with members appointed by both parties could be a viable tool. The composition and powers of such a board should be carefully negotiated, including matters such as quorum requirements, voting thresholds, and the allocation of board seats.
Since founders of family businesses usually have less financial power than institutional investors, they typically require that their right to receive dividends is safeguarded against an investor that does not require annual distributions for financial stability. This can be addressed through minimum dividend policies, provided that the distributions based on such policy do not jeopardise the company's working capital requirements or breach any financing covenants. Founders may also seek to negotiate anti-dilution protections and pre-emptive rights to ensure their economic interest is preserved in the event of future capital raises.
Resolving deadlocks
As mentioned earlier, decision-making is one of the most negotiated topics during the setting up of joint ventures. Hungarian law provides limited statutory guidance on deadlock resolution, making contractual provisions even more critical. Resolving deadlocks could especially be complicated to regulate in joint venture agreements. In non-material or operational questions, generally, one of the parties is provided the right to resolve on the matter giving rise to the deadlock. Other deadlock resolution mechanisms that parties may consider include escalation to senior executives, mediation or expert determination. The choice of mechanism should reflect the parties' risk appetite and the strategic importance of the joint venture to each party.
In material questions, e.g. the adoption of the annual finances, stricter deadlock resolution mechanisms are required, and it is essential that the parties agree in advance on an exit mechanism to avoid a situation where the lawful operation of the joint venture company is prevented by the lack of decision on the shareholders’ side. In many deals, following a lock-up period, the investor has a call option, and/or the founders have a put option, which they can exercise in case of an unresolved deadlock. It is just as essential that in such cases, the valuation methodology is agreed by the parties in advance before the occurrence of the matter giving rise to the deadlock.
Tax restructuring
Tax restructuring has become a standard preliminary step to optimise the corporate structure and minimise future tax liabilities amongst Hungarian founders who are preparing to bring in external investors. Hungarian tax law provides several structuring options that, if implemented correctly, can result in significant tax efficiencies for both founders and investors. Common restructuring techniques involve the use of trusts and establishing a new holding company above the operating company or companies, allowing founders to sell shares in the holding entity whilst maintaining flexibility for future corporate reorganisations. Appropriate timing is essential, as restructuring too close to an investment may delay the transaction, whilst restructuring too early may mean the structure doesn't align with the final investment terms.
Synergies
Joint ventures are fundamentally based on the concept of synergy—the principle that the combined entity will generate greater value than the sum of its parts—yet quantifying and capturing these synergies remains one of the most challenging aspects of structuring and operating such partnerships. In the Hungarian market, synergies often arise from combining the founders' local market knowledge and customer relationships with the investor's capital, operational expertise, international network and sales channels. From a legal drafting perspective, the joint venture agreement should explicitly identify the anticipated synergies and establish measurable key performance indicators tied to synergy realisation, with clear timelines and accountability mechanisms, as disagreements often arise when parties have fundamentally different expectations about which synergies are achievable and over what timeframe. Competition law considerations become paramount when synergies involve market consolidation, customer or supplier coordination, or information sharing between competitors, as authorities in Hungary and the EU will scrutinise whether the joint venture creates or strengthens a dominant position or facilitates anti-competitive coordination beyond what is reasonably necessary for the legitimate joint venture objectives. It is also crucial to involve competition lawyers during the negotiations phase, as early information sharing could have negative competition law implications. Parties should also consider implementing information barriers and clean team arrangements during the due diligence phase to mitigate competition law risks associated with pre-closing information exchange.
Conclusion
Investing in Hungarian family-owned SMEs through joint venture structures presents significant opportunities for both investors and founders, but requires careful legal structuring to align the parties' interests and manage potential risks. By addressing the key considerations outlined above — including warranty and indemnity insurance, decision-making and control, deadlock resolution, tax structuring and synergies — parties can establish a solid foundation for a successful long-term partnership. Oppenheim's multidisciplinary team has extensive experience advising on all aspects of Hungarian SME joint ventures and is well-positioned to guide clients through these complex transactions.
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The content of this article does not constitute legal advice and is intended solely for informational purposes. Consequently, the information and statements contained herein are not comprehensive and should not be relied upon as legal opinions or business decisions; differing circumstances not examined or mentioned herein may lead to different conclusions. Oppenheim Law Firm rejects any responsibility for the content of this article, the statements contained herein, and for any legal validity of these statements in individual cases.