The IDE filtering labyrinth
Judit Budai, Senior Partner, Szecskay Attorneys at Law (left); Adrienn Tar, partner, Szecskay Avocats
As the global economy grows, FDI screening rules are experiencing a renaissance around the world. COVID-19 has even helped evolve the sophistication of local market protection rules, allowing states to keep tabs on strategic industry assets and the ownership of operating companies. The complexity of these regulations also stems from emergency COVID “legislation”, where there is not much time and resources to clearly place the rules within the legal framework.
In this article, we dare not claim that we can give our readers Ariadne’s red thread to get out of the Labyrinth; instead, we aim to provide you with the dos and don’ts that we’ve experienced so far.
Since January 1, 2019, Act LVII of 2018 on the control of foreign investments undermining the national security of Hungary (“FDI Screen Act I”) has been in force. Essentially, this pre-applied regulation (EU) 2019/452 of the European Parliament and of the Council of March 19, 2019 established a framework for screening foreign direct investments in the Union, a regional response to American protection measures.
Originally, this rule aimed to monitor investors outside the EU, EEA and Switzerland, when they aimed to acquire, directly or indirectly, at least 25% of the capital (or 10% in listed entities) in a local company. , or create a company / branch, or modify its activity, or its right to operate infrastructures, equipment and assets essential to activities in several fields.
These were: Weapons and ammunition, military technology and equipment production; production of dual-use products; production of intelligence tools; banking, payment investment and insurance services; certain utilities, including electricity, gas and water services; electronic communications services; and the specific electronic information systems of state bodies and municipalities.
A 2020 COVID emergency government decree extended this regulation to EU investors until the end of 2021. One transaction already known to be covered by this decision is VIG’s proposed acquisition of Aegon.
The FDI Screen Act I authorizes the Hungarian Ministry of the Interior to have the effectiveness of a proposed acquisition or creation of a company or of an operating right recognized within the above framework. The notification must be made within 10 days of the signing of the deed of purchase or establishment.
The minister has the discretion to assess whether a transaction violates Hungary’s national security interests. If this is the case, the minister can take a prohibition decision, which can be appealed to the regional court in the capital of Budapest. This court can only note the non-conformity of the decision on the basis of the underlying procedural rules and can refer the procedure to the Minister.
If no request is made, the acquisition or foundation cannot be effectively registered and a fine of HUF 1 million for natural persons or HUF 10 million for legal persons may be imposed. The exercise of property and operating rights is also prohibited. The ministry can investigate within five years of obtaining information about the transaction. The obliged person may need to dispose of the participation or illegally acquired assets over which the State has pre-emptive rights.
Since May 2020, the Hungarian government has introduced a special COVID IDE screening measure, which is regularly debated by the legal community in Hungary. Law LVIII of 2020 (“FDI Screen Act II”) extends to all non-European investors intending to acquire at least 10%, and to EU investors seeking to gain influence (essentially control majority) above an acquisition value of HUF 350 million.
Here the scope of the decision is in the hands of the Ministry of Innovation and Technology when the target business / asset is a strategic Hungarian business or operation. This rule is also applicable until the end of 2021 and operates according to principles similar to those of the FDI Screen Act I. Here, the discretionary power of the Minister is based on the fundamental economic and strategic interests linked to the operability of networks and equipment. and security of continuous supply. from the point of view of the national economy, where it is not regulated by sectoral EU legal regulations or national law.
In summary, every merger and acquisition or restructuring transaction involving foreign parties remains subject to careful assessment under Laws I. and II on the protection of FDI. until the end of 2021.
This article first appeared in the print issue of the Budapest Business Journal on June 4, 2021.