This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in the Hungary.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
Key rules and laws Legal provisions applicable to all forms of M&A transactions are included in Act V of 2013 on the Civil Code (Civil Code) containing the general rules of Hungarian civil law, the Hungarian law of contract as well as general and specific rules applicable to all forms of legal entities including companies. Besides the above, the Civil Code also contains high level, generally applicable rules on the transformation, merger and demerger of companies making it the fundamental source of law relating to M&A transactions.
More specific legal provisions applicable to transformations, mergers and demergers of companies are set forth in a separate piece of legislation, Act No. CLXXVI of 2013 on the Transformation, Merger and Demerger of Certain Legal Persons (Transformation Act). Among others, the Transformation Act contains the prerequisites of transformations, mergers and demergers, the procedures to be followed in case of transformations, mergers and demergers, as well as the transparency, reporting and audit requirements applicable to these sorts of corporate transactions. The Transformation Act prescribes specific rules for companies limited by shares, especially in respect of audit and management reports.
Specific corporate changes resulting from mergers and acquisitions are registered in Hungary by the competent court of registration. The relevant procedure (including documentation and publication requirements) is regulated by Act V of 2006 on Public Company Information, Company Registration and Voluntary Liquidation (Company Procedures Act).In addition to the Civil Code,the Transformation Act and the Company Procedures Act, Act CXL of 2007 on Cross-Border Mergers of Limited Liability Companies (Cross-Border Mergers Act) applies in cases where at least one of the the companies participating in a merger is not domiciled in Hungary but in another member state of the European Union. The Cross-Border Mergers Act serves the implementation of Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005.
Act CXX of 2001 on the Capital Market (Capital Market Act) contains essential rules on issuing and offering securities. The provisions of the Capital Market Act may be relevant if the company concerned with the transaction is a company limited by shares. In respect of publicly traded companies, the Capital Market Act sets forth specific provisions for the acquisition of participations in public companies limited by shares, in particular reporting obligations, IPOs and minimum offer prices. Public purchase offers and M&A activity relating to public companies is controlled and approved by the Hungarian National Bank since 2013. Act CXXXIX of 2013 sets out the scope of activity and the procedural rules applied by the Hungarian National Bank.
Detailed rules on disclosure and publication obligations of publicly traded companies can be found in Decree 24/2008 (VIII.15.) of the Minister of Finance and the Stock Exchange Rules published by the Budapest Stock Exchange contain further detailed provisions to be observed by publicly traded companies.
Besides the above acts and laws, a significant part of foreign investments in Hungary are also protected by way of bilateral investment treaties (BIT). BITs grant basic rights to foreign investors in compliance with international standards, and enable foreign investors to seek remedy before international forums if their right to fair and equitable treatment should be violated.
Key regulatory authorities The main authority supervising the legal compliance of M&A transactions is the court of registration having competence for registering certain corporate changes resulting from the transaction. In addition, special rules apply to mergers and acquisitions of companies engaged in regulated industries such as the energy, media and financial sectors. The acquisition or transformation of such companies may require the prior approval of the competent regulatory bodies, setting further preconditions and documentation requirements for carrying out a successful transaction. Competent authorities for the mentioned sectors include the Hungarian Energy and Public Utility Regulatory Authority, the National Media and Infocommunications Authority and the Hungarian National Bank, respectively.Irrespective of the industry or sector concerned, mergers and acquisitions reaching a certain market threshold shall be reported to, or approved by, the Hungarian Competition Authority (GVH). The reporting obligations and the rules of approval are set forth in Act LVII of 1996 on the Prohibition of Unfair Trading Practices and Unfair Competition (Competition Act).
What is the current state of the market?
In 2017, the Hungarian M&A market experienced a rise of 150% as compared to 2016, reaching an estimated market value of around 4 billion US dollars, and coming to the most successful year since 2010. The market continued to be dominated by strategic investors over financial investors on the one hand, and on the other hand by domestic transactions over international transactions.
Which market sectors have been particularly active recently?
In 2017, Real Estate was the most active sector on the M&A market, with 27 closed transactions. Significant deals were also made in Food and Beverages, Services, and Telecom&Media.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Current trends on the market are expected to continue. Real Estate is foreseen to remain an active sector, and domestic transactions are expected to continue dominating the market.
From a legal point of view, transactions will definitely be affected by the application and interpretation of Hungary’s new civil law codex, the Civil Code, which came into effect 4 years ago, as well as the new competition law regulation introduced last year, changing merger control thresholds.
What are the key means of effecting the acquisition of a publicly traded company?
Acquisition of shares in a publicly traded company can be effectuated under any title allowed by the Civil Code including sale and purchase, swap, donation or contribution to the acquiring entity’s registered capital. However, in case of publicly traded companies, the specific rules of the Capital Market Act must also be complied with. If 33 or under certain circumstances 25 per cent of the voting rights in a publicly traded company would be acquired, the acquisition can be made only via a public takeover bid pursuant to the Capital Market Act.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Publicly available information in general. Pursuant to the transparency regime governed by the Company Procedure Act virtually all relevant corporate information relating to companies registered in Hungary is publicly available either via the company registry or the corporate documents underlying the registered data. Such publicly available corporate information includes the members of the company’ management, the auditor, members of the supervisory board, signing rights (save for signing rights based on a separate power of attorney), registered seat, registered capital, bank accounts (but not the amounts placed there). In case of a limited liability company (Kft), information on the members of the company is also disclosed to public. In case of public or private companies limited by shares (a Zrt or Nyrt) this is limited to shareholders reaching at least 75 per cent of the votes. Changes to a Hungarian company’s articles of association are not only registered in the company register but also published in the so-called Company Gazette which is available on line.
The corporate documents underlying the above registered data, and the yearly financial reports of companies are also available to the public and can be accessed via online platforms operated by the Hungarian Ministry of Justice.
In addition, public registers will show detailed information on the company’s real estate, registered intellectual property and the status of credit collaterals owed or owned by the company. All of these registers can be accessed via electronic means.
Disclosure obligations of publicly traded companies Beyond the above, the Civil Code and the Capital Market Act prescribes further publication obligations for public companies limited by shares. Pursuant to the Civil Code, such companies are required to publicly disclose the minutes of each and every shareholders’ meeting and the resolutions made on such meetings. Under the Capital Market Act, public companies must also publish certain regular reports and may be required to publish extraordinary reports under certain circumstances. Accordingly, public companies must publish annual financial reports, further financial reports every six months, and also interim management reports, as well as further monthly reports regarding the voting rights related to the shares and regarding the company’s registered capital. In addition, listed companies must publish extraordinary reports anytime they become aware of information that could directly or indirectly influence the exchange rate or return of the shares, or may be otherwise important for market actors.
Due diligence. In must cases, due diligence is conducted (information is disclosed) with respect to the target company in accordance with the request of the potential acquirer. The transferring shareholder and the target company have to address such requests and disclose information in a way that the disclosed information should be true and correct. Should the provided information prove to be untrue or misleading either individually or in the context, the target company or the the transferring shareholders as the case may be would be held liable for the damage the acquirer incurs as a result of such untrue information. Amongst other cases, if the acquirer concluded the deal and the information provided in the due diligence later proves to be untrue or misleading, the transferring shareholder (and the target company, if applicable) will be subject to liability ex contractu, and consequences will be drawn in accordance with the transaction documents in the first place. That is, the acquirer may have warranty claims or damage claims or penalty claim as stipulated in the contract, as interpreted under the governing law. However, under Hungarian law, if in fact it was the misleading or untrue information that made the acquirer to conclude the deal, and the acquirer would not have entered the transaction if the true situation or information had been disclosed, or otherwise the untrue information pertained to an essential circumstance, and the mistake was caused or could have been realized by the other party, the acquirer may contest the contract (may invalidate the deal) alleging that it had been mistaken. In this case the status before the transaction must be reinstated if possible, and the damage incurred by the acquirer must be compensated according to the rules of liability ex delicto.
To what level of detail is due diligence customarily undertaken?
Due diligence is usually carried out to a level as requested by the buyer. The requested level of due diligence customarily depends on various factors such as: the size of the target, the share to be acquired, the type of the acquirer, or the aim and expectations of the acquirer. Due diligence will most probably be a more in-depth and specialized one if the target is a large enterprise, if a majority share is acquired, if the acquirer has sector specific expertise or if the acquirer intends to take the business further and to expand it. On the other hand, the due diligence will most likely be more limited in scope if the target is a smaller company or a start-up, if only a minority share is acquired as a result of the transaction, if the acquirer has less sector specific expertise or if an exit is foreseen in the short or medium term. Also, the depth of the due diligence isusually aligned with the volume (value) of the transaction: transactions of less deal value commonly allow a higher level due diligence.
More recently, transferring shareholders and target companies have become more conscious and diligent to limit the due diligence in accordance with the target’s interests for protecting its business secrets, and for keeping the target’s confidentiality obligations.Also, considerations under applicable data protection and competition laws are becoming more and more important in the context of disclosing information in the course of the due diligence. These considerations, more than before, lead transferring shareholders and target companies to apply a more conscious and structured approach to the due diligence. Therefore, due diligence is confined to redacted information in certain cases. Sometimes, due diligence is divided into phases where only limited and less business sensitive information is shared with potential acquirers in the beginning and more sensitive information is disclosed only at a later stage or to a limited number of addressees. Also, more emphasis is put on having proper non-disclosure agreements in place.
The above trend has intensified following the publication of Notice No. 1/2017 of the GVH on forbidden information sharing in the context of mergers and acquisitions and the GVH’s recent enforcement practice. We anticipate that the entering into effect of GDPR will further promote legal consciousness when it comes to the disclosure of information in the context of M&A.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
Shareholders’ meeting and management body Under the general corporate governance regime set out in the Civil Code, corporate decisions are basically taken at two levels in case of Hungarian companies: Essential strategic, business and personal matters of the target company are decided at the shareholders’ level, such decisions being taken by the company’s supreme body comprised of all shareholders (the shareholders’ meeting). Matters not referred to the competence of the shareholders are decided by the management of the company consisting either of one or more managing directors (in case of a limited liability company) or a board of directors / sole director ) in case of a company limited by shares. Matters referred to the competence of the management usually include operative issues.
Hungarian corporate law clearly divides and protects the competence of the different corporate decision making bodies. Although the management body must abide by the decisions made by the shareholders’ meeting in its competence, the shareholders’ meeting does not have the right to limit the management body’s competence and refer certain matters to the competence of the shareholders’ meeting on an ad hoc basis. Also, the shareholders’ meeting does not have the right to instruct the management body in matters falling into the management body’s competence. As an exemption, the Civil Code provides that the sole owner of a target company has the right to instruct the management body in any matter, and the management body is obliged to follow such instructions.
In general, it is the competence of the shareholders’ meeting to decide on the following essential matters regarding the target company:
i) merger and demerger,
iii) increase or decrease of registered capital,
iv) modifying the target company’s articles of association,
v) approval of acquisition of shares in the target company by a third person (if applicable), purchasing the shares in the target company to be offered to a third person or designating another third person to purchase (if applicable),
vi) appointment and dismissal of the management body, the auditor and the members of the supervisory board (if applicable),
vii) bringing damage claims against the members of the management body, a shareholder, the auditor or any member of the supervisory board.
As a general rule, the shareholders’ meeting takes its decisions with the majority set forth in the articles of association (usually 50 per cent plus one vote or two thirds of the votes), but in some of the above cases a legal minimum majority of three fourths of the votes is necessary to pass a decision.
Supervisory board According to the target company’s articles of association, certain decisions of the shareholders’ meeting and those of the management body may be subject to the prior approval of the target company’s supervisory board. Further, the supervisory board may be vested with corporate decision making competences in case of which the supervisory board essentially takes on the role of the management body in respect of the matters referred to its competence.
What are the duties of the directors and controlling shareholders of a target company?
The core provisions on the duties and liability of directors and controlling shareholders of a Hungarian company are set out in the Civil Code and in Act XLIX of 1991 on the Bankruptcy Procedure and the Liquidation Procedure (the Insolvency Act).
As a general rule, the directors of a Hungarian company must manage the company in accordance with the laws, the articles of association and the decisions of the shareholders’ meeting while prioritizing the interests of the company. This duty becomes more diversified in case of a threatening insolvency of the company when the management must also take into account the interests of the company’s creditors. As a general rule, directors are liable towards the company for the breach of their above legal obligations. However, in case of the company’s insolvency, directors may also be held liable towards the company’s creditors if the company is liquidated and creditors’ claims remain unsatisfied.
Similarly, controlling shareholders may bear liability towards the company’s creditors for their decisions made regarding the controlled company. Under the Civil Code, controlling shareholders may be held liable towards the company’s creditors if the company is liquidated due to the controlling shareholder’s detrimental business policy conducted with respect to the company. Pursuant to the relevant provisions of the Insolvency Act, a controlling shareholder may be held liable towards creditors for wrongful trading in case it acted as shadow director of the company and did not take into consideration the interests of the company’s creditors.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Shareholders’ approval and decision rights. Shareholders other than the selling shareholders may be involved in M&A transactions by way of exercising certain decision and approval rights in several different ways.
The shareholders of a private company may agree in the company’s articles of association, that the shares of the company can be transferred to a third person only with the company’s consent. Pursuant to the Civil Code, the shareholders’ meeting of the company has competence in resolving on the consent.
Also, if a shareholder wishes to transfer its share in a limited liability company to two or more separate acquirers or if it wishes to transfer only a part of its share such share needs to be divided. Such division must be approved by the shareholders’ meeting. At the shareholders’ meeting, the transferring or dividing shareholder cannot vote regarding the transfer or the division. Hence, the transfer and the division will actually be allowed or rejected by the other (non-transferring and non-dividing) shareholders.
Shareholders’ right to make a counter-offer in a public takeover bid. In a public takeover bid under the Capital Market Act, shareholders have the right to make a counter-offer and may, thus, attempt to prevent acquisition by the person who intends to acquire shares via the public takeover bid.
Involvement of employees. In Hungary, the involvement of employees is M&A transactions is rather formal and confined to information and consultation rights and employees do usually not have consent or approval rights.
Employees involvement in the supervisory board and the board of directors. Under the Civil Code, employees of larger companies are involved in the supervision and, in certain cases, the management of the company via employee representatives. At a company that has more than 200 full-time employees (average per year), one third of the members of the supervisory board must be appointed from the employee representatives. The supervisory board supervises the company’s management. It also opines on the draft financial report of the company before it is approved by the supreme body, and on the intended merger or transformation of the company, as the case may be., The company’s employees are involved in these competences via the members of the supervisory board who are employee representatives.
If a public company is managed by a uniform board or directors, which performs the tasks of both the management board and the supervisory board, and employees have the right to take part in the supervisory board based on the number of employees employed at the company , the board of directors and the workers’ council must agree on the participation of the employees in the board of directors. Hence, via the members of the board of directors who are employee representatives , employees may be involved in the management and supervisory competences at the company.
Ex ante information of employees in case of transformations, mergers and demergers. The Transformation Act prescribes an obligation for the company’s management to inform employees on the intended transformation, merger or demerger of the company after the resolution on the transformation, merger or demerger but still before the registration thereof by the competent court of registration. This employee notification is a precondition for the registration of the transformation, merger or demerger. However, it does not convey any consent or approval rights to employees.
Employees’ opinion on public take-over bid. In case of the acquisition of a public company via a compulsory public takeover bid under the Capital Market Act, the management board must issue and publish an opinion of the compulsory public takeover bid, to which the opinion of the employees shall also be attached. Such opinions most commonly address the operation program and the business plan submitted by the bidder. The opinions must be published to the other shareholders of the target company as well.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality of an M&A transaction before closing is usual market practice in Hungary whereas conditionality after closing is applied very rarely and subject to limitations.
Conditionality before closing. In most cases, deals are structured in a way that the closing (completion) of the transaction is conditional upon a number of conditions precedent (closing conditions). This may have legal (regulatory) reasons but practical considerations relating to the subject matter of the transaction may also come into play.
A manifest closing condition is the approval of the relevant authorities such as the GVH or other supervisory authorities set out in point 1 above. Beyond that, depending on the parties’ agreement, further actions may have to be taken or certain matters may have to be resolved by the transferring party or by the target company. Such actions or matters may include the completion of certain pending obligations, the waiver of pre-emption rights, the conclusion or termination of contracts with third parties and other reorganization steps. In addition, internal consents may have to be obtained by both parties for the parties to be able to complete the transaction.
In order not to allow the uncertain, pending situation to last for too long, the parties usually agree on a long stop date, stipulating that if the closing conditions are not fully completed or waived until that specific date, the transaction agreement terminates or can be rescinded.
Conditionality in case of public takeover bids. Acquisitions of public companies by way of public takeover bids go with a certain level of conditionality. Pursuant to the Capital Market Act an acquirer making a public takeover bid for the shares of a public company must, as a general rule, purchase all shares offered to it. However, the acquire may reserve its right to rescind the if as a result of the public takeover it cannot acquire more than 50 per cent of the votes in the target company. Another factor of conditionality or uncertainty is that in a compulsory public takeover bid, one or more (subsequent) counter-offer(s) can be made, and such subsequent counter-offer(s) automatically invalidate the previous public takeover bids (and counter-offers) and all statements of acceptance made by the shareholders.
Conditionality after closing. Once the closing of the transaction occurred, the parties usually deem it as finished, and, save for crucial and irreparable breaches, the parties do not tend to allow or choose a potential rescission from the transaction. In case of reparable or non-crucial breaches the parties most commonly stipulate contractual sanctions such as penalty or option rights, but not usually rescission from the transaction will be allowed. Only in few cases do the parties agree to rescind or terminate the transaction if certain future conditions are not satisfied (certain profits are not reached or certain events do not occur, etc.). It is more common that post-closing conditionality affects the purchase price. Parties may agree on post-closing purchase price adjustment mechanisms or earn out structures which may take account of future uncertainties of the target company’s business. Usually, such arrangements are requested by purchasers whereas sellers are more interested in completely finalizing the deal at closing without the possibility to reopen certain parts of the agreement.
What steps can an acquirer of a target company take to secure deal exclusivity?
Usually, acquirers and sellers sign term sheets or letters of intent in Hungarian M&A transactions. In these documents, the seller may be required to undertake exclusivity, i.e. for an agreed period of time, the seller shall not engage in discussions with third parties regarding the sale of its participation in the target company, shall not offer the deal to any other person, and shall not respond to any such approach from third persons. The parties may agree that the breach of such undertaking triggers penalty obligations for the seller (if so stipulated in the term sheet or letter of intent) and liability of the seller for the damages of the acquirer (by the force of law). However, in case of a dispute regarding the facts, the breach must be proven by the acquirer which may not always be easy.
Generally, under Hungarian law, the acquirer cannot claim damages merely because the other party walked away from the transaction without concluding the contract. This is due to the Hungarian legal standpoint that the parties do not have the obligation to conclude the contract. In most cases the party will not even be liable for implied conduct. However, as a specific case of culpa in contrahendo set out in the Hungarian Civil Code, a party may bear liability ex delicto for the damages incurred by the acquirer as a result of the other party’s breach of its obligation to inform and cooperate with the acquirer in the course of the negotiations. The respective party will bear such liability if, upon commencing, conducting or terminating the negotiations for the transaction, it has breached its obligation to act fairly and in good faith.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Reasonably, acquirers intend to ensure that once the transaction has been agreed the transaction will be completed and the other party cannot simply walk away from the transaction. To that end, acquirers may require the other party to undertake to pay a penalty to the acquirer for the case the other party fails to complete a closing condition (provided that such failure was attributable to that party) and thus frustrates closing, or otherwise unreasonably refuses to complete the transaction. It is of note that, if the failure or refusal of the other party constitutes a breach under the transaction documents, under Hungarian law the acquirer will have the right to claim the damage it incurred as a result (less penalty, if applicable), from the other party.
The parties often agree that each party shall bear its own costs in relation to the transaction. However, the acquirer may at times stipulate that the costs of a successful transaction, including the costs of the due diligence, shall ultimately be borne by the target company.
Which forms of consideration are most commonly used?
In Hungarian M&A transactions the parties usually stipulate money as consideration for the acquired participation. The consideration may be paid from various sources such as own funds or loan and on various terms. Consideration may be paid as a lump sum or in instalments and it may also be paid in advance into escrow (which is rarely the case). Most commonly, the consideration is paid upon closing and in certain cases the parties agree that the consideration is partly paid after closing (such as in case of earn-out arrangements or agreements on payment in instalments). Oftentimes, a part of the consideration is paid to escrow or it is withheld to cover potential warranty claims or other breaches.
In some cases, the transaction is partly or purely a swap, where the consideration provided by the acquirer can be shares in another company, or the undertaking of a certain obligation, performance of an agreed service, etc.
The Capital Market Act sets out more detailed provisions on the consideration payable in case of the acquisition of a public company by means of a public take-over bid. In such cases, the public takeover bid must specify the consideration. The consideration may be money and/or securities. However, when making their declaration of acceptance, the transferring shareholders have the right to request that the consideration be paid in money. The consideration must be covered by state securities issued by EU or OECD states, or bank guarantees issued by banks seated in the EU or an OECD state.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
The core provisions on registration and public disclosure of ownership changes in Hungarian companies are set out in the Company Procedure Act and, in case of public companies, the Capital Market Act. Whether and at what ownership level disclosure is required generally depends on the form of the target company.
In case of a limited liability company (Kft.), all shareholders, irrespective of their ownership level, are indicated in the company register which is publicly accessible via electronic means. The change of the shareholder of a limited liability company must be registered in the company register and publicly disclosed irrespective of the level of ownership it has acquired.
In case of a (private or public) company limited by shares (Zrt. and Nyrt.), the identity of a shareholder is not specifically disclosed in the company register as long as the respective shareholder does not own more than 50% of the votes. If a shareholder holds more than 50 % of the votes, this fact and the identity of the shareholder is indicated in the company register which is publicly accessible. The rule applies if a shareholder holds at least 75 % of the votes. Shareholders holding a smaller portion of the votes are not disclosed to the public via the company register. However, all shareholders of the company exercising shareholders’ rights are indicated in the book of shares of the company, which is publicly accessible and may be looked into by any third person at the registered seat of the company.
In case of public companies limited by shares (Nyrt.), the Capital Market Act prescribes special disclosure obligations which are applicable in addition to the above general provisions. Shareholders of a public company are required to notify the company and the Hungarian National Bank acting as supervisory authority if their participation in the votes in the company’s shareholders’ meeting reaches, exceeds or falls below the following ratios: 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 75, 80, 85, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99 %. At the same time, the company is required to notify the supervisory authority once it receives such a notification from a shareholder and to publish such notification. Pursuant to the Capital Market Act, separate disclosure requirements apply to the process of acquiring a participation in a public company limited by shares via a public takeover bid. For more details, please refer to point 16 below.
At what stage of negotiation is public disclosure required or customary?
Negotiations on the potential acquisition of a Hungarian private company are usually not disclosed to the public until the transaction documents are signed or until the transaction is closed and relating changes are registered in the company register. In case of the acquisition of a participation in a private company, public disclosure is only required by law in the cases described under point 15 above.
In case of a merger or transformation, public disclosure of the transaction must be made immediately after the respective shareholders’ meetings’ resolution on the merger or transformation several weeks before the merger or transformation can take effect to ensure that creditors will have sufficient time to claim security for their receivables vis-á-vis the concerned company, if applicable.
In case of the acquisition of a participation in a public company limited by shares (Nyrt.), additional disclosure requirements apply if the acquisition is made via a public takeover bid. In this case, several public disclosures need to be made in the course of the entire public takeover process. Pursuant to the Capital Market Act, a public takeover bid must be made if more than 33% of the votes, or, if no other shareholder owns more than 10% of the votes in the target company, more than 25% of the votes is acquired. The bidder is required to submit the public takeover bid for approval to the Hungarian National Bank acting as supervisory authority as well as to the target company’s board of directors. At the same time, the bidder shall publish the public takeover bid. Likewise, the bidder is required to publish the result of the supervisory proceeding as well as the deadline for making a declaration of acceptance immediately once it has received the supervisory authority’s resolution. If the bidder modifies the approved public takeover bid in respect of the consideration payable for the shares it shall immediately publish such modification. The target company’s board of directors is required to make an opinion on the public takeover bid and to publish such opinion. Likewise, any counter-offer as well as the result of the public takeover process need to be published.
Is there any maximum time period for negotiations or due diligence?
In case of the acquisition of private companies, the timeframe for negotiations and for due diligence is not regulated by the law. The timeframe is usually agreed upon by the parties, taking into account practical considerations which have an effect on the timing of the transaction, such as potential deadlines for the target company or for any of the parties, potential changes in the business or in the law, etc.
In case of the acquisition of a public company limited by shares (Nyrt.) by way of a public takeover bid, the Capital Market Act sets a certain timeframe for the public takeover process. Accordingly, the deadline for accepting the public takeover bid must be at least 30 days but may not be more than 65 days including extensions if any. This deadline is counted from the publication of the supervisory authority’s decision on the approval of the public takeover bid. The result of the public takeover bid shall be established and published within two days following the end of the aforementioned deadline.
Are there any circumstances where a minimum price may be set for the shares in a target company?
A statutory minimum price applies in case of the acquisition of a public company limited by shares (Nyrt.) via a public takeover bid. In such cases, the price offered in the public takeover bid must reach the statutory minimum price, i.e. the highest of the prices calculated based on the factors set out in the Capital Market. Also, when counter-offer(s) are made in a compulsory public takeover proceedings, the price offered in each subsequent counter-offer must be 5% higher than the price specified in the original compulsory public takeover bid or in the directly preceding counter-offer.
In addition to the above statutory requirements applicable to public companies, minimum prices may be set out in shareholders’. This may especially be the case where the acquisition is based on the exercise of drag-along rights, tag-along rights or call options.
In public companies,
Otherwise, the parties to the deal are free to agree on any price: no minimum or maximum price is set forth by law. However, if a party discovers that there was a gross disparity between the value of the shares and the price, the aggrieved party may contest the deal on the grounds of gross disparity in value based on the Hungarian Civil Code.19. Is it possible for target companies to provide financial assistance?
In case of private companies, Hungarian law is silent on target companies providing financial assistance for the acquisition of their shares. Consequently, such assistance is not prohibited or restricted in case of private companies.
However, in accordance with EU regulations, in case the target company is a public company limited by shares (Nyrt.), such financial assistance is restricted: the company may provide financial assistance to a third party for the acquisition of its shares only on market terms (i.e. for appropriate consideration) and from the funds available for payment of dividends, and provided that this was based on a detailed proposal by the management board of the target company and approved by the target company’s shareholders’ meeting with a majority of at least 75% of the votes. Such proposal must explain, amongst others, the reasons for, the risks of, and the advantages (for the target company) of the financial assistance, and it must be submitted to the court of registry. These rules serve the protection of the target company’s creditors and the interests of the target company, and as a guarantee that financial assistance is provided upon the agreement of most shareholders and the management of the target company.
Which governing law is customarily used on acquisitions?
The general position under Hungarian law is that the parties are free to choose the governing law in their own discretion. However, no foreign law may be stipulated if the transaction does not have a significant foreign element. That is, two Hungarian parties contracting for a Hungarian asset laying in Hungary cannot agree to submit the transaction to foreign law. Also, the rules of Hungarian international private law must be observed upon choosing the governing law. In addition, the mandatory provisions of Hungarian law relating to the share to be acquired shall be applied irrespective of the personal law of the parties or the governing law stipulated by them. Such mandatory rules include the procedure and formalities for transferring title to the shares, the effect of the transfer, registration and disclosure requirements etc.
In case of the acquisition of a public company by way of a public takeover bid, the supervising authority of the public takeover bid is the authority of the country where the target company’s shares were first listed. If the shares were listed in more countries at the same time, the target may choose the supervising authority. In principle, the governing law of the public takeover bid will be the law of the country of the authority supervising the public takeover bid. However, if the public takeover bid is supervised by the Hungarian authority, but the target company’s registered seat is outside Hungary, certain essential aspects of the public takeover will still be governed by the law of the country of the registered seat instead of Hungarian law.
Hence, it is reasonable to use Hungarian law as the governing law of the transaction if the share of a Hungarian target company is concerned unless a specific characteristic of the individual transaction leads to the stipulation of foreign law. Parties tend to stipulate foreign law for the transaction if, for example, the Hungarian transaction is part of an international transaction affecting several jurisdictions and the parties wish that the entire global transaction to be governed by the same (foreign) law, or if the parties would want to use a certain legal structure or instrument which is not feasible under Hungarian law but under the selected foreign law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
The main documentation requirements applicable to the acquisition of a listed company are set out in the Capital Market Act. As described under point 15 above, shareholders of a public company are required to notify the company and the Hungarian National Bank acting as supervisory authority if their participation in the votes in the company’s shareholders’ meeting reaches, exceeds or falls below the following ratios: 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 75, 80, 85, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99 %. Such notification shall be published by the target company.
If more than 33% of the votes, or, if no other shareholder owns more than 10% of the votes in the target company, more than 25% of the votes is acquired, the acquirer shall make a public takeover bid pursuant to the Capital Market Act.
For conducting a public takeover process pursuant to the Capital Market Act, the buyer must prepare and publish the public takeover bid, which needs to contain all material aspects of the offer as set forth by the law. The offer needs to have several attachments including the operation program and business report regarding the target company, proof of the offeror having sufficient funds available to cover the consideration payable for the shares, the agreement that stipulates the party empowered to submit the bid (if the takeover bid is submitted by persons acting in concert and it is not submitted by the parties jointly), contract for the purchase or repurchase option or for the call option on the forward purchase of shares (if applicable), and a statement for the exercise of the buy option (if applicable) where the bid is for acquiring up to 90% of the voting rights in the target company.
Following the approval of the public takeover bid by the Hungarian National Bank, the offeror shall publish the approval, the public takeover bid as well as the deadline for submitting declarations of acceptance.
Following the end of the deadline for submitting declarations of acceptance, the offeror is required to publish the result of the public takeover bid within two days.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
The formalities prescribed by the relevant laws, most importantly the Civil Code, the Company Procedure Act as well as the Capital Market Act depend on the corporate form of the target company. Different formalities apply in case of limited liability companies (Kft.), private companies limited by shares (Zrt.) and public companies limited by shares (Nyrt.).
Quota of a limited liability company. The ownership stake held by a shareholder in a limited liability company (Kft.) is called a “quota”. Most commonly, shareholders have one single quota in a Kft. (proportionate to the rights it embodies), but if the shareholders so agree in the articles of association, a shareholder may hold more than one quota. In order to validly transfer a quota, the parties shall conclude a written quota transfer agreement. In order for the transfer to become effective vis-á-vis the company, the acquirer of the quota shall notify the company on the acquisition and enclose the quota transfer agreement to the notification. Once the managing director of the target company has received the acquirer’s notification, he or she shall register the acquirer in the company’s members’ list. The acquirer as the new owner of the quota shall be subsequently registered in the company register kept by the court of registration.
The transfer of a quota may be subject to restrictions. Compliance with these restrictions and proper documentation thereof may be a precondition to the transfer being registered. Restrictions may include the following
(i) If the quota is sold to a third party acquirer (who is not a shareholder of the company yet), the other shareholders, then the company, and finally another third party designated by the company have a pre-emption right regarding the respective quota. Hence, in order to register the acquirer as the new owner of the quota, a waiver or non-exercise of such pre-emption rights must be documented;
(ii) If the shareholders so agree in the company’s articles of association, the quota can be transferred to a third person only with the consent of the company (such consent to be granted by the supreme body of the company);
(iii) If a quota is to be divided and transferred to two or more separate acquirers, or if only a part of the quota is transferred and the other part is kept by the original shareholder, the quota must be divided. Such division must be approved by the supreme body of the company, and shall be documented to register the transfer.
Shares of companies limited by shares. Both printed and dematerialized shares are validly transferred if a valid legal title underlies the transfer, such as sale and purchase, donation, swap, contribution to another company’s registered capital, etc. Printed shares in a private company limited by shares (Zrt) can be transferred by handing over the printed shares to the acquirer and simultaneously ensuring via a written endorsement that the acquirer’s name be indicated on the share as its owner. For the acquirer to become the owner of the share, its name must be indicated as the owner of the share at the end of a successive chain of previous owners (endorsements). Dematerialized shares in private or public companies limited by shares can be transferred via transferring and crediting the respective shares to the acquirer’s security account.
Importantly, if the formalities duly certify that a given person has become the owner of the respective share, the defect or absence of a valid title underlying the transfer will not have effect vis-á-vis third persons acting in good faith, i.e. the owner certified by the formalities shall be deemed as the owner of the share. In order to be able to be able to exercise its shareholder’s rights vis-á-vis the company, the transfer shall be reported to the company and be registered in the book of shares by the company’s management.
In addition to the above, new shareholders holding more than 50 % of the votes in the target company shall be registered in the company register.
Public companies limited by shares. If a public company limited by shares is acquired by way of a public takeover bid, additional documentation requirements apply as set out in point 21 above.
Are hostile acquisitions a common feature?
In Hungary, target companies are not commonly subject to hostile acquisition.
What protections do directors of a target company have against a hostile approach?
Directors of a public target company may apply protection measures subject to the restrictions set out in the Civil Code and the Capital Market Act. Protection measures may include the increase of the company’s registered capital, acquisition of the company’s own stock, so-called poison pill defense (limiting the maximum level of votes that can be acquired in the company, or facilitating the dilution of the acquirer by the other shareholders at a discounted price), financial assistance or other restrictions in the company’s bylaws, or the inclusion of change of control clauses in the company’s business critical contracts.
As for the restrictions on financial assistance, we refer to point 19 above.
Furthermore, the Capital Market Act restricts the possibility for the company’s management board to apply protection measures as follows: if a public target company’s articles of association so provide, the directors of the target company must remain neutral and cannot take measures to prevent or disturb the acquisition (such as a capital increase or the acquisition of the company’s own stock). Notwihstanding this restriction, the directors may (i) encourage that a counter-offer is made in case a compulsory public takeover bid, or (ii) decide to implement a resolution of the supreme body made before the announcement (or information) of the public takeover bid, provided that it constitutes the ordinary course of business of the target company, or (iii) take the measures specified in the resolution of the supreme body made at a meeting convened after the announcement of the public takeover bid.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Under the Capital Market Act, a public takeover bid must be made if more than 33% of the votes, or, if no other shareholder owns more than 10% of the votes in the target company, more than 25% of the votes is acquired in a public company.
In addition to the cases where a mandatory public takeover bid must be made, there are instances when shareholders may exercise statutory put option rights vis-à-vis a shareholder acquiring a certain level of ownership. As a general rule set out in the Civil Code,
shareholders may require a shareholder acquiring 75 % of the votes in a limited liability company (Kft.) or a private company limited by shares (Zrt.) to purchase their shares at equal terms. Additionally, the Capital Market Act provides that minority shareholders may require the offeror to purchase their shares if, as a result of the public takeover bid, the offeror acquired at least a 90 % interest in a public company limited by shares (Nyrt.).
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders may have statutory put-option rights vis-á-vis a majority shareholder holding a certain level of ownership as set out in point 25 above. Also they may have contractual put-option rights or tag-along rights stipulated. In addition, minority shareholders will continue to have (besides its general shareholders’ rights such as voting and receiving dividends) certain information and involvement rights regarding the target company.
Pursuant to the Civil Code, each and every shareholder, irrespective of their stake, has the right to review the registers and documents of the company, and to request information from the management regarding the company. Information cannot be withheld, and the review of documents cannot be refused, save for the protection of the company’s business secrets, or the case if the shareholder abuses this right, or refuses to sign a non-disclosure agreement.
In addition to the above, under Hungarian law, minority shareholders owning together at least 5% of a private company, and at least 1% of the votes in a public company limited by shares, may commence certain measures for the protection of their interests in the company: Minority shareholders may arrange for (i) the meeting of the company’s supreme body to be convened with the aim and purpose specified by the minority shareholders, (ii) any economic event related to the activity of the management from the preceding two years, or the latest financial report to be examined by an independent auditor, (iii) a claim of the company to be enforced against any of its shareholders, or members of the management, or the auditor, or members of the supervisory board, (iv) amending the agenda of the shareholders’ meeting. Also, minority shareholders owning together at least 5% of the votes in a private company limited by, and 1% of the votes in a public company limited by shares, have the right to request the court to appoint an auditor to examine payments made by the company from its equity to the shareholders.
In companies limited by shares, rights attached to a certain series of shares can be changed detrimentally only if the shareholders owning such shares specifically consent to the change as set forth in the company’s articles of association. The same rule applies in case the registered capital of such companies is increased: if the capital increase would affect the rights attached to certain shares, the increase can be validly implemented only if all concerned shareholders approve. These provisions can be ruled out in a private company limited by shares but not in a public company limited by shares.
Is a mechanism available to compulsorily acquire minority stakes?
Under Hungarian law, squeeze-out mechanisms are available only in case of public companies limited by shares (Nyrt.). The Capital Market Act provides majority shareholders with the possibility to exercise a statutory call option right vis-à-vis minority shareholders if i) the shareholder indicated in its request for the approval of the public takeover bid that it wishes to exercise a call option right, ii) the shareholder holds an interest of at least 90 % within three months following the successful completion of the public takeover process and iii) the shareholder verifies that it has sufficient funds available to pay the consideration for the shares to be acquired.
For statutory put option rights of minority shareholders, please refer to point 26 above.