New Hungarian corporate law rules take effect this Summer. Amendments to both existing provisions and the introduction of entirely novel legal concepts are of great practical importance to companies operating in Hungary. The changes will require a thorough review of all companies' founding documents and corporate structure so as to avoid any breaches of the law and to enable companies to make the most of the new opportunities.
On 9 December 1997, the Hungarian Parliament passed Act CXLIV of 1997 (the "Companies Act"), replacing Act number VI of 1988 (the "Old Act"), which lays down mandatory rules for all economic entities. Most of the changes will take effect on 16 June this year.
The main aims of the Companies Act are:
- to protect creditors more efficiently and
- to minimise uncertainties in company law.
For the latter reason, the previous principle that almost all rules of the Old Act were permissive, (the Old Act could be departed from with the exception of provisions relating to an Rt) no longer exists. All provisions of the Companies Act are prima facie mandatory and its provisions can only be departed from if this is expressly allowed by the Companies Act.
General provisions for all companies
Establishment of a new company
In order to establish a company, it is necessary to execute a deed of foundation or articles of association countersigned by an attorney or incorporated in a notarial deed. From the date of the countersigning (and not from the date of signing by the members, as previously), the company will now exist as a so-called "pre-company."
A pre-company is not a separate company form but it can start its business activities from the date of filing the documents with the court of registration (not from the signing of the deed of foundation, as previously) except for activities for which a licence is needed.
There are four restrictions relating to corporate matters for pre-companies:
- its articles of association may not be amended unless the court of registration orders this in its resolution
- the members of the pre-company may not be changed and consequently the transfer of quotas or shares is not allowed until registration of the company
- the members may not be expelled from the pre-company
- the members may not resolve to terminate the company without a legal successor, to transform it to another company form or to merge it.
Before registration the pre-company must use the letters "b.a." (under registration) after its name on its stationery and on any documents it signs.
If, and when, the company is registered, all agreements, rights and obligations which the pre-company has concluded, acquired or undertaken before registration are deemed to have been made in the name of the company, and after registration they become the agreements, rights and obligations of the registered company without any further action or approval. There is therefore no need to pass adopting resolutions, as previously.
The company as an entity will now only come into existence on the date of registration by the Court of Registration. Previously, registration had a retrospective effect and the company existed from the signature of the deed of foundation.
The process of registration
Aware of the problems caused by the slow registration of new companies and the substantial backlog of pending documents in the Court of Registration, the legislators have included provisions aimed at making the company registration procedure more efficient. These changes were made in the Companies Registration Act, passed concurrently with the Companies Act.
Accordingly, an important feature of the Companies Registration Act is that there is an obligation upon the Court of Registration to decide on the question of registration in a relatively short time: 30 days for Bts (limited partnerships) and Kkts (unlimited partnerships) and 60 days for other companies.
Under the previous cumbersome and lengthy procedure, founders of new companies were required to obtain a tax number and a social security number before they were able to submit their application form to the Court of Registration. Under the new provisions these tasks will be carried out by the Court of Registration.
As referred to above, there will also be mandatory deadlines imposed upon the Court of Registration within which they must pass a decision on applications for registration of new companies or changes. The initial deadline for registration in the case of private limited companies ("Kfts") and joint stock companies ("Rts") will be 60 days from submission of the application form. If, upon the expiry of this period, the Court fails to pass a decision within a further 8 days, the changes or registration for which application has been made are deemed to be automatically passed and registered.
Should the Court of Registration refuse registration, the pre-company must stop its operation and the members will be liable for the obligations and undertakings of the company in accordance with their equity ratios. In addition, in case of such a refusal by the court, the management is also liable on two counts:
- the senior officers are liable for damages towards the members if they were negligent or intentionally caused damage
- the senior officers are responsible to third parties and creditors with unlimited liability if the members of the rejected company have limited liability and the members' contributions do not cover all claims of the creditors.
The 30 or 60 day deadline for registration also applies to the registration of any corporate changes following establishment of the company. In most cases, where the articles of association or deed of foundation are modified by the supreme organ of the company, both the minutes of the meeting and the articles of association must be filed, the latter in a consolidated form, countersigned by a lawyer. The documents must be clearly marked to indicate what the new provisions are.
In the case of minor changes, such as a modification of the seat, site or the range of activities of the company, only the minutes of the members' meeting are required and the consolidated articles of association do not need to be filed. However, in such a case the lawyer countersigns the minutes instead of the articles of association or deed of foundation.
In addition, the procedure for changing the seat, site(s) or activities of the company has been simplified in such a way that members can now pass a resolution on these changes by a simple majority, while a three quarters majority is required for any other modification to the articles of association.
There are also provisions aimed at increasing the efficiency of companies by submitting their documents in time. The 30 day period within which documents relating to changes must be submitted to the Court is unchanged. However, there will be sanctions for non-compliance with this rule. Fines between HUF 50.000 and HUF 500.000 may be imposed for such delay.
Under a new provision, after 16 June 1998, a person may be appointed as managing director or other senior officer of a maximum of three companies. However, if a person is appointed before 16 June 1998 in more than three companies as a member of the Board, he will not have to resign on 16 June 1998 and may stay in his position as long as his mandate runs.
For companies whose Board members are also members of more than three other companies' Boards, and who wish to retain the services of such persons for as long as possible, it may be wise to appoint these individuals for a five year period before 16 June 1998. This restriction only applies to management and not to members of the Supervisory Board, since the Supervisory Board is not part of management under Hungarian law. No matter how many positions a senior officer holds, he must inform the other companies in writing of any new appointment.
There is also a new provision relating to the disqualification of senior officers. If a company goes into insolvent liquidation, anyone who was a senior officer of that company for at least a year during the period of two years prior to commencement of the liquidation, is disqualified from acting as a senior officer of another company. This disqualification stands for three years from the date of the final order of the Court of Registration to delete the company from the Company Register.
A managing director must be a natural person (apart from managing directors of unlimited partnerships) and must perform his tasks personally. He may not authorise anyone else to represent him at a Board meeting, not even another director. Therefore he may not have an alternate.
The Companies Act reintroduces the old concept of a "company manager". The company is still generally represented by its managing directors or directors, as the case may be. In addition, the company in its general meeting may appoint an ordinary employee to act as company manager ("cégvezeto"), and represent the company in all matters generally. Other employees of the company may only be authorised to represent the company in particular cases. The deed of foundation must state whether the company manager has authority to sign in the name of the company alone or jointly with others. A company manager must meet all conditions and requirements that are set for senior officers.
Under the Companies Act, a Kft will be obliged to set up a supervisory board only if its primary capital is more than HUF 50 Million or if the Kft has more than 200 full time employees on a yearly average. In the case of a one-man company, only the latter case triggers the obligation to set up a supervisory board. It remains mandatory to set up a supervisory board for Rts.
The Companies Act increases the powers of supervisory boards. It provides that the deed of foundation of an Rt or the articles of association of a Kft may impose powers upon the supervisory board to
- appoint, withdraw and to determine the remuneration of the members of the board of directors (managing directors), and
- to approve any transactions specified in the articles of association or deed of foundation.
According to the Companies Act, an auditor is no longer classified as an organ of the company. Instead, once an auditor is appointed, the board of directors (managing directors) of the company must conclude an agreement with the auditor, based upon the rules of the Hungarian Civil Code, under which the company commissions the auditor. If the auditor appointed is a firm, a natural person has to be designated to carry out the work personally and such designation has to be approved by the highest organ of the company.
It is now mandatory to appoint an auditor for Rts, one-man companies, and for Kfts if their primary capital is more than HUF 50 Million.
Representation and signatures on behalf of the company
Who may represent the company before third parties?
- The members of the management are the representatives of the company by law, but their right of representation may not be validly limited against third parties. This means that if, for example, the articles of association state that a particular person is not authorised to sign a contract with state authorities, the restriction is only binding within the company between the members and that person. The register at the Court of Registration will not contain this restriction and therefore third parties will have no notice of it. Any contract signed by the particular person and a third person therefore will be valid, despite the provisions of the articles of association and the signature.
- the company may grant a right of general representation to an employee who is not member of the Board.
- the management may appoint an employee with a limited right of representation. Consequently, it is possible to grant limited powers to non senior officer employees as opposed to the position of senior officers whose statutory right of representation cannot be effectively limited against third parties.
Expulsion of members
Under previous rules, the members' meeting could, under certain conditions, expel a member. This is no longer possible under the Companies Act. Only the Court (not the Court of Registration, but the ordinary county court) may expel a member in a judgment on the grounds that the membership of the member significantly endangers the aims of the company. To initiate such a court procedure the members' meeting must pass a resolution by a three quarters' majority.
Subsequently, the company as plaintiff may lodge its suit within 15 days from passing such resolution and request the court to expel the member. The court must hear the case within 15 days from filing the suit. There is a limitation to this in that shareholders of Rts, any member of a two member company or a member holding at least 75% of the votes may not be expelled, even by court proceedings.
Challenging the resolutions of a company before a court
The possibility of challenging any resolution of a company by a member, the management, or a member of the Supervisory Board remains. Such a challenge may be initiated within 30 days from the date on which the person making the challenge became aware of the resolution but no later than 90 days after the actual date of the resolution challenged. This so called "objective" deadline has been increased from 30 days.
A new rule has been introduced in order to protect creditors. One-man companies will now be prohibited (in general) from establishing another one-man company. However, this rule will not apply to existing one-man companies.
Acquisition of substantial share interests in closed Rts or substantial quotas in Kfts
The Companies Act contains certain requirements to be fulfilled by persons who acquire 25%, 50% and 75% of the shares in a company respectively. Some of the rules require notification of the share interests acquired and there are also rules requiring the mandatory purchase of minority shareholders' shares.
Under existing regulations all these provisions apply only if a Hungarian Rt. acquires the requisite percentage of shares in another Hungarian Rt. One of the most sub-stantial changes extends the application of these rules. After commencement of the new rules they will cover all cases where any person, whether domestic or foreign, a private individual or any type of company, acquires 25%, 50% or 75% of the shares in question or quota in either an Rt or a Kft.
If any of these thresholds is exceeded, this fact must be notified to the Court of Registration within 30 days and must be published. Furthermore, if the relevant new shareholding exceeds 50%, the minority shareholders will be entitled to sell their shares to the majority shareholder at market value.
If the notification obligation is breached or fulfilled late and the company is subsequently liquidated, the share-holder in breach will bear unlimited liability for any debts incurred by the company before actual notification if the assets of the company do not fully cover its debts.
Furthermore, if, due to the influence of a majority shareholder (one holding over 50% of the shares), a company carries out a permanently detrimental business policy, and as a consequence the assets of the company do not cover its debts upon its liquidation, the court may hold the majority shareholder fully liable without limitation for the company's debts.
Even more stringent rules will apply if anyone makes an offer to acquire a shareholding of over 33% in a public Rt. These are dealt with below.
Unlimited and limited partnership (Kkt and Bt)
The rules relating to Bts and Kkts have not been significantly modified. One change, however, enables these entities to hold members' meetings. Previously, Kkts and Bts did not hold members' meetings. From 16 June 1998 members may hold members' meetings provided that the articles of association include provisions on the method of convening such meetings and the passing of resolutions. It is not mandatory to hold members' meetings, just a possibility. However, if the holding of a members' meeting is provided for in the articles, this must be complied with.
The provisions relating to the majority necessary to pass resolutions have also been amended. in some cases under the old act a two thirds majority was required. Now this figure has been increased to a three quarters' majority, but in some cases, for instance for amending the articles of association, 100% of the votes is required.
Following 16 June 1998 when the articles of associa-tion of a Kkt or Bt are first amended, the members must change the provisions on the majority of votes imple-menting a three quarters 'majority instead of the two thirds' majority. Due to the mandatory nature of the Companies Act, members of a Kkt or Bt must participate in the members' meetings, if any, personally. Represen-tation by proxy is unlawful, as opposed to Kfts and Rts.
Limited liability companies ("Kft")
The minimum capital of a Kft has been increased to HUF 3 million. Companies which are established before 16 June and have a capital less than HUF 3 million must increase their capital to the minimum level within two years of 16 June 1998. 100% of the contributions in kind and 30% of the cash contributions, but at least HUF 1 million, must be paid before the date of filing of the founding documents with the court.
Mandatory contents of articles
A new item has been added to the list of mandatory provisions in a Kft's articles: the rules relating to the convening of a second members' meeting when the previous members' meeting is inquorate must be spelled out.
In connection with the list of members there is one change: it must indicate the amount of the registered capital of the company.
Transfer of quotas
The provisions on pre-emption rights over quotas have been slightly amended. The Companies Act expressly provides that any member may be granted a special pre-emption right in the articles of association. If such a pre-emption right is stipulated in the articles, it takes precedence over the statutory pre-emption rights of other members, the company and a third party appointed by a members' meeting. In such a case the other members may exercise their pre-emption rights over the quota to be sold only after the relevant member has failed to exercise his pre-emption right. Members have 15 days to decide whether to exercise their pre-emption rights.
The time during which the company itself and an appointed third party may exercise their pre-emption rights has been increased from 15 days to 30 days. No departure from these rights and deadlines is allowed. Pre-emption rights are not negotiable, they may not be sold and cannot be waived by the obligee.
It will now also be possible to stipulate in the articles provisions requiring the approval of the company when a member plans to sell its quota to a third party, in order to protect the company from hostile new members. This rule gains importance when the existing members and the company cannot or do not want to exercise their pre-emption rights but would still like to influence any transfer. Again, this possibility only exists if the articles of association stipulate it. Also, it is not enough to state in the articles that the approval of the company is necessary for selling a quota to a third party. The articles of association must stipulate the conditions for, and reasons of, approval or rejection.
New rules on members' meetings have been introduced and include the following provisions:
- unless otherwise provided by the articles of association, the members' meeting must be held at the registered seat of the company. However, members may unanimously agree on a different place in advance
- it is still possible to pass resolutions in writing without holding a members' meeting, except for passing a resolution relating to the annual balance sheet and the allocation of profits
- the minutes of the members' meeting must be signed by the managing director and one member who was present. Previously, all members present had to sign the minutes of a kft.
Single member Kfts
The special rules for single member Kfts have been clarified by the Companies Act:
- the founder who passes the resolutions must notify the management of the company in writing of such a resolution
- contracts between the company and the founder must be in writing in order to be valid
- even though the founder has limited liability in general, this rule may be set aside and unlimited liability imposed upon the single member if he fails to notify the management of the fact that he has acquired all the quotas, or if it is shown that he carries on business which has an adverse effect in the long term upon the company and this fact is upheld by the court upon the claim of a creditor. In the latter case, a judgment from the court is required, otherwise the general rule of limited liability remains.
Company limited by shares ("Rt")
Formation of a company limited by shares
As previously, there are two types of Rts: closed and open. However, the Companies Act now makes a clear distinction between these two types as the distinction was slightly unclear in the Old Act.
Companies which are established through a private placement are defined as closed companies. A public company is a company whose shares are wholly or partially publicly issued. Therefore, even if one share of a company is issued publicly (i.e. to a not previously identified investor), the company immediately becomes public with all the attaching burdens.
The definitions of private placement and public offering have been changed in the closing provisions of the Companies Act which amends the Securities Act. Private placement means: "the issuance of securities to investors individually identified in advance, upon a letter of intent issued by such investors prior to the issuance". This means that the previously existing "35 investors limit" has been deleted and a new requirement, the letter of intent, introduced. In the light of this new regulation, the definition of public issuance has also changed.
In case of both closed and public companies, the deed of foundation must include, in addition to the minimum contents stipulated by the Old Act, a declaration by the founders to subscribe for the entire amount of the share capital. In addition, the deed of foundation must specify the expected costs of formation. In the case of closed companies it is still possible to contribute in kind assets, while in the case of public companies this possibility is no longer available. For an in kind contribution to closed companies, the auditors have to provide a detailed report on the value of such in kind contribution.
A new element is the introduction of the subscription minimum which is likely to make the formation of public companies easier than it was under the Old Act. Under the Old Act the founders had to specify the amount of share capital to be subscribed. if less than the entire share capital was subscribed the formation of the company was declared unsuccessful. This could lead to unfortunate results if, for example, 99% of the share capital was subscribed but the entire formation failed because of the missing 1% subscription. Now the Companies Act provides that the founders may specify, in addition to the amount to be subscribed, a subscription minimum. For instance, the founders may set the amount of share capital to be subscribed at HUF 100 million and the subscription minimum at HUF 60 million. The formation will be successful as long as the share capital subscribed exceeds the subscription minimum, i.e. HUF 60 million.
The chart below lists the main advantages and disadvantages of the two types of Rts, closed and open companies.
Closed companies: advantages
- Right of first refusal may be established
- In-kind contribution is accepted
- The deed of foundation may restrict the type or classes or
shares that may be acquired by specific persons
- Transfers of shares may be exercised only after receipt of
consent of Board of Directors
- CEO may exercise rights of Board of Directors, therefore no
election of Board is required
- Can be established by transformation
Public companies: advantages
- Only 10 per cent of share capital must be paid up at
- Subscription minimum may be stipulated
- Only agreements with holders holding 10 per cent or more
shares require consent of Supervisory Board
- Take-over rules apply
Closed companies: disadvantages
- 30 per cent of share capital must be paid up on
- Every agreement between the company and its shareholder or
close relative thereof requires consent of Supervisory
- Take-over rules of Companies Act do not apply
Public companies: disadvantages
- No restriction on transferability of shares is accepted
- No in kind contribution is accepted, only cash
- Election of Board is necessary
- Cannot be established by transformation
The provisions of the Companies Act now contain detailed provisions on preference shares which were not included in the Old Act. Preference shares may now confer:
- a priority in dividend,
- priority in liquidation,
- priority in voting, or
- a right of first refusal in the case of closed companies.
The latter provision decided a very important issue - the right of first refusal over shares. The Old Act did not contain specific provisions on whether shareholders may have a right of first refusal in the case of the sale of shares. There was also no definitive court practice. However, in the past few years most of the courts have allowed such a right of first refusal. Now the Act clearly declares that a right of pre-emption over shares of closed companies is allowed.
The Companies Act also contains regulations concerning golden shares and shares entitling the holders to a right of veto. It provides that voting rights attaching to golden shares may not exceed 10 times the face value of the share. This means that the previously existing practice, i.e. to multiply the face value of golden shares by thousands or millions, will not be allowed in the future. However, the Companies Act also expressly permits the creation of preference shares, the holders of which may veto any resolutions of a General Meeting regardless of their face value.
There are new rules concerning a company's own shares. In the case of closed companies, the proportion of own shares held by the company may not exceed 10% of the share capital, while in the case of public companies this figure may not exceed 5% of the share capital. It has become an exclusive right of the general meeting to decide upon the purchase of own shares. Own shares held by the company must be sold within one year or, in the case of an unsuccessful lapse of such period, the company must redeem the shares and decrease its share capital.
Previous rules regarding so-called interim shares have been clarified in the Companies Act. This special type of share is issued, as before, to shareholders who have not yet paid their entire subscription money. In the case of both the foundation of a new Rt and a capital increase, only 30% of the subscription monies need to be paid upon subscription, the rest must be paid within one year. The previous possibility of issuing interim shares to cover the interim period has now become an obligation of Rts. Furthermore, the Companies Act now states clearly that interim shares are categorised as tradeable securities. The only difference between transferring a normal share and an interim share will be that if the transferee fails to pay up the outstanding portion of the subscription money, the original holder of the interim share will be treated as an on-demand guarantor of the monies payable.
Financial assistance to prospective shareholders
A significant new rule is that an Rt may not grant a loan to a third party to enable a third party to purchase its shares. This prohibition also covers the granting of on demand guarantees for such purpose. One exception from this prohibition is the issuing of employee shares or the issuing of ordinary shares to the Rt's employees under favourable terms pursuant to a separate legal rule. This separate rule may, for instance, be a provision of the Privatisation Act.
The minimum share capital of a company registered by shares will be HUF 20 million, the cash contribution of which may not be less than 30% of the entire share capital or HUF 10 million.
Transfer of shares
As mentioned above, the Old Act did not specifically regulate the transfer of shares. Therefore, it was unclear whether it was possible to impose restrictions on such transfers. Now the Companies Act expressly allows three methods of restriction on transfer. These new rules clarify the uncertainties concerning the transferability of shares, but because of a conflict of the new regulations with certain other pieces of legislation, the transferability problem has not been entirely solved by the Companies Act. The new regulations are as follows:
- in a closed company's deed of foundation it is possible to specify that certain types or classes of shares may only be acquired by specific persons.
- In the deed of foundation of a closed company it may be stipulated that the consent of the company is required for the transfer of registered shares. Such consent must be given by the Board of Directors and may only be refused upon well-founded grounds such as in the case of a hostile take-over attempt by a competitor of the company, or other grounds, specified in the deed of foundation. The prospective buyer of shares does not have to wait for a long time, since if the Board of Directors does not declare its consent or refusal within 30 days from receipt of the letter of intent, the consent is deemed to have been given.
- However, these two new possibilities of restriction on transferability pose problems. The Civil Code declares that in the case of printed shares the share certificate incorporates every right and title attaching to it. Thus anyone who acquires the share certificate acquires full title and every right incorporated in such shares. This means that even if certain restrictions on transferability of shares are contained in the deed of foundation, a bona-fide third party acquiring shares in contrary to such provisions will acquire full title and every right, regardless of what is stipulated in the deed.
- A further new rule regarding transferability provides that a right of first refusal or an option to buy or repurchase will only be valid vis-a-vis the company or third parties if such right has been indicated by overstamping the relevant shares. A difficulty arises from a government order on the printing of shares which declares that printed shares may be overstamped only if the face value or name of the share changes. Overstamping of shares for any other reason is prohibited. This conflict, however, may be solved by applying the legal principle of the superiority of an act over a government order. Because the Act is a higher ranking piece of legislation than the government order, the regulations of the Act, ie. the Companies Act, will prevail over the government order. Nonetheless, it is questionable whether such overstamping of shares will be effected by simply applying a stamp on the shares or whether overstamping must be carried out by a printing house. If we apply the provisions of the government order, overstamping may only be made by a printing house which is a costly and time consuming procedure.
Operation of an Rt
There are substantial new rules on conflicts. In the case of closed companies, each agreement between the company and a holder of registered shares or close relative thereof will need the prior approval of the Supervisory Board. In the case of public companies this restriction applies only to shareholders holding at least 10% of the voting rights.
If the value of such an agreement exceeds one tenth of the company's share capital the prior consent of the Supervisory Board is not sufficient and in this case the approval of the general meeting is required.
No agreement at all may be concluded between a shareholder and the company if such shareholder or his/her close relative is a member of the Board of Directors or the Supervisory Board.
Payment of interim dividends has also been made more difficult. According to the Companies Act, an interim dividend may only be paid if an interim balance sheet is prepared and approved by the general meeting. The balance sheet must show that the interim dividend payment is justified and that it is highly likely that the interim dividend and the final dividend together will not exceed the amount of net profits for the year. This is a rather complicated provision and the wording of the Hungarian text seems unclear. Even the experts involved in the drafting of the Companies Act have admitted that the wording will need to be improved. However, there is one favourable development. The Companies Act declares that an interim dividend received by a bona-fide shareholder contrary to the above provisions will not have to be repaid.
As a result of the above modifications, decisions upon interim dividend payments have become the exclusive competence of the general meeting.
A positive development is that from now on it will not be necessary to file the entire protocol of a general meeting with the Court of Registration, since an extract of the protocol will be sufficient.
Furthermore, the operation of the Board of Directors of closed companies has been simplified, since according to the Companies Act the deed of foundation of a closed company may provide that no Board of Directors will be elected but instead, all rights and obligations of the Board will be exercised by the CEO.
If the deed of foundation was carefully drafted under the Old Act, the Board of Directors of an Rt could carry out a capital increase by itself and no resolution of the general meeting was required. According to the Companies Act, the Board of Directors may only be empowered in the deed of foundation to increase the capital by 25% of the original capital per year. Such right may only be granted for five years to the Board of Directors.
For payment of shares in the case of a capital increase the same rule applies as for the formation of the company, ie. 30% must be paid up for closed companies and 10% for public companies but if shares are subscribed at a value higher than the face value, the entire premium must be paid at once.
A new rule concerning capital increases protects shareholders from dilution of their shareholdings. According to this new rule, if a new class of shares is created during a capital increase, for the adoption of the resolution relating to such increase, a three quarters majority decision of the other classes of shares affected by such capital increase will be required. It is unclear which classes of shares are deemed to be "affected". Theoretically, every class is affected if a new class is created. According to the commentary issued by the drafters of the Companies Act, this issue must be interpreted in a restrictive manner.
One-man companies may only operate in the form of a closed company. A rather irrational new rule concerning closed companies is that if the founder of a one-man company is a legal entity, a senior officer of the founder may not also be the senior officer of the one-man company.
These regulations are entirely new in Hungary and apply to public Rts only. A basic rule is that if someone intends to acquire more than 33% of voting shares in such a company, either directly or indirectly, the prospective purchaser must issue a public offer to shareholders and holders of convertible bonds in the target company. The offer must extend to an additional amount of shares in such a way that at least 50% of the company's voting shares are covered by the offer. The offer and the purchase of the shares must be managed by an investment company. The waiting period after the issuance of the tender offer must be a minimum of 30 and a maximum of 60 days.
The offer price must be:
- not less than the weighted average price for the 90 days immediately preceding the date of the tender offer in the case of listed shares
- a weighted average for the 180 days immediately preceding the issuance of the tender offer as published by the stock exchange in the case of OTC shares
- a price specified by the State Money and Capital Markets Supervision ("SMCMS") if the price cannot be calculated on the basis of the above two methods.
The offer must be filed with the SMCMS who may reject the tender offer within 15 days from the date of its receipt if it is deemed to be unlawful. Within three days from the date of receipt of the approval by SMCMS, the offeror must publish the offer. After expiration of the 15th day from the date of publication, owners of shares and convertible bonds may indicate their intention to sell.
During the acceptance period the target board may not carry out any "poison-pill tactics", ie. pass decisions that would "disturb" the take-over procedure. It is unclear what is meant by "disturbing behaviour". One example is that during the acceptance period the Board may not acquire the company's own shares.
A counter offer may be published during the acceptance period, prior to the 10th day before the expiration of the acceptance period. Such a counter offer must specify a purchase price which is at least 5% higher than the price offered by the first offeror, or the second offer or must intend to buy at least 5% more shares than the first offeror, or offer to pay for the offered shares in cash. If the counter-offer fulfils the above criteria, the first offer shall be deemed to be void and all deadlines start running again in connection with the second offer.
If the number of shares for which the offer has been accepted is less than the amount of shares specified in the offer, the offeror may cancel the offer subject to the conditions specified in the offer. Alternatively, in the case of an irrevocable offer, the shares for which the offer has been accepted must be purchased.
If the offer to purchase is accepted for more shares than the number of shares the offeror wishes to buy, the offeror will acquire the shares in proportion to the number of shares held by each seller. The result of the offer must again be filed with the SMCMS.
Merger and transformation
A significant new rule provides that no merger or transformation of a company may be effected until the company is registered. In the past it was common practice to found a company and immediately afterwards merge or transform such company. Now this possibility is no longer available.
A further change provides that at least two general meetings must be organised in order to carry out a merger or transformation. At the first merger or transformation meeting general consent must be reached and the Board must be authorised to prepare the merger. The actual decision will be made at the second meeting. Between the two meetings numerous documents, such as the transformation or merger balance sheet, the draft deed of foundation and the inventory must be prepared. It should be noted that no specific time must expire between the first and second meetings, ie. the two meetings can be held almost immediately after each other. However, this rule, does not apply to the merger of Rts.
A major simplification is that if the date of the second merger or transformation meeting is before 30 June in any year, the ordinary annual balance sheet may be used and no specific merger or transformation balance sheet need be prepared.
No public Rt may be established by way of transformation. If the intention is to turn a Kft into a public Rt, the Kft must first be transformed into a closed Rt and its shares then publicly offered.
A further change imposes an obligation upon the merging companies to file with their application for registration of the merger or transformation a copy of two announcements made in "Cégközlöny" in two consecutive weekly issues.
This gives rise to practical problems. According to the new procedural rules, any corporate change (including copies of the announcement) must be filed with the competent Court of Registration within 30 days of the change. If it is assumed that the announcement of a merger or transformation is applied for within eight days from the date of the second general meeting (as required), Cégközlöny normally publishes the announcement 15 days after such application for the first time and seven days later for the second time. After this, Cégközlöny sends a photocopy of the relevant pages on which the publications were made. By the time these copied pages are received, the 30 day deadline for filing may have expired, and a fine between HUF 50.000 and HUF 500.000 may be imposed. It is therefore crucial that publication of the announcement is applied for immediately after holding the second meeting.
Specific rules on mergers
The above rules of transformation apply to mergers, with the following additional requirements:
- Previously, not every type of company could be merged with each other (companies with limited liability could only merge with companies with limited liability and companies with unlimited liability only with companies with unlimited liability). Now every type of company may merge with every other type of company under one condition: the post-merger company must take the form of one of the merging companies. If the two merging companies are of the same form, the post-merger company may be of a different form. This means that if a Kft and a Bt merge, the post-merger company may not be an Rt only a Kft or a Bt but if a Kft is merging with another Kft, then the post-merger company may be an Rt, since the two merging companies are of the same form.
- Special rules apply to the merger of two Rts. As mentioned above, the general rules on transformation do not set any specific time period between the two merger meetings: these may be organised immediately after each other. However, if two Rts are merging, there must be at least a 30 day interval between the two meetings. In such a case, in addition to the merger agreement the boards of the merging companies must prepare a report on the legal and economic grounds for the merger and the exchange rate of shares. In addition to preparing and auditing the merger balance sheet, the auditors must make a declaration on the evaluation methods of the exchange rate. Furthermore, either the auditor or an independent expert must prepare a further report on the reasonableness of the previous report.
The changing business climate in the 10 years since the last Companies Act has necessitated substantial changes in the law. The new act has clarified a number of uncertainties and has established some entirely new concepts in Hungary, such as the rules governing takeovers. As with any new legislation, it will undoubtedly give rise to further questions and will possibly be amended a number of times in order to correct any defects.
For anyone with a business presence in Hungary it will therefore be crucial to review and revise their existing corporate documentation well in time before the Act takes effect, and to keep a regular eye on further developments. Cameron McKenna Ormai will be pleased to provide you with the necessary assistance and advice.