Hungary proposes ex-ante competition tool to regulate essential companies

On 2 April 2024, the Hungarian Ministry of Justice submitted an omnibus act to the Hungarian parliament proposing the amendment of several Hungarian laws, including the Competition Act. This Proposal’s most noteworthy element is – based on the German example – expanding the Hungarian Competition Authority’s (HCA) toolbox by introducing a new ex-ante regime enabling the HCA to impose obligations on certain companies without first having to demonstrate a violation of the law.

This following article summarises the Proposal’s new rules, potential consequences and next steps.

PROPOSED NEW COMPETITION TOOL

Scope of the new regime

The proposed new regime will be applicable to undertakings essential for competition and consumers across markets, which are referred to as “undertakings of fundamental importance”. Importantly, the Proposal does not contain sectoral limitations. Instead, it provides a non-exhaustive list of factors that should be considered when assessing whether a company has “fundamental importance” (e.g. market share, financial strengths, vertical integration, etc.).

The Proposal authorises the HCA to designate companies as having fundamental importance based on the aforementioned factors.

HCA’s new powers – prohibitions and obligations for designated companies

In its designation decision, the HCA may impose obligations and prohibitions on the concerned company. Such measures may relate to business activities, but could also include severe interventions concerning company structure and ownership, as follows:

• Self-preferencing, interoperability: The HCA may prohibit designated companies from favouring its own offers over the offers of its competitors, using and combining data without consent, impeding interoperability and data portability;
   
• Information provision: The HCA may oblige designated companies to inform their business partners of the performance, quality, or success of their rendered services;
   
• Intervention into structure and ownership: If the designated company is not capable of carrying out its activities or meeting its obligations, the HCA may interfere with the company’s structure and ownership to ensure security of supply. For instance, the HCA could have operations temporarily transferred to third parties, suspend voting rights, initiate appointments to management positions, or even order divestment or the sale of the designated company as a whole.

Monitoring and sanctions

The HCA could verify compliance of designated companies with their obligations in the framework of follow-up investigations. In case of non-compliance, the Proposal authorises the HCA to impose a fine of up to 13% of the previous year’s group-level net turnover.

Designation decisions would be reviewed by the HCA ex officio every three years or upon the request of the designated company. On the basis of this review, the HCA can either establish that the company no longer has “fundamental importance” (i.e. revoke the designation) or uphold the original designation.

BACKGROUND AND INTERNATIONAL OUTLOOK

The Proposal draws from a recent amendment of the German Competition Act, which introduced a similar tool (this is also described in the explanatory memorandum attached to the Proposal). There are also, however, substantial differences. For instance, while the designation criteria are very similar in most aspects (some criteria are word-for-word translations), the German legislation explicitly requires a dominant position. In contrast, the Proposal merely provides that the companies’ market share should be assessed. The possible obligations are also similar with one substantial caveat: under the German regime, intervention into structure/ownership is limited to divestment of subsidiaries/assets by the designated company. In contrast, the Proposal contains a significantly more elaborate toolbox. Additionally, while the Proposal only focuses on security of supply as a prerequisite for such intervention, the German legislation provides for more robust guarantees (e.g. it must be preceded by a sector inquiry showing a significant and continuous disruption of competition).

The ex-ante nature of the Proposal’s new tool also resembles the EU’s Digital Markets Act (DMA). However, the DMA is far more targeted (i.e. it only covers large online platforms meeting a set of narrowly defined objective criteria).

POTENTIAL CONSEQUENCES AND RISKS

The Proposal could bring about a significant change in the Hungarian competition landscape, but it also opens multiple questions. For instance, given the lack of sectoral limitations and the rather broad designation criteria, the industries that may be primarily affected remain to be seen. Based on the current wording, companies holding strong positions could be caught by the new regime in various sectors of the economy.

Additionally, while prohibitions and obligations for designated companies are similar to those under the German model, the HCA’s powers to interfere in the operation/ownership of designated companies seem to go well beyond that example. As such, the HCA would not only be authorised to order the divestment of certain subsidiaries, but it could also have operations taken over by third parties, suspend voting rights, influence the composition of management, or even require the sale of the entire designated company as such. In this regard, questions may arise as to whether such severe interventions are coupled with appropriate guarantees. In this context, the Proposal focuses on security of supply, but given that this notation is not defined the new tool could, in theory, be prone to unpredictable enforcement.

TIMING AND POTENTIAL NEXT STEPS

The Proposal is currently at the first stage of the legislative process, awaiting discussion both in committee and before the plenary session. As such, it may be subject to amendments. Under the applicable procedural framework, parliament could pass the Proposal within a few weeks or the process could also take longer. If passed, the new rules would enter into force on 1 July 2024.

Although the legislative process is pending, the HCA has already reacted to potential developments. In an interview, the president of the HCA first welcomed the Proposal, and indicated that the HCA would clarify the practical details of the application of the new tool after extensive consultation with market players.

Given that the new tool may fundamentally impact the operation of multiple companies as well as Hungarian competition enforcement as a whole, stakeholders and competition practitioners should closely monitor developments.

The article was co-authored by Márton Angyal.

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