Hungary proposes changes to private equity fund governance and state-backed financing

What happened

Transfer of fund management. Under the amended Section 74 of the Act on Collective Investment Forms (Kbftv.), a fund manager could transfer the management of a closed-end fund to another eligible manager without the supervisory authority's prior approval. It could do so either with the approval of at least 60 % of the investment unit holders or, at their initiative, it would be required to do so. If the transfer agreement is not concluded within 20 days of receipt of the unit holders' initiative, the supervisory authority could order the transfer by administrative resolution within 15 days. It would act at the request of the same 60% majority, provided that the receiving manager has declared that it will take over the fund. The resolution would set the deadlines for the handover, and the transfer date could not be later than the 60th day following the initiative.

Fund managers would have 30 days from entry into force to include the new transfer mechanism in their management rules and submit them to the supervisory authority. If they fail to do so, the management rules would be deemed amended, and the supervisory authority could impose measures and sanctions.

Temporary restriction on capital calls. For 90 days following entry into force, a closed-end fund manager could not call capital contributions under Section 69 of the Kbftv. if at least 60 % of the investment unit holders do not consent to the call in order to protect state-backed investor interests. According to the explanatory memorandum, the restriction would suspend capital calls only temporarily and would not affect investors' underlying commitments.

Takeover bid rules. The bill amends Section 68 of the Capital Markets Act (Tpt.). A change of manager of a closed-end venture capital or private equity fund under the new procedure would not automatically trigger a mandatory bid in respect of listed companies in which the fund holds a stake exceeding the bid threshold. Nor would the change of manager or the investors' declaration amount to acting in concert. The receiving manager would have to notify the affected listed companies and the supervisory authority within 15 days of the change of manager.

Separately, a person who unintentionally crosses the bid threshold, for example as a result of the enforcement of financial collateral, could avoid a mandatory bid. To qualify, the person must notify the supervisory authority within 15 days and reduce its stake below the threshold within six months. In the meantime, its voting rights would be capped at the threshold.

Eximbank and MFB collateral exemptions. The bill repeals the provisions of the Eximbank Act and the MFB Act that currently exempt the lender from requiring further security for certain obligations backed by a state guarantee. According to the explanatory memorandum, this would not automatically require additional collateral in every case. Instead, it would remove the statutory basis for disregarding additional security merely because a state guarantee is in place.

Termination of the Integration Organisation. The Integration Organisation would cease to exist without legal succession. Its assets would pass to the Hungarian State, and the Hungarian National Asset Management Inc. (MNV Zrt.) would exercise the ownership rights. A settlement commissioner appointed by the minister would publish a call to creditors within eight days, and creditors could file claims within 40 days. Recognised claims would be satisfied from state assets, up to the value of the assets transferred to the State. Any set-off or assignment of claims against the Integration Organisation would require the commissioner's prior written consent.

The bonds held by the Integration Organisation would transfer to the State without the issuers' consent. The transfer would not constitute an extraordinary maturity event and would not affect the issuers' obligations, including the joint and several liability of successor issuers.

Why it matters

The transfer mechanism would significantly strengthen the position of the investor majority vis-à-vis the fund manager. It is backed by a transfer ordered by the supervisory authority if the parties fail to reach an agreement, as well as by a deemed amendment of the management rules if the fund manager fails to update them. The accompanying amendments to the Capital Markets Act mean that a change of manager does not trigger a mandatory bid for portfolio companies listed on a regulated market. The 90-day restriction may affect liquidity planning for funds with state-backed investors.

For Eximbank- and MFB-backed financing, security requirements may be assessed case by case, even where a state guarantee is in place. Creditors and bondholders of the Integration Organisation will need to comply with the special settlement procedure and its deadlines.

Who is affected

The proposed changes are particularly relevant to:

• managers and investors of closed-end investment funds, including private equity and venture capital funds, especially funds with state-backed investors;
• listed companies in which such funds hold significant stakes, and lenders enforcing collateral over listed shares;
• Eximbank, MFB, and their borrowers and financing counterparties; and
• creditors and bondholders of the Integration Organisation and the issuers of the bonds it holds.

What to watch next

The proposals are not yet law; their adoption remains subject to the completion of the parliamentary process and promulgation. Market participants should monitor any amendments made during the legislative process, particularly to the transfer mechanism and the 90-day restriction on capital calls. As a general rule, the Act would enter into force on the day following promulgation. The provisions terminating membership in the Integration Organisation and terminating the organisation itself would enter into force on the second day following promulgation. Fund managers should prepare to amend their management rules within 30 days of the Act's entry into force.

Author: Vivien Veres