FDIs in Hungary - "sensitive industries" under scrutiny

2019 | roadmap

In October 2018, the Hungarian Parliament accepted legislation with a rather ominous title. The "Act on Controlling Investments Detrimental to the Security Interests of Hungary" (the "Act") is illustrative of the government's protectionist approach. It seeks to establish further control over EU/EEA-external investments in Hungary. The Act enters into force on 1 January 2019 and introduces significant burdens for investors in industries considered "sensitive".

Concept

The Act covers those transactions which lead to the acquisition of more than 25 % of the shares or decisive influence by a foreign investor in a Hungarian undertaking active in certain sensitive industries. In the case of a publicly listed company, the acquisition of only 10 % of the shares triggers this obligation. The Act also covers the acquisition of rights pertaining to assets and infrastructure necessary for these sensitive industries, and the establishment of Hungarian branch offices with relevant activities. These transactions will require prior approval from the competent minister.

 

Sensitive industries

Approval is necessary only if certain sensitive industries are concerned. These include examples like arms manufacturing, equipment designed for the secret service, financial, energy and public water services. However, the Act also covers electronic communication and electronic information systems for state and municipal organisations. Industries featuring items used for both civil and military purposes are also affected.

 

Foreign investor

A foreign investor is a natural person, legal entity or organization from outside the EU, EEA or Switzerland. Transactions carried out through legal entities from within this area are also covered if the person having decisive influence over the acquirer qualifies as a foreign investor.

 

Proceeding

The Act requires the foreign investor to present its economic activities and attach all documents relevant for establishing control relations. The competent minister must decide within 60 days whether the transaction is potentially harmful, but may also extend the deadline by up to 60 days. A prohibition decision may be appealed before the Budapest-Capital Regional Court. In case of an omission to notify, the minister may impose a fine of up to around EUR 31,000 on legal entities or EUR 3,100 on natural persons and order divestment. The Hungarian state may also be entitled to pre-emption rights in such cases. The minister's approval also constitutes a prerequisite for other approval proceedings related to sensitive industries.

 

Impact and comments

It remains up to the government to clarify the detailed rules of the proceedings. At this stage, however, the Act seems to entail significant burdens on compliant market participants, which may easily be evaded by less rigorous undertakings. It is also unclear what constitutes an investment detrimental to national interests. The government may seek to establish more clarity in its upcoming decree.

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This article was up to date as at the date of going to publishing on 10 December 2018.