Category: Hungary

Andras Levai is the Head of Legal-CE Ethics and Compliance at Tesco Central Europe. Levai, who is based in Hungary, has been with Tesco since June 2009, when he joined as Senior Legal Counsel. In 2013, he was appointed to the role of Group Internal Auditor for Hungary and Turkey and he became the Head of Legal for Hungary in 2014. He was appointed to his current role in 2016. Prior to Tesco, he worked at the Hidasi & Partners Law Firm.

CEELM:  To define the goal, what is a compliance culture in your mind?

ANDRAS: To give you a feel of my role, I am now handling the ethics and compliance agenda for the Central European region (Hungary, Czech Republic, Slovakia and Poland). Bribery, competition law, data privacy and all kinds of compliance governance land on my rather broad agenda. In this capacity, I like making the analogy that compliance and a compliance culture are like a cake and the cherry on top of it. 

The cake represents the basics in terms of compliance. By “basics” I mean all the trainings, the guidelines, the communications, etc. I like doing compliance, but sometimes it can seem a bit of a dry area. 

In contrast, the cherry is the culture of it all. It’s the one thing you can start focusing on once you have the basics in place, and you have done them right – otherwise you wouldn’t be able to develop a culture. What is culture? It’s the next step. It’s asking how you achieve a company where people are not “forced” to engage in compliance and resent it when it comes up – either because it’s perceived as boring or because it’s a tedious exercise. It’s about how do you get people to complete an online training because they perceive it as something important for them, to protect themselves and the business. After two or three years of building the basics, we have now started focusing on the culture side of things, and we’re already seeing results. And, really, as a compliance function leader that’s when you start being happy in your role – when you start noticing genuine engagement from the rest of the company towards compliance. 

CEELM:  Since you mentioned you now have your cake and are finally ready to start working on the cherry, what’s the first step towards it?

ANDRAS: We just started a workshop with our managers and directors on our code of business conduct. We already had an online training that takes place each year. However, this year we started with a workshop for smaller groups of our senior colleagues. This is not just about the specific provisions and the content of the code of conduct. The critical component focuses on the bigger picture of “how” someone should act with integrity as a responsible leader within Tesco. 

Before we started it, we just hoped that this be well-received from our colleagues, who had said they didn’t think they could participate in an exciting and genuinely interactive workshop on compliance and ethics. That was really good for us to hear, of course, as we worked hard to develop an agenda that moved away from a technical lecture into an interactive discussion. 

CEELM:  And what are the elements you use to make it interactive?

ANDRAS: Prior to the workshop, we ask colleagues to prepare by reflecting on and sending us a leader that they admire. As an ice-breaker, we use their responses to explain why they admire that leader and why they believe he or she acts with high integrity. This is a good starter and the desired outcome of it is to “define” what integrity means for people. It is very interesting to see how in different workshops, run in different countries, for different functions, the outcome is very similar. There are very interesting discussions that stem from the results as well as the similarity between the results across the different workshops. 

In the second half we put ethical dilemmas up for debate and open up the floor to all. The questions raised tend to be related to our own company rather than commonly-discussed ethical dilemmas. We look to debate questions around the lines of “should companies do more or not than what is required by the letter of the law,” or others derived directly from our own operations.

CEELM: Why did you pick this format and target audience?

ANDRAS: It was actually based on an internal survey we carried out a while ago. Every year our colleagues need to make a declaration at the end of year financial year that they have respected the company’s code of conduct – this is mainly a process resulting from UK Bribery Act compliance efforts. Along with this exercise, we launched a quick survey to our colleagues to find out what it is that “encourages them to follow an ethical culture” within their role. The results in CEE indicated that, more than in other jurisdictions, line managers were highly respected and perceived as role models. It only made sense then that we focused some of our efforts towards training them as compliance culture ambassadors. This was the critical point that led us to start these workshops. 

CEELM: What other activities did you find help you build that compliance culture?

ANDRAS: I’d describe them all generally as activities that are not the ordinary way to communicate with colleagues. For example, for our competition function, we carry out an “extraordinary” event for our buyers. This is a half day event where one part is a theoretical – one where we present competition law – and one is a part focused on a discussion around this area followed by a light quiz on the topic with a few prizes at stake to get people engaged. This is, again, something that can bring competition and compliance closer to people and make it a bit more interesting – especially since this is intentionally organized outside of the office. 

Each year we also run what we call a “colleague event.” There we, the compliance team, regularly have an exhibition zone. It was weird for us to have a booth the first time we set it up, but over time we developed a quiz game that participants can get involved in, and, again, win some prizes. In my mind, these are not core elements but small things to bring compliance closer to the hearts and minds of our colleagues. 

CEELM:  How large is your compliance team and how is it structured?

ANDRAS: It consists of nine people, covering three areas: Business Integrity (bribery, trainings, communications, and governance); Competition Law; and Privacy. I have people in all four CEE countries and we work in a structure similar to big law firms, in that we have practice groups – we don’t work country by country but practice area by practice area. My Data Protection Officer is in Krakow, my competition legal counsel is in Budapest and so on. 

CEELM:  Since you mentioned privacy, how much of an impact has data protection had on your work over these past few years?

ANDRAS: A significant one. The largest team in my group is the privacy group now. We have a rather robust program in place – in line with the UK program. It gave us a lot of work over the last couple of years and I am sure it will continue to do so. Even though the GDPR is becoming less and less newsworthy, it still was a huge change for an organization the size of ours, where you have thousands of systems and processes in place, making it a considerable challenge to keep it all under control. 

CEELM: Any future developments you see on the horizon that will have a similar impact?

ANDRAS: Nothing really at the scale of the GDPR. We spent the last three years with the launching of the different compliance programs I mentioned already. I think that now we are in a position where we can say we have the cake, so now – while I cannot know for sure what the future holds – I really hope we can focus on the cherry part and develop the existing programs.

This Article was originally published in Issue 6.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Andras Mohacsi is the Head of Competition Law and Sanctions at British American Tobacco, where he is responsible for designing, rolling out, and coordinating the implementation of the company’s global competition law and sanctions compliance programs, as well as overseeing the management of any related proceedings against any group company. He first joined BAT in Hungary in 1998. Before that, he worked as Head of Legal of Daewoo Bank Hungary.

CEELM:  What would you say is the critical first step towards building a compliance culture?

ANDRAS: It’s obviously hugely important that what the compliance culture consists of in a company is defined and expressed – following the principle of a top-down funnel. The key principles and beliefs should be incorporated in a very important policy document and articulated in a very clear manner in a form that is signed off on by the board of the highest decision-making body of the organization and clearly communicated throughout the organization. 

In our case, we have a document called “The Standards of Business Conduct” – and I know many other companies have a similar document. It might sound simple and formalistic, but I don’t believe you can talk about a culture without clearly articulating the clear principles and the clear boundaries everyone needs to respect. This is ideally done per area, since that’s how it becomes tangible for the people working in an organization. 

This document, supported by the board, needs to set out precisely what the very clear high level dos and donts for the organization are, and these should be clearly articulated on everything from how we deal with sanctions, to competition matters, and bribery, and so on. 

It is important that this be taken seriously. It has to be supported by a “speak up” line that people can use to raise their concerns and register incidents if they believe those principles are not followed. Equally, it is critical that any concern or incident that is raised is actually followed-up on, is properly reviewed and if necessary investigated, and, where necessary, that the appropriate and proportional sanction is applied. 

Again, one could argue this is a slightly formalistic approach – and that may be true – but I find it fundamental in as far as the “hard side” of compliance is concerned. 

CEELM: What’s the “soft” side of it?

ANDRAS: The “soft side” is how this is supported by communication, by the remuneration structure of the organization, and how compliance topics are addressed at corporate events, functions, and sessions. How these principles actually find their way into the business activities.  

One of the most useful signs that you have a true compliance in place is when you see its principles being implemented irrespective of how attractive a deal might look from a commercial perspective. When we are called in to carry out a due diligence project – whether related to a bribery concern, or AML, or anything else – we know people are really engaged with our compliance principles. It is important to be able to point to a track record of, at times, wanting to enter into a deal but, after checking to make sure all these areas were adequately considered, saying “no.” Of course, no one is saying we have to say no all the time, but that is the biggest sign that the compliance culture you are fostering has spread throughout the organization: when its principles find themselves applied in every decision. 

CEELM: You mentioned that, in the process of defining your principles in that high-level document, they would ideally be broken down into areas. What are the most important ones, in your mind?

ANDRAS: Typically, a modern standard business conduct document would address all compliance areas which are relevant for the business model of an organization. When you have a global organization like BAT, obviously it would cover a very broad range of areas, but I don’t think there is a defined list of compliance areas which have to be incorporated into this kind of document for every single company. For example, if you are not on the stock exchange there is no need for a chapter on insider trading, and if you are a very small company, lighter concerns about competition law exist. Arguably, there are some key areas: competition law, bribery and corruption, AML, illicit trade, and tax evasion. Those are also some of the main ones that I deal with on a daily basis – but there are other areas covered within my company such as insider trading and books and records, and a few others that are not directly covered by my department.

CEELM: But is a large compliance manual actually something that people digest?

ANDRAS: It really shouldn’t be a long document. In terms of size, I think the ideal scenario is that you have a “chapter” per area (such as competition law) but that it is not longer than what you’d include on a power point slide, or maybe two. That is more than enough to include the absolute critical policy messages you wish to convey. You want to think of these as constitutional messages rather than a manual for all to use.

Obviously, beneath that document you may need some procedures that take into consideration how these high-level commands or principles can best fit into the business model of the organization. That’s particularly important since we shouldn’t forget that one organization may have various different businesses. Think of GE and how many different businesses they may have. I think the absolute key is that you need to consider the actual business environment and business model of the organization: who are your suppliers, what’s your growth model, the size of organization, and so on. It is from that starting point that you can then identify how can certain risks feature in the context of the various aspects of your model. What could be a typical bribery scenario vis-à-vis your suppliers? What could be the typical bribery temptation scenarios for your employee groups? Once you map those out you have what we call “achieving a risk” or “temptation assessment” in the context of the business. 

Depending on the risks, you need to figure out what are the most practical procedures that would fit under that high-level policy document. The role of these procedures is to give guidance to the users as to how you are expected to comply with the high-level policy statements. It would, for example, tell the person in our procurement department, “this is your supplier due diligence process to ensure compliance.” From this point, of course, you need to start looking into the very important pillar of trainings but these too need to be based on who does what and why – it cannot be abstract, and it has to be meaningful for the type of person and his/her type of role in the organization. Only then you can say that your approach is risk-based – based on the actual risk that, at least in theory, can happen in that specific situation. 

CEELM: This all feels like it’s still more organizational set-up than the soft side of things. 

ANDRAS: It is, but when you talk about culture you want to talk about the soft things. I am personally very much a believer that you can talk about the soft stuff only once you have laid a very very solid foundation when it comes to the hard elements – when you have done your risk assessment, you have your policy statement, you have your procedures, you have your training programs, you employ forms of control on a regular basis. On that last one, for example, we have a system in place where everyone reports once a year and declares themselves as either compliant or partially compliant (these reports are then signed off by a senior person who carries out the due diligence on a statistical basis). If you declare yourself only partially compliant, you need to put forward a justification and a remediation plan. Furthermore, once every few years we carry out an internal audit, where people go on the ground and carry out a solid assessment to see how all of this works out in real life. 

CEELM: Earlier you mentioned your “speak up” line as a good indicator of an existing compliance culture. Since we are still talking about hard aspects, what processes have you set up to facilitate it?

ANDRAS: Indeed, “speak up” is enormously important. It is so because if people use this tool, then you know people within your company understand what the potential issues are, and that they think seriously about it and take it seriously enough to talk about potential problems if they come up. It is also important that employees are protected when they speak up and that it is seen as something constructive and positive. It reflects that people care and feel ownership.

It is important to enhance this feeling by following up, as I mentioned earlier, but also by setting up a reporting process. We pull stats together based on it and report them internally – sometimes this is done to an internal auditing committee: “Last year we had 2000 incidents raised based on our ‘speak up’ line, 25% were related to HR complaints and so on.” These stats are also an opportunity to demonstrate to the auditing committee, and the broader organization, that you have followed those up, investigated, and, ultimately, taken action when justified. If anyone has breached the standards of business conduct you need to show real and serious consequences. Such consequences can vary and we need to show to everyone that, if proportional, a staff member was fired, or we terminated a supplier or customer despite commercial benefits. These are real, palpable demonstrations to help further our compliance culture. 

CEELM: Since we spoke a great deal about policy-setting, how does your team move from dictating “this needs to be done this way,” which may cause friction, towards engaging your other business functions in a collegial manner?

ANDRAS: Indeed, while we have many areas where the messages we convey are easy, there are others where there is actual resistance and the level of resistance can actually differ from mild to rather strong. There are a number of factors behind this resistance. Sometimes, especially in cases pertaining to competition law matters, the pressure is very high commercially because people just want to make their numbers. In other cases, such as when we want to roll out a third party due diligence project: the resistance doesn’t come from the fact they do not buy into the need to do it, but from the fact that it is enormously burdensome.

This leads to one of the key aspects of a successful compliance function: we need to remember that we are working with a business and make an effort to understand where push-back is coming from. Sometimes it’s a simple matter of sitting down with our colleagues to spend some time convincing them to engage. Sometimes we need to realize that we are placing unnecessary burdens on our colleagues. The key message is that while we need to design and roll out robust compliance procedures that are based on the actual risks the organization is facing, we need to listen to our business colleagues and work with them to simplify the compliance procedures, to make them more effective.  

This Article was originally published in Issue 6.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Starting or continuing a mining project has always been subject to various licensing requirements. However, an amendment to spatial planning laws that became effective on March 15, 2019 increases the regulatory challenges faced by investors by introducing a completely new condition for obtaining the local municipality’s blessing, even for operations that are already underway. Therefore, the aftermath of the most recent regulatory changes should not be underestimated, as the number of mining sites exceeds 800 in Hungary.

Licensing and Concession Requirements: 

Save for a handful of exceptions, the exploration, appraisal, and exploitation of hydrocarbons, coal, and methane bound in coal seams and ores is subject to a concession agreement, as is any mining activity related to geothermal waters more than 2,500 meters below the surface. Any other mining activity (e.g., clay or sand mining in open pits) may be carried out subject to a license issued by the mining authority. 

If explorations are successful, the mining entrepreneur may request that the mining authority designate the exact boundaries of the mining site within which appraisal and exploitation may be performed.   

In addition, to actually perform exploration, appraisal, or exploitation, the mining entrepreneur is obliged to prepare a technical operation plan and have it approved by the mining authority in advance. Technical operation plans for exploitation are limited in time (up to five years for underground mines and hydrocarbon and oil mining, and up to 15 years for open pit mines). The mining entrepreneur must revise the technical operation plan annually and amend it, if necessary. All amendments to the technical operation plan must again be approved by the mining authority.

These requirements for establishing a mining site and for preparing and periodically reviewing or amending the technical operation plans are particularly important in light of the following changes made to the local spatial planning rules: First, as of March 15, 2019, the mining authority may only establish a mining site upon the request of a mining entrepreneur if the local municipality has designated the site as a mining area in the respective local spatial planning code. If the municipality has not done so, the entrepreneur needs to prove that the local municipality passed a resolution in which it agrees with the new mining project and intends to prepare or amend the applicable local spatial planning code. 

Second, the March 15 amendment also prescribes that the mining authority may approve a technical operation plan only if the proposed mining area is formally designated as a mining area in the relevant local spatial planning code. 

Therefore, new mining projects will be subject to local municipal approval, because in the absence of a properly amended local spatial planning code, the mining authority may not establish a mining site and thus no appraisal or exploitation works may be started. 

Even already running exploration, appraisal, and exploitation projects will be subject to the discretion of the local municipalities, because the approval of the new or amended technical operation plans of those projects will also depend on the local spatial planning codes. In addition, the amended spatial planning laws may be interpreted as applying solely to the technical operation plans of open pit mines. However, pursuant to a strict interpretation of the amended laws, the above requirement applies to all kinds of technical operation plans, including underground mines. 

Although local municipalities are required by law to prepare and update their local spatial planning codes, several municipalities in Hungary have outdated local spatial planning codes – or no code at all. In the case of new investments, this risk may be evaluated before the investment decision is made and may be managed when preparing the project. For already running projects, however, the absence of a properly updated local spatial planning code could result in the forced suspension of the project if the effective technical operation plan cannot be amended or renewed in due course. 

Due to these risks, mining entrepreneurs are advised to check the conformity of the local spatial planning code with the legislative changes that took place on March 15, 2019 in order to make sure that a mining site may be established or an ongoing project may be continued without any spatial-planning-related concern. 

By Kinga Hetenyi, Partner, and Daniel Varga, Attorney at Law, Schoenherr Budapest 

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Competition/Antitrust expert Sam Baldwin is a British national in Budapest’s Szecskay Attorneys at Law. Before joining Szecskay he spent eight years as an attorney in Copenhagen with the Gorrissen Federspiel law firm. He has significant experience advocating before national competition authorities and the European Commission and is successful at fending off accusations of wrong-doing on behalf of clients. He has represented companies in national court proceedings as well as at the General Court and European Court of Justice in Luxembourg.

CEELM: Run us through your background, and how you ended up in your current role with Szecskay Attorneys at Law.      

SAM: My background is a little bit complicated. My parents are both British nationals who moved to Copenhagen, 

Denmark, where I was born and raised. I met my wife in Hungary as I was living here for a while during my gap-year just before starting law school in 2004. She eventually came to Denmark where we lived as I finished university and started as an associate at Gorrissen Federspiel, a recognized Danish firm, where I practiced for eight years doing EU & Competition law. As a senior attorney in 2017, I went for a six-month secondment at Szecskay – one of Gorrissen Federspiel’s partner/network firms – as this was an opportunity for my wife to spend some time with the big family she has here. As it turned out, we liked life in Budapest and as there was an opportunity for me to join Szecskay’s antitrust practice as Of Counsel, we decided to stay.

With my parents’ migration from the UK to Denmark, and now mine from Denmark to Hungary, it seems my family has exercised its EU free-movement rights more than most. It is therefore particularly sad for us that the UK is set to leave the EU. 

CEELM: Was it always your goal to work abroad?          

SAM:  Yes & no. I certainly always imagined temporarily working abroad but I had not envisaged becoming a permanent/indefinite expat. My initial reluctance to relocation was probably due to the logistical inconvenience of being based – and particularly of raising a family – in another country than your original home-country. As a child in Denmark, I remember visiting family in England at least three to four times a year, which was great but not always convenient in terms of having to travel all the time in order to see family.  

CEELM: Tell us briefly about your practice, and how you built it up over the years.        

SAM:  I do exclusively EU & Competition law, and I have built my practice on two pillars: advocacy and operational compliance. The advocacy stuff is often simply getting clients out of trouble if they are accused of wrong-doing by antitrust enforcers. But there is just as much advocacy in complex merger control proceedings in persuading the regulator that a merger will not lead to anti-competitive effects. With the operational compliance work, it’s about advising clients in the critical grey areas of competition law (of which there are many), and over the years I have developed a particular interest in price & discount design as I have helped clients avoid various forms of pricing abuse. 

I have found it important to also base my practice on active contributions to the competition law community. Back in Copenhagen I founded the Young Competition Law Professionals network, which was a result of going to competition law conferences and always seeing debates by the same handful of (certainly distinguished and learned) middle-aged gentlemen.

I also enjoy offering my two cents on tendencies within EU antitrust in articles and blogs and I regularly publish on a prominent competition law blog. I don’t know if anyone reads my posts, but at least I get to see my name in print (albeit digitally).  

CEELM: How would clients describe your style?     

SAM:  As a huge fan of the cringe comedy tv-series The Office (the original UK version, not the US spin-off) I simply cannot resist answering this question like the character David Brent would by saying that clients describe me as “refreshingly laid back for a man with such responsibility.” But award-winning comedy aside, I like to think that clients experience me as an advisor who does more listening than talking. I generally ask a lot of questions so I can be completely in sync with the commercial and market realities the client is facing. 

When advising on compliance matters, it is also important for me to calibrate my advice to the client’s appetite for risk. And by risk I do not mean the risk of getting caught, but rather – in grey areas where there is no clear legal precedent – the risk that an antitrust enforcer is not persuaded by what the client and I think are pro-competitive reasons for certain behavior. This risk needs to be weighed against the commercial downsides of being overly cautious. This is modern compliance management in a nutshell, I think. 

CEELM: There are obviously many differences between the Hungarian and the Scandinavian judicial systems and legal markets. What idiosyncrasies or differences stand out the most?         

SAM:  One of the most notable differences in the legal market is the size of the (big) law firms. A firm of 30 lawyers or more is considered big in Hungary, whereas it is considered medium-sized in Denmark. 

However, this is not due to there being fewer private practitioners in Hungary. In fact, relative to population, there are twice as many lawyers in private practice in Hungary as there are in Denmark. The difference is likely due to the fact that Danish law firms have historically grown through a series of mergers of already sizeable firms, whereas there has been relatively little merger activity in the Hungarian legal market. This may be due, perhaps, to another significant difference: the age of the firms. 

By way of example, while Szecskay celebrated its 25th anniversary in 2017, Gorrissen Federspiel in Denmark is celebrating its 150th anniversary in 2019. The reason for the age difference may be at least in part that few corporate law firms in Hungary date back further than to the early 1990’s following the fall of the Iron Curtain. For the same reason, in Hungary you will often find that the founding partners whose names form the law firm’s brand are still active. Szecskay’s founder, for example, Andras Szecskay, is still going strong and is Managing Partner of the firm. Where there is no difference, however, is the high-performance culture and commitment to being the best. This seems to be the culture in BigLaw everywhere. 

CEELM: How about the cultures? What differences strike you as most resonant and significant?

SAM: One cultural legal quirk I noticed immediately is the love that the Hungarian legal system has for stamping documents. Sometimes it seems like the validity of a document is directly proportionate to the number of stamps, seals, and ribbons on it (… perhaps a slight exaggeration). 

As for cultural differences in general, the most obvious one is the fact that Hungarians are more direct in their communication – which certainly anyone with a British background will notice. 

Hungarians call a spade a spade – or as they say, “nevezuk neven a gyereket,” which means, “we call the child by its name.” This can also be reflected in how lawyers communicate with each-other. Where a British lawyer might say to opposing counsel, “this precedent is unhelpful to your case,” a Hungarian lawyer might say “this precedent is detrimental to your case.” This cultural difference is even reflected in email salutations. In Hungarian, it is common to end your email salutation with an exclamation mark – like, “Dear Sam!” – whereas the ongoing debate among native English speakers seems to be whether to put a comma or nothing at all – i.e. “Dear Sam,” vs. “Dear Sam”. But certainly no exclamation mark!

As someone brought up with the British understatement, the direct style can take a little getting used to, although I like it. And Hungarian lawyers being more direct is of course a generalization, as the temperament and style of lawyers vary considerably like everywhere else.

CEELM: What particular value do you think a senior expatriate lawyer in your role adds – both to a firm and to its clients? 

Sam: Well, many corporate law firms claim to have an international profile but few actually walk the walk. At Szecskay, quite a number of us are qualified in other jurisdictions, and we think that this helps to demonstrate to clients that the firm is truly international and outward-looking.

As for myself in particular, I benefit from a lot of prominent Scandinavian companies having significant presence here, often with regional HQs in Hungary serving as hubs for operations in CEE. Our Scandinavian-based clients really value our ability, for example, to provide legal compliance-management solutions that can bridge the Scandinavian way of doing things with the desire to expand and grow their business in CEE.

CEELM: Do you have any plans to move back to Denmark?      

SAM: No, not at the moment. If I were to return, it wouldn’t be for the climate.  

CEELM: Outside of Hungary, which CEE country do you enjoy visiting the most, and why?          

SAM: Prague is certainly beautiful. And so is Vienna, where I also have some in-laws, so plenty of excuses to visit. That said, there are so many places that I have unfortunately not yet been.  

CEELM: What’s your favorite place to take visitors in Budapest?   

SAM: One of the first places I take visiting family and friends is the Margaret Bridge, which connects Buda and Pest across the Danube and is also connected in the middle to the very green Margaret Island. The island is great for strolls during the day, and at night it is fantastic to stand on Margaret Bridge and look down the river at the Parliament Building, Buda Castle, and the Chain Bridge – all of which are generously lit up after dark. At Szecskay we have actually published a little book called Our Budapest in which all senior lawyers have indicated their favorite places in the city. If anyone is interested, they are welcome to email me and I will send them a copy. 

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In January 2019 CEE Legal Matters reported that Deloitte Legal had advised K&H Bank on long-term non-recourse project financing provided to Photon Energy Group for Photon Energy’s 11.5 MWp proprietary PV power plant portfolio in Hungary. Pontes Budapest advised Photon Energy on the deal. We reached out to both firms for more information.

The Players:

• Counsel for K&H Bank: Luca Bokor and Balazs Varszeghi, Partner Associates, Deloitte Legal
• Counsel for Photon Energy: Csaba Polgar, Partner, Pontes Budapest

CEELM: Luca and Balazs, how did Deloitte Legal become involved with K&H Bank on this matter? 

LUCA: After taking part in a number of solar projects, Deloitte held a workshop for K&H on the financing of solar plants back in 2017. Throughout the workshop, which we put together with the financial and technical advisory team of Deloitte, we were able to answer complex and specific questions K&H raised regarding such projects, and we must have made a positive impression. I think that the workshop was a good example for the “AS ONE” concept of Deloitte, namely that clients may get advice on a wide scale of questions at one single spot, and the various service lines of Deloitte rely on the knowledge and experience of one another. After being selected as one of the top three law-firms in the Photon tender the enthusiasm of our young team in the course of a personal meeting with Eszter Nagy from K&H and Clemens Wohlmuth from Photon convinced Photon as well, and we were thrilled to be selected for this project.

CEELM: Csaba what about you? How did you and Pontes Budapest start working with Photon Energy?

CSABA: Pontes Budapest has been advising Photon Energy Group since October 2017 in connection with all of their Hungarian dealings. Photon is a long-standing client of Pontes’s Warsaw Office and the referral came from them. The introduction was made by Christian Schnell, who is the head of our Warsaw Office and co-head (along with me) of Pontes’s Energy Practice Group. First contact was made by Georg Hotar, who is the CEO and majority owner of the Photon Energy Group, which is ultimately listed on the Warsaw and Prague Stock Exchanges. We had a fairly long phone conversation, followed by an introductory meeting where I was pretty thoroughly cross-examined on our energy (in particular solar) experience, knowledge, market insight, and contacts, and even our business-mindedness. The first mandate came shortly after that first meeting directly from the CEO, so we hopefully made a good impression.

CEELM: What, exactly, was the initial mandate when you were each retained for this project, at the very beginning? Balazs, what about you and Deloitte Legal, when you were retained by K&H? 

BALAZS: By the time we were engaged the indicative finance term sheet had already been agreed between the bank and the sponsor. Hence, we were mandated to perform the legal due diligence of the project and to represent K&H, the lender, in the transaction, including the drafting, negotiating, and finalizing of the finance documentation, and to verify closing conditions. As customary in such matters, we also provided additional ad hoc advice on regulatory and other matters when necessary during the transaction. 

CEELM: And what about you, Csaba? What was the initial mandate from Photon Energy?

CSABA: Our first mandate was related to the acquisition of the solar portfolio, in connection with which we later provided borrower-side project-finance-related legal services. We first co-operated with Photon Energy’s business development team, headed by Lukas Jelinek, who is responsible for identifying suitable targets, carrying out legal, financial, and technical due diligence on the target entities, negotiating the acquisition documentation, and pushing the transactions to reach financial closing under the sale and purchase agreements.

CEELM: Who were the members of your teams, and what were their individual responsibilities?

LUCA: The energy team was led by Balazs, and I led the finance part of the project with the assistance of Managing Associate Linda Al Sallami. 

CSABA: Our team consisted of Trainee Peter Ruff, Associate Alexandra Cseri, and Of Counsel Szilvia Kassai, all working under my overall supervision and responsibility. Szilvia was responsible for the acquisition-related tasks, including due diligence and translation documentation. Alexandra and Peter were responsible for the security documentation and conditions precedent collection in the project finance phase. I dealt mainly with the Loan Market Association standard facility agreement negotiations and supervising all aspects of the transaction, including the energy regulatory related elements.

CEELM: How was the final agreement structured, why was it structured in that way, and what were your roles in helping it get there? 

LUCA: The credit facility agreement is based on LMA standards with ten borrowers as co-debtors. In the structure, we initially had to distinguish between the refinancing facility regarding the already existing plants and the plants under construction (each in a different phase of completion). Naturally different draw-down conditions apply to each. We were keen to minimize the number of documents related to the facility agreement as much as possible, without jeopardizing the enforcement rights of the bank, thus the ten borrowers were combined in one single credit facility agreement and most of the security agreements were drafted on project-basis.

CSABA: The final agreement was an LMA standard term loan project finance facility agreement, accompanied by a full set of security documents securing repayment of the loan provided. The loan is a limited recourse loan, secured by the project cash flow and project assets. The loan was provided for three solar power plant portfolios to be built at three distinct locations in Hungary by ten special purpose vehicle companies, with different timing and technical content. We had a very large number of collateral documents and an unusually long conditions precedent list that are needed to be fulfilled to disburse the loan.

CEELM: What was the most challenging or frustrating part of the process? 

Balazs: The most challenging was the fragmented nature of the project, and therefore the transaction as well. The project was compounded of over 15 smaller plants, distributed among ten borrowers, and spread among three locations. This complexity of the project had to be factored in during our due diligence and finance work, and the high number of PV plants and borrowers made the due diligence process and financial closing (CP collection) particularly burdensome.

CSABA: The most challenging part was agreeing on the terms of the loan agreement and the sponsor’s undertaking agreement. We had to be particularly attentive to the fact that the ultimate mother company in the Photon Energy Group is publicly listed, which meant certain limitations in connection with the undertakings that a project financing bank would normally like to see in the project finance documentation. Also, in both the acquisition and the financing due diligence phase, we had to face a number of challenging energy regulatory issues related to solar developments. The solar industry is relatively young in Hungary and both the authorities and the market players lack the necessary experience to deal with certain issues that are properly handled in more mature markets. Regulations are also silent on certain significant legal and technical issues and the parties involved often have to agree on unforeseen risk allocation sequences that are inevitable to close the transaction successfully.

CEELM: Was there any part of the process that was unusually or unexpectedly smooth/easy?

LUCA: I think the cooperation and communication was very easy between all parties involved in the transaction. Though Photon initially intended to close the transaction within a rather ambitious time frame, even the prolonged signing date did not cause too much tension. Each party tried to be as flexible as possible.

CSABA: The security package negotiation was somewhat easier than expected. Also, notarization of the documents (which can be a painfully long, full-day process) went surprisingly easy, largely due to the seamless co-operation with Deloitte Legal and the professionalism of the acting notary, Dr. Viktor Mate.

CEELM: Did the final result match your initial mandate, or did it change/transform somehow from what was initially anticipated? 

Luca: Yes it did. As we were working on the drafts, the work on the construction of the plants did not stop either. So the financing for some of the project actually turned into re-financing by the end of the deal. Also the security structure was somewhat flexible when we started negotiating with K&H. Our view on the structure of the documents – namely some of the security agreements were drafted on a borrower basis, and others on a project basis – was completely accepted by K&H. This way we could reduce the number of security agreements to 33.

CSABA: As our initial mandate was the acquisition of the projects, it obviously changed and resulted in the project-finance-related mandate. It is actually one of the most satisfying things in a transactional lawyer’s life: the follow through the whole lifecycle of a project, from the birth of the business idea, through acquisition and financing, up until actual construction of an asset, all done with our help. Moreover, it is even more rewarding if the tangible result of the transaction we have been assisting with is a sustainable, renewable, and green asset such as a solar power plant portfolio. It is actually in line with our so called “triple bottomline impact” policy, which Pontes Budapest has pioneered to implement in the coming years as a law firm. In a nutshell, it means that we only undertake assignments from clients that are not only profitable from a financial point of view, but which can also be identified from a social and/or environmental point of view. 

CEELM: Balazs, what specific individuals at K&H Bank directed your team’s work, and how did you interact with them? 

BALAZS: Eszter Nagy, Head of Structured and Project Finance at K&H, and Imre Baji-Gal, senior project finance manager – both familiar with the particularities of solar financing – instructed us on behalf of the client. Our knowledge of Eszter and Imre from other transactions, coupled with their knowledge of the market and experience in similar solar matters, made interaction with them really smooth and seamless, and we could always arrive at a common understanding rather easily.

CEELM: How about you, Csaba? Who instructed you at Photon Energy?

CSABA: Our work was directed and supervised by Clemens Wohlmuth, the CFO of Photon Energy Group, and Martin Morovics, project finance manager. We mainly communicated through e-mail and phone, with personal meetings arranged when and if necessary. As the full documentation was more than 1,200 pages, with the facility agreement itself being 300 pages, it was sometimes more efficient to meet personally and sit through a day with the bank and its advisors.

CEELM: Luca, how would you describe the working relationship with Pontes Budapest on the deal? 

LUCA: Pontes Budapest got involved in the transaction after the first round of negotiation of the credit facility agreement. The first round of discussion of the facility agreement was between the Deloitte Legal team, Eszter Nagy, and the Photon Team only, therefore mostly business-related questions were discussed. Most of our meetings were personal meetings, especially in the earlier rounds. Coming closer to the signing date telephone conferences became more frequent. Given the complexity of solar financing deals, the final negotiations actually took place in more than one week. The working experience with Csaba Polgar was very positive, as he is an experienced lawyer in both energy matters as well as financing deals, and therefore having him on the other side of the table was a good professional experience.

CEELM: Csaba, how would you describe the working relationship with the Deloitte Legal team? 

CSABA: The Deloitte team was led by Luca Bokor, supported by Linda Al-Sallami. Both were reasonable, professional, and experienced in project finance matters. Where needed, they were supported by Balazs Varszeghi, head of Deloitte’s energy practice. Given the magnitude of the documentation, we largely communicated by e-mail, but we also talked a lot over the phone and had a number of meetings in order to reach successful signing. The final negotiations took two full days. There were tense moments, but this is the nature of these things. Both parties had reasonable and ample arguments, both from a legal and business perspective, and it is ultimately always up to the clients to make the final call on the allocation of risks that are inherent in projects of this type. Deloitte’s response time to our queries was simply superb and they also had the necessary bandwidth to produce the particularly hefty documentation in time. I would be happy to work with them again on other translations. It’s a young and dynamic team – a good example of a perfect counsel-to-counsel collaboration.

CEELM: How would you each describe the significance of the deal to Hungary, or to the region? 

BALAZS: We are clearly experiencing a very tangible take-off of solar transactions and solar financing in Hungary (and in the region generally). While the communicated goals of the government and the regulator with respect to the share of solar electricity generation in Hungary’s future energy mix may seem somewhat ambitious, it is nevertheless clear that the current hype around solar is yet far from being exhausted. The investments by well-known, professional investors such as Photon, and the emergence of specialized teams at finance providers and legal and technical advisors competent in solar projects demonstrates that there is trust in the current Hungarian solar electricity production market, and in its future development.  

CSABA: From Photon Energy’s perspective, the deal was very significant as this was their first successful project financing on the Hungarian market, which is now one of their key markets, with huge growth potential. For K&H Bank, which is I think one of the market leaders on the solar finance market, the deal was also important as Photon is one of their key accounts, with very ambitious financing plans for the future.  Overall, I think the significance of the financing on the market is that it was done fully in line with international standards, showing that the Hungarian renewable regulatory subsidy scheme aimed at facilitating the implementation of at least 3 GW of solar power plants before 2030 is fully bankable and acceptable for large and sophisticated international investors such as the Photon Energy Group.

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The number of electric vehicles in Hungary is rising. In response to this, the National Building Regulation of Hungary (OTEK) has established new requirements for the provision of recharging points, with a January 1, 2019 deadline. Although these new rules have had some visible results, there is significant delay in establishing full compliance. Those who fail to meet the requirement may anticipate the imposition of penalties.

OTEK requires that stores trading daily consumer products covering over 300 square meters such as food chains, mini-markets, hypermarkets, shopping malls, supermarkets, and wholesalers are obliged to establish at least two recharging points for every existing 100 parking places (or part thereof), as are the operators of parking meter zones (such as parking garages). For example, a parking garage with 110 parking places must provide four recharging points. With respect to the construction of new parking places, the requirements are even greater: Cabelling for at least 10 recharging points must be provided for every 100 parking places (or part thereof), so that, if operation of these recharging points becomes necessary (or mandatory) later, they can be made functional easily, without wrecking the road surface. With these provisions, the Hungarian legislator advanced ahead of EU law: the provisions were adopted in 2016, prior to the similar rules in the EU’s Clean Energy Package of 2018, and they are also more demanding than the EU’s law on recharging stations, which covers only newly-built parking places. 

With regard to already-existing parking places, the deadline for stores and operators affected by the law – approximately 130 supermarkets and thousands of hypermarkets across Hungary in cities like Budapest, Gyor, Debrecen, and Kecskemet – to meet the requirement of establishing the necessary number of recharging points was January 1, 2019. Some of them have, in fact, already fulfilled their obligation. For instance, most of the shopping malls in Budapest offer complex solutions for EV owners, and the international supermarkets are constantly developing and extending their recharging capacities.

However, the vast majority of stores – many of which could not meet the requirement in time – are still only at the beginning of the process. They penalties they can anticipate, however, will not relieve them from the obligation; they will still have to establish the required number of recharging points irrespective of paying the penalty.

The implementation of the Regulation may be boosted by the fact that the Hungarian legislation covering e-mobility has become more elaborate in the past few years. And besides the Regulation there is a Government Decree on e-mobility that sets out the framework for the operation of recharging points. Based on these rules, most petrol stations have turned to the commercial operation of recharging points by setting payment conditions to their e-mobility services. This may offer new perspectives for the stores and parking meter zone operators as well. Additionally, there are tax benefits attached to e-mobility as the large majority of the costs of their establishment can be deducted from the corporate tax base and the public utility providers’ special tax on recharging point operators. 

All the above actions were made necessary by the rising demand for “green plate cars” (i.e., cars that are hybrid or fueled completely by renewables). In September, 2018, there were 7916 green plate cars in Hungary, of which 3522 were in category 5E (the category of pure electric vehicles (EVs)). At the end of the year, there were around 10,000 and 3,700, respectively. This fits to the projections of the Ministry of National Development of Hungary, which predicted approximately 200,000 EVs and 20,000 recharging points by the year 2030. Therefore, Hungary may anticipate an increase in the number of recharging points (there are around 550 at present), and the affected stores and operators can play a huge role in that. However, the fact that the return on investment of recharging points is not yet clear is causing some reluctance on the side of the investors.

Ultimately, it is still a chicken and egg question in Hungary: it is not clear whether the number of recharging points will lead to the penetration of EVs, or au contraire, whether the demand for EVs will result in new recharging points.

By Laszlo Kenyeres, Partner, and Adam Lukonits, Associate, Wolf Theiss Hungary

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.