Category: Hungary

The Hungarian Competition Authority (HCA) cleared the acquisition of sole control over Invitel Távközlési Zrt (“Invitel”) by Digi Távközlési és Szolgáltató Kft (“DIGI”) conditionally – with commitments – in May 2018. A few months later, it established that DIGI had intentionally misled HCA officials and therefore revoked the decision and imposed a fine on DIGI of HUF 90 million (approx. EUR 280,000). It then reopened the proceeding to assess the relevant markets affected by the misleading information. Revoking a merger clearance decision is not without precedent in the HCA’s recent practice, as the HCA has invoked three clearance decisions in the last two years. What is new, however, is that the HCA granted a derogation from the suspension clause to prevent negative market consequences from interfering with the already closed transaction. The HCA also resorted to a dawn raid during the original proceeding, which is a new instrument in merger control cases.

Original clearance decision containing commitments

In the original proceeding, DIGI undertook, among others, to sell the Invitel cable network to a designated buyer, and that its cable television services subsidiary (i-TV) will not renew its rental contracts with the local owners of the cable networks and will not offer its contractual partners to conclude a contract with the Invitel network in those areas where the services of i-TV and Invitel overlap. The HCA has granted DIGI six months to undertake the commitments.

Review proceeding ending in revocation of the clearance decision

The HCA received market indications suggesting that the commitments undertaken by DIGI did not cover all the municipalities where i-TV and Invitel were both present. The HCA initiated a competition supervisory proceeding to investigate the matter and found that the original decision – and therefore the commitments – covered only 23 overlapping areas, and established that there were in fact 89 overlaps, i.e. DIGI misled the HCA by not signalling that the proposed commitments do not cover the entire overlapping area. The HCA stated that the list of overlapping areas based on which the overlaps between the parties’ activities could be ascertained is a significant fact, which also forms part of the mandatory content of the filing form. In fact, DIGI did not provide a full list of the overlapping areas, only a link to the specific place on DIGI’s website. The HCA based the list of areas in the commitment on a document obtained from DIGI during a dawn raid (which has only recently been allowed in merger control investigations) and did not realise that it was not a full list. The HCA classified this as an unlawful omission of a significant fact, which is a condition for revoking a decision.

DIGI argued that it did not intentionally mislead the HCA and that it believed the HCA wanted to limit the scope of commitments with respect to the overlapping areas. During the review proceeding, it asked the HCA to amend the decision (including the commitments) instead of revoking it, to prevent several negative consequences, including insecurity in the market by customers. The HCA rejected DIGI’s arguments and revoked its clearance decision, imposing a fine on the company of HUF 90 million (EUR 280,000, less than 10 % of the turnover realised in the non-reported areas by i-TV and less than around 2 % of DIGI’s turnover in the previous year).

The legal consequences of revoking the decision

Revoking the decision meant that both the clearance decision and the commitments ceased (became null and void), i.e. the transaction had to be assessed and ruled on again by the HCA. DIGI had already closed and implemented the transaction, and therefore was in breach of the suspension obligation. Since the acquisition of control was unlawful, the situation had to be resolved. The HCA accepted DIGI’s request for non-separation and allowed it to continue the already initiated steps of the implementation of the concentration (e.g. the transfer and development of the networks and services, and Invitel’s integration into DIGI) under the supervision of the trustee, until a new decision is adopted. It therefore granted a derogation from the suspension clause. The proceeding to reassess the merger is still ongoing.

This decision falls in line with other recent revoking decisions which highlight the HCA’s scrutiny of data provided by the companies in merger control proceedings. Companies must be aware that the decrease of the deadline to rule on mergers (in simple cases eight days) places a bigger burden on them and requires more diligence on their part to provide correct and sufficient data for the merger assessment. If the HCA receives information from any source on potentially incorrect or omitted information which it deems significant (especially information which affects (potential) horizontal overlaps and thereby the market shares and potential market position of the parties), it will not hesitate to apply the most severe consequence of revoking the decision and imposing a fine. Pre-notification talks before a merger control with the HCA are useful to discuss open issues or the scope of the required information, but are necessarily limited to the information provided by the parties and to a quick review of the provided information. They are not binding on the HCA, and therefore do not provide ultimate certainty about the outcome of the HCA’s detailed assessment. 

By Anna Turi, Counsel Schoenherr

On September 11, 2018, CEE Legal Matters reported that Akos Eros, the Managing Partner of Squire Patton Boggs in Hungary, had taken a team from that international firm to join Wolf Theiss, led in Budapest by his old friend Zoltan Faludi. The reunion of these two actual comrades-in-arms is a source of real excitement at Wolf Theiss Hungary, which is embracing the changing legal market of the moment with confidence and style.

Early Encounter

The Hungarian legal market – focused, for obvious reasons, on the country’s capital – is fairly intimate, like those of many of its CEE neighbors, and many of its participants, especially those who came of age during the Communist era, know each other well. Eros and Faludi are no exception.

“We’ve known each other for 33 years,” smiles Faludi, sitting with his new colleague in a conference room at Wolf Theiss’s Calvin Square office in Budapest’s 8th district. The two were born the same year, albeit in different parts of Magyarorszag – Faludi was born in Komlo, in the southern part of the country, while Eros was born in Budapest and grew up in Jaszbereny –and first met in 1985 while performing their country’s then-mandatory military service in Zalaegerszeg, in far western Hungary. After that commitment ended the two went to different law schools, with Eros graduating from the University of Szeged in 1992 and Faludi graduating in 1991 from the University of Pecs.

Faludi’s Energetic Path to Wolf Theiss 

After obtaining his law degree, Faludi spent a short year with the Judit Korompay Law Firm – a boutique he describes as “a one-woman show” — then joined Budapest’s Koves & Partners a year later. He stayed with the firm for 17 years, both before and after its 1994 merger with Clifford Chance, in the process developing a market-leading Energy practice.

In 2007 Faludi accepted Wolf Theiss’s offer to open the firm’s Budapest office, which he has led in the decade since. “We were one of the last genuine international law firms to open an office in Budapest,” he says of Wolf Theiss. “We started out as a very strong energy practice, then eventually transformed from a boutique into a very strong full-service firm. And we became a major player in this league,” he says.

Indeed, in recognition of Faludi’s widely-recognized Energy expertise, at Wolf Theiss he is the Regional Co-Head of the Projects (Energy & Infrastructure) group. He was also the Chairman of the Energy Arbitration Court in Hungary from 2007-2017 and remains a Listed Arbitrator at the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry.

Still, Faludi bristles at the suggestion that Wolf Theiss reached out to him simply for his Energy expertise. “I was an M&A lawyer specializing in Energy. I still hope that the firm’s choice was picking the person rather than the sector. And it’s worked! We’ve grown into a very stable firm.”

Eros Takes a Different Road

While Faludi was working with LKT, Clifford Chance, and then Wolf Theiss in Budapest, Eros chose a different path, spending his first year after law school traveling and learning English in the United Kingdom and Australia. Once back in his native Hungary he saw an advertisement in the country’s HVG newspaper for a vacant position at an international law firm. He decided to interview almost as a lark (“I had no idea what an ‘international law firm’ was,” he laughs), and in 1992 he ended up joining the Budapest office of Heller, Lober & Bahn – which (with one or two stops in-between) merged with Freshfields in 2000. 

In 2004, Eros left Freshfields to open Coopers & Lybrand’s associated law firm in Budapest. Eros shakes his head at the memory of his two years with the then-Big Five firm, saying that “it wasn’t a mistake, as I learned a lot and don’t regret the experience, but they didn’t know what to do with lawyers.” After two years he jumped to Arent Fox, which merged with Squire Sanders & Dempsey in January 2000.

So why, after twelve successful years with Arent Fox/Squire Sanders/Squire Sanders & Dempsey/Squire Patton Boggs, did Eros decide to leave the Cleveland-based firm? He suggests that trends in the legal industry affecting international firms had a role. “We’re heading away from globalization right now,” he says. “President Trump in America is an example of this move towards nationalism. Thus, when you are with a big international firm like Squire Patton Boggs, you are one of 500 equity partners. Your view is irrelevant. The Chairman doesn’t care what someone in Singapore or Perth or Budapest wants to do. It’s irrelevant. The main stream is the United States – or for an English firm it’s England.” He pauses. “Because of that, you start to feel that it’s a different firm than the one you helped build, that you wanted to be a part of. This is not just Hungary — it’s the same in Paris, and China. We are outside of the focus.” He describes a plan to expand his team at SPB that was eventually squashed from its US headquarters. “And I heard this from other European offices as well. And I realized, ‘if the firm is not committed, then I’m not committed.’”

Together, Looking Forward

Zoltan Faludi sensed the time was right to reach out to his old comrade: “We wanted to grow, and we heard he was unhappy and we reached out to him.” For his part, Eros says that he was attracted by the opportunity to stay in a firm with a multi-national practice and a real commitment to the region. “Zoltan and Janos and I found each other,” Eros says, referring to Wolf Theiss Partner Janos Toth (Laszlo Kenyeres is the fourth partner at Wolf Theiss Budapest). “That’s not a coincidence. I’m too old to go through this with another ILF, and then have it change its focus again.”

Faludi laughs. “Yes, being part of the core business is a good thing.” Indeed, he says that he feels more invested and more a part of Wolf Theiss than he ever did at Clifford Chance. “I feel more integrated. That comes with size. When you are 1 of 30 partners you are more invested than you are in a firm with hundreds of partners all over the world. And this is a good feeling! To be a player — an influencer — when you can.”

Faludi and Eros are both excited about the opportunity to work within Wolf Theiss’s regional network as valued contributors rather than remote outposts. According to Faludi, “Wolf Theiss generates about 60% of its work and revenues in Austria. The rest is CEE-generated.” And that, he insists, is a strength. “Comparing it to the Anglo-Saxon firm I used to work with, Wolf Theiss’s Austrian nature matters. They are neighbors. They know what’s going on. The historical traditions, the banks. They are simply far more aware and familiar with the countries and cultures of CEE than the London-based or New York-based firms.”

In addition, he emphasizes, the firm’s strategy – which involves a footprint across CEE but carefully avoids the US and UK – allows it to benefit from referrals from the ILFs. “One of our big advantages for clients is that we are able to assist them in all 13 offices. We can cover the entire region at once. This is what we can do really well. Plus, we can work really well with the English and the US firms. We are not competitors — we can cover the region for them. And we are free to choose who we will work with.”

And, despite the gradual withdrawal of many international firms in recent years, business is good. “The Hungarian economy is going well,” Faludi reports. “There are more and more clients, and assets are cheaper. The political situation may be good or bad, but at least it’s stable.” As a result, the Budapest office contributed more than EUR 3 million in revenues to Wolf Theiss’s bottom line, placing it among the top three of the firm’s CEE/SEE offices.

Ready Today for Tomorrow

Both Faludi and Eros believe the gradual withdrawal of international law firms from CEE is part of a sea-change in the provision of legal services in the region. “There’s a consolidation of the legal market,” Faludi says. “Clients are changing; we have to change as well. Tech, commoditization, etc.” But he’s confident all this works to Wolf Theiss’s advantage, allowing his office to pick up extremely strong lawyers feeling abandoned by their former employers. “The ILFs are withdrawing – but we’re not going anywhere. So this is a good opportunity for us to grow. To pick up a high-quality lawyer who wants to stay in the market but whose firm may have different strategies. Wolf Theiss is growing now. In Prague, in Poland. This is a reaction to the positive things happening in CEE.”

Ultimately, Faludi concludes, “Wolf Theiss has not changed its strategy. It may have started a bit late, but it was committed to being a CEE law firm, and it still is. We’re not going West, we’re not going to Russia. We are here, and this is where we want to be.”

Eros agrees, with a comment that doubles as a personal statement. “And we don’t want to go anywhere else.”

This Article was originally published in Issue 5.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On 20 November 2018, the European Parliament’s Committee on Employment and Social Affairs (“EMPL”) adopted modernised rules for coordinating social security systems. The EMPL focused on facilitating labour mobility while safeguarding the workers’ social security rights in cross-border situations, by determining under which Member State’ s system a person is insured. The purpose of the new rules is to make it easier for EU citizens to work in another EU Member State and to have a fair access to social security benefits.

The social security coordination is based on the basic principles that (i) EU citizens shall be subject to one national social security system and shall pay contributions only in one country, (ii) the foreign EU citizens shall have the same rights and obligations as the nationals of the country where they are insured, and (iii) insurance periods competed in different EU countries shall be accumulated when grating benefits. As a new provision, the EMPL agreed that an insured person could retain unemployment benefits for six months after leaving a Member State and this Member State would be able to prolong the period until the benefit expires. The EMPL also proposed that job seekers should be able to choose whether to receive unemployment benefits from the last country the worked in, or the country they live in. The EMPL also adopted provisions to avoid protection gaps and establish legal clarity and transparency for long-term care benefits.

The final form of the rules will be decided during the negotiations between the European Parliament, the Council and the European Commission.

By Levente Csengery, Partner, KCG Partners Law Firm

The Hungarian Act on the Employee Stock Ownership Plan (the “ESOP Act”) was amended by the Hungarian Parliament in November 2019. It is good news that the amendment does not affect the taxation of incomes from the ESOP organization, so it is still possible to get a private income through an ESOP under very favorable tax conditions. Accordingly, payments made to the employees within the ESOP are solely subject to a 15% personal income tax, which means 18.5% savings for the employees, while on the other hand employers can reduce their public burdens with 21%.

The amended ESOP Act however significantly influences the conditions for the establishment and the operation of the ESOP organization, and in some cases, they are explicitly restricted. For example, the ESOP shall be solely based on securities representing shareholder’s rights: the ESOP organization can handle shares, other securities embodying the same investor risk to shares, or relating rights to these securities from 2019. Other big change is that the securities/rights must be kept in the ESOP organization for at least 12 months (from 2020 to 24 months) before the ESOP organization perform payments to the employees.

The amendment will enter into force at the beginning of 2019. According to the amendment, the existing ESOP organizations have 6 months from the entry into force to comply with the new rules, however, the ESOP organizations established until 1 January 2018 have more benefits, i.e. some restrictions do not apply to them.

By Eszter Kamocsay-Berta, Managing Partner, KCG Partners Law Firm

In December 2018 the Hungarian Parliament adopted a new legislation that significantly changes the Hungarian Labour Code. The proposer stated that the goal of this new legislation is ‘to remove administrative burdens from the employees, so if they want to earn more – with their consent – they can work more’.

According to the currently applicable laws, 250 hours of overtime work can be ordered for employees in a calendar year. The new proposal changes the possible overtime for 400 hours if the employer and employee agree on it in writing. The works councils and trade unions, as well as the employers’ interest groups have expressed their disagreement with the changes. They argue that it might result in a limited negotiation power of the employees, it also imposes an unwanted burden on them, and that this change is not the way to solve the problem of the shortage of labour. 

The amendment also changes the working time cycle rules by shifting the maximum duration of working cycling from 12 months to 36 months and it also changes the rules of weekly rest day and rest period. These will also mean even more paperwork for the employers, since they will have to keep the data concerning the work undertaken for a longer period. 

The new legislation enters into force on 1 January 2019.

By Levente Csengery, Partner, KCG Partners Law Firm

At the end of October 2018, the Hungarian Government has submitted to the Parliament a bill on the amendment of the Hungarian Building Act and the Hungarian Copyright Act relating to the copyright of the architectural creations, technical facilities and their plans.

The bill clarifies the right to use and the economic rights of the authors in respect of the plans designed by employees of state architect companies operated before the Hungarian change of regime and aims at the transfer of such plan documentations to the Lechner Tudásközpont. 

The bill determines the scope of the ‘national plan asset’, meaning the architectural-technical documentations of the architectural creations owned by the state and the municipality and all related right to use and economic rights of the author. In addition, the bill introduces the architectural copyright register held by Lechner Tudásközpont. As a result, in case of the alteration of a plan of an existing building, the consent to the alleration shall be requested from the person indicated as author in the register.

In case of architectural creations considered as orphan works (i.e. where the beneficiary of copyrights or the domicile of the beneficiary is unknown), the bill would enable that in case the request for use has been submitted by the owner of the building, the permit of the Hungarian Intellectual Property Office for use would also cover the adoption of the architectural creation, and it may be extended once for request. Furthermore, the bill defines a new free using case ensuring the reproduction of the building, drawing or building plan and making them available for the general public without any permit, free of charge for the purpose of the restitution of the building.

By Gabriella Galik, Partner, KCG Partners Law Firm

An amendment to the act on industrial properties enters into force on 1 January 2019. Such amendment not only modifies the existing trademark procedures, but also creates a more efficient, fast and customer-friendly system. Due to this modification, the Hungarian trademark legislation will also be conform with the requirements of the applicable EU directive.

The modification of the current trademark system has not only been necessary in order to comply with the EU legislation, but also to comply with the technological, social and other significant changes. One of the most important effects and changes of the amendment that it consists of the extension of registrable marks with the abrogation of the requirement of graphic representation, meaning that audio- or video files can also be submitted. Secondly, the modification introduces new absolute and relative grounds for refusal and it modifies the provisions on collective and certification marks. 

The new modified trademarks system will also be in line with the requirements of the applicable data protection regulation (in particular with the provisions of GDPR) that causes the change of the practical rules of the electronic administration (especially on the scope of the processed data). 

The modification enters into force in January 2019, meaning that now we should soon see the benefits of an improved, modern system in operation. 

By Rita Parkanyi, Partner, KCG Partners Law Firm