Category: Hungary

“This crisis has the potential to be a lot worse than Lehman Brothers,” opined George Soros, the Hungarian-born American financier and philanthropist about the 2009 crisis, and he was right.

In 2008-2009, no one could have imagined that the crisis that was about to unfold would change corporate lawyers’ spectrum so dramatically, how we think about business law, and how thin the borderline is when it comes to white-collar crimes. In this article we will provide a brief overview of some of the key trends in corporate culture that have caused significant changes to legal services in the past decade in Europe – particularly in Hungary and the rest of Central and Eastern Europe (CEE).

Corporate life has changed massively these past few years: ethics and compliance have become core issues and key functions; in-house legal departments have assumed new duties encompassing, among other things, internal investigations, compliance guidelines, and whistleblowing systems; and these phenomena have been mirrored in law firms that service international corporations and their local affiliates. Lawyers in law firms and in-house legal departments who promised eternal fidelity to civil law in law school started to review old criminal law textbooks. Particularly in CEE, general financial instability, increasing living costs, unpredictable career paths, and existential fear often formed the basis of employees committing white-collar crimes of diverse magnitudes. Nationwide scandals involving white-collar crimes by members of the political elite further eroded personal integrity. Employees who had been caught red-handed often reacted by confessing, fighting not only with fear of legal consequences but also with loss of their human dignity. Others, with a more criminal character, often attempted to escape by destroying or forging evidence, threatening witnesses, or traveling to jurisdictions with no extradition treaties. For a long while it appeared that ever more irregularities were committed, or at least detected and investigated, and imposing punishment to make an example of those violating the law was seen as necessary to limit further wrongdoings.

In fact, while previous irregularities long went unnoticed or, if detected, often unpunished, the new era required in-house and external counsels to investigate and analyze a plethora of white-collar crimes – from all kinds of fraud (like a misuse of the corporate credit card), through embezzlement, up to various forms of bribery and corruption. It often astonished investigators to see how creative and sophisticated – or, alternatively really plain and dull – their former colleagues were when inappropriately funneling out corporate assets. And it must have been bitterly surprising for ex-workers, who often believed it was fine to use corporate funds for private purposes or that corruption was an inherently normal form of business, that not only were they laid off, but civil or even criminal actions were initiated to reclaim misappropriated funds. In my own practice I observed that all employers always wanted immediate labor law consequences, with about two-third also requiring a repayment of the pecuniary loss, but a much lower percentage (not more than 15%) wanted charges filed with the police – and even fewer sought injunctions and other procedural tools to block the stolen funds. 

In Hungary, as elsewhere in CEE, introducing whistleblowing hotlines was extraordinarily challenging, as the mere action of reporting recalled one of the darkest elements of communist regimes. Nonetheless, employees quickly understood that reporting irregularities served both their own interests and those of the corporation, and statistics demonstrate that whistleblowing has now become a key tool in corporate self-cleaning.

Where do we stand today? Many believe that this process is about to peak now with regular compulsory compliance trainings for all employees, establishment of compliance departments separate from traditional legal work, and the creation of investigations teams both in-house and by law firms. It is nonetheless not possible to predict which way we are moving forward and whether compliance will take an even larger bite from our everyday work and life. As a matter of reaction, however, exemplary consequences imposed on wrongdoers and the increased likelihood of getting discovered should in an ideal world result in fewer white-collar crimes being committed, which may soften proceedings and restore balance.

By Zsolt Okanyi, Partner, CMS

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

An advantageous economic environment supported a growth in investment volume in 2016, as the residential investment sector and other segments of the property market performed well. Generally, the market has become more balanced in recent years after the recession triggered by the economic crisis, both in terms of segmentation and in supply and demand. 

Considerable new investment and development projects have appeared in recent years, triggering vigorous progress in the office sector for 2017, since some of these projects remain in progress and other, new ones, are about to commence. One of the most popular places for property investments and developments is still Budapest. The so-called office corridor on Vaci Street represents a highly popular location, with numerous projects continuing in 2017. Our law firm is proud to be assisting our client, a Hungarian investment fund, in a significant real estate transaction in 2016 in this office corridor, as well as other clients in several complex projects in the industrial and hotel segment.

Positive tendencies can be detected also on the industrial property market, although not as spectacularly as in the office sector. Statistics show positive developments here, after a previous five-year period of stagnation. The vacancy rate is very low in modern logistic parks, and since demand continues to increase, investment volume should continue to grow in 2017.

The hotel sector is a dynamically developing sector, and our country is very proud of one of our luxury hotels located in downtown Budapest, which won the TripAdvisor Traveller’s Choice Award this January in worldwide competition.

Although dynamic development appears in almost all segments of the real estate market, longer construction periods and higher construction costs – resulting in higher rental fees – are common due to manpower shortfalls in the construction industry. Due to increasing demand numerous new projects will be launched, and growing competition may be expected among the market players. Therefore, innovative development solutions, cost efficiency, and excellent accessibility will, as important decision making criteria, become more critical. 

While a Eurostat survey showed a solid 4.3% increase in housing prices as measured by the House Price Index from Q3 in 2015 to Q3 2016 at the EU level,  the highest annual increase (11.6%) was recorded in Hungary.

Residential property prices moved significantly in the past five years, but the extent of the increase was different in various geographical areas and segments. The most dynamic growth occurred in Budapest, while house prices in the small cities in the countryside ascended only slightly. In addition to newly built residential properties, the prices of secondhand homes have also risen significantly. Solid growth is expected to continue in 2017.

A foreseeable boom is coming in the residential property market due to the effect of the numerous flat-construction projects that started last year. The figures of the Hungarian Statistical Office reveal that the number of newly built flats increased by 22% in Budapest in 2016, with 29% growth reported in cities with county authority. According to the estimations of real estate market analysts, the number of new homes to be built in 2017 may reach 14-16,000, with Budapest (and its greater metro area) and the Lake Balaton area expected to remain the most popular areas. 

The Hungarian government’s housing market policy has also had a positive impact, stimulating not only the newly built but also the used-home market by means of a home purchase assistance scheme.

Beyond the local investment funds and individual and institutional investors, more and more foreign investors are finding Hungary attractive for property investments, and as the credit rating agencies have also graded Hungary suitable for investment, we can confidently state that Hungary is back on the local and international investment map.

By Zita Orban, Senior Lawyer, Head of Real Estate, Kapolyi Law Firm

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The European Commission has put a new energy package on the table in order to maintain the European Union’s leading global role in clean energy transitioning.

This package proposes to cut CO2 emissions by at least 40% by 2030 while modernizing the economy, creating jobs for European citizens, and catalyzing growth. The 13 proposals have three main goals: putting energy efficiency first, achieving global leadership in renewable energies, and providing a fair deal for consumers. Such goals are ambitious, but they may be achievable if the content of the proposals is in line with stakeholders’ views. The Commission has good intentions with this legislation, but the proposals must line up with market reality to deliver on these goals.

Current renewable energy rules, laid down mainly in the EU’s Renewable Energy Directive (RED), provide that 10% of the energy used for transportation must come from renewable sources by 2020. Given the existing level of technical advancement, many Member States can only meet this mandate by blending biofuels with high greenhouse gas (GHG) fossil fuels. Due to a recent revision of the RED, at most 7% of this target should come from conventional biofuels such as those sourced from starch-rich crops (e.g., maize) or oilseeds (e.g., rapeseed). The latest proposal rebrands these biofuels as “food-based biofuels” and suggests a further lowering in the cap to 3.8% by 2030. This proposal is aimed at boosting the advanced biofuel industry due to its allegedly higher GHG savings and, at the same time, respecting the humanitarian and environmental arguments promoted by NGOs active in Brussels law-making.

Regulation lies at the heart of every renewable energy business model, including those related to biofuels. Indeed, regulation is crucial for biofuels not only because it defines the potential market but also because it seeks to ensure a level playing field within the EU and provide adequate protection against cheap imports from overseas. Finding the right regulatory scheme requires a thorough analysis of the best available science on GHG emissions, a requirement set by the RED itself. Moreover, even the best scientific results have to be interpreted in the context of other EU policy goals, including rural development, job creation, and economic growth. Although the proposal of the Commission certainly takes GHG emissions into account, it seems to fall short of making convincing arguments regarding their real life-impact on the rest of the issues at stake.

The direction that EU legislation is taking is of utmost importance to Hungary, since the country has lately become the third biggest bioethanol producer in the EU. It is little wonder that the proposal of the Commission raised eyebrows throughout the Hungarian agribusiness and biofuels communities. Hungary will reach the biofuels blending rate specified by the current RED on January 1, 2019, only a year before RED II kicks in and – according to the present form of the proposal – gradually phases out conventional biofuels as a legally recognized method of mitigating GHG emissions. Therefore, the country would have to readjust to the changes in the regulatory environment both domestically and in its export markets. Industry speakers claim that the good intentions of the Commission in making these legislative changes do not line up with the proposals themselves, as the nascent Hungarian bioethanol industry would all but perish as collateral damage if it cannot make the shift to producing advanced biofuels. Critics of the proposals say that such a transition seems unrealistic at this moment even with the most optimistic financial models due to the lack of regulatory certainty, which might deter any potential investors.

To sum up, the public debate about the future of renewables in European mobility has just entered into a new phase, and there is no doubt that the outcome will have a profound impact on the economy of the CEE region, including Hungary. The stakes are high because the new regulation may give further impetus to the bio-economy, but it may kick the industry onto a sidetrack as well. The ball is now in the court of the Government of Hungary to take a position on the future of biofuels.

By Gabor Kovacs, Partner, and Adam Burt, Trainee, OPL

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In the past few years people turned to capital markets instruments because of the low interest rates attainable on savings accounts held by banks.

Several brokers offered interest rates three or four times higher than savings accounts, and some established fraudulent schemes to pay the early bird interest. Some brokerage houses falsified reports sent to their clients and to the Hungarian National Bank, which is responsible for the supervision of capital markets. After the brokerage scandals of 2015, which revealed that some local brokerage houses had manipulated their information systems, making their reports on securities an inaccurate reflection of reality, retail investors lost trust in capital markets instruments and investment service providers. And no wonder why: hundreds of billions of Hungarian forints went missing, tens of thousands of depositors and investors were aggrieved, and many brokers were arrested.

2016 was meant to be the year that investor trust was restored. The new EU Market Abuse Regulation took direct effect across EU member states on July 3, 2016, and it has not only extended the market abuse regime to issuers of securities traded on multilateral and organized trading facilities but has also had an impact on disclosure and record keeping obligations of issuers of securities currently listed on EU regulated markets, as well as bringing about significant changes to the reporting of directors’ and senior managers’ dealings.

Under the new EU Market Abuse Regulation, issuers are obliged to inform the public as soon as possible of inside information that directly concerns the issuer. Further, ad hoc notices need to be posted in an easily identifiable section of an issuer’s website for at least five years, and the inside information disclosed needs to clearly indicate date and time of disclosure and must be organized in chronological order. The Issuers are still permitted, though, to delay disclosure of inside information to protect their legitimate interests, as long as the public is not misled and confidentiality can be maintained. Furthermore, although issuers were already obliged to maintain insider lists documenting details of persons with access to inside information, such lists are now required to be more elaborate, with more detailed personal information of insiders included.

As to the reporting of directors’ and senior managers’ dealings, the new EU Market Abuse Regulation continues to oblige persons discharging managerial responsibilities and other persons closely associated with them to publicly disclose any transactions conducted on their own account above an annual threshold. The new rules also extend this disclosure obligation to persons discharging managerial responsibilities of an emission allowance market participant or of an auction platform, auctioneer, and auction monitor involved in the auctions held under Regulation (EU) No 1031/2010, in so far as their transactions involve emission allowances, derivatives thereof, or auctioned products based thereon. The reporting timeframe has been tightened, and the reporting has been standardized. Also, the new EU Market Abuse Regulation introduces a general trading prohibition for persons discharging managerial responsibilities in closed periods (for instance, for 30 calendar days before the announcement of an interim or year-end report).

Beside the regulation of the European Union, which is directly applicable in Hungary, the government introduced a new checking scheme for investors on January 1, 2016, to further strengthen capital markets activities and to restore investors’ trust. The new scheme allows investors to check whether the information received from a broker is the same as that submitted by that broker to the Hungarian National Bank. Brokers must send their reports to investors and to the Hungarian National Bank on a monthly basis. The information sent to the Hungarian National Bank is anonymous, and contains only the account number and the list of securities deposited into the account; therefore, the Hungarian National Bank cannot identify the owner of the account. If the monthly balance sent to the investor is not identical to the one submitted to the HNB, the investor may initiate an HNB investigation against the broker. The investigation can be initiated anonymously as well.

The measures seem promising so far, though not perfect. The low interest rates attainable on savings accounts are pushing retail investors towards capital market instruments, and such reporting and monitoring measures may in the future prevent systematic falsification of the reports and harm to investors.

By Gergely Szaloki, Partner, Schoenherr Hungary

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In December 2016, the Hungarian national electronic communications regulator (the NMHH) was among the first EU national regulatory authorities to apply the new EU Regulation 2015/2120 on net neutrality (the “Regulation”), then followed that up with a similar decision in January 2017. In these decisions, the NMHH followed the strict interpretation of the Regulation proposed by the Body of European Regulators for Electronic Communications (the “BEREC”). The NMHH’s decisions are part of a wider string of test cases springing up across the EU on how the Regulation is to be interpreted.

Net Neutrality

On November 25, 2015, the EU issued the Regulation, which lays down measures concerning open Internet access and addresses the concerns of net neutrality advocates. The Regulation enshrines common rules to safeguard the equal and non-discriminatory treatment of traffic, as well as ensuring that end-users have a right to access and distribute the content of their choice. The EU intended to put in place a system to guarantee the continued functioning of the Internet ecosystem as an engine of innovation. The Regulation’s form means that the rules are directly applicable and transposition into national law is not necessary. The Regulation entered into force on April 30, 2016.

Zero-Rating

A flash point in the ongoing debate on net neutrality is the issue of zero-rating. Zero-rating is when an ISP, often a mobile broadband provider, imposes a limit on data traffic by contract, yet allows unlimited use of one or more apps without their traffic counting towards this limit. Should this practice be allowed under the net neutrality principle? This is a divisive issue.

BEREC Guidelines

In anticipation of future discussions on interpretation of its text, the Regulation mandated that the BEREC issue guidelines for national authorities. 

According to the BEREC’s reading of the Regulation, zero-rating is not in and of itself a violation, and it may be allowed under certain circumstances. The BEREC adds that the number of applications zero-rated by the operator is a relevant factor, as are other considerations, such as whether the range and diversity of applications that end-users can choose from is materially reduced in practice. Under the BEREC’s approach, if just a single app’s traffic is zero-rated, then this is more likely to limit choice than if an entire category of apps (e.g., all music-streaming apps) is zero-rated. 

Most interestingly, however, the BEREC seems to interpret the Regulation strictly by making a harsh distinction between zero-rating before and after reaching a data traffic cap: “[A] zero-rating offer where all applications are blocked (or slowed down) once the data cap is reached except for the zero-rated application(s) would infringe [the Regulation].” 

The BEREC has been fiercely criticized for interpreting the Regulation so strictly. For example, in their contribution to the public consultation by BEREC, the GSM Association and the European Telecommunications Network Operators’ Association came to a very different conclusion. They believe that zero-rating could, in some cases, be extremely beneficial to the consumer (in particular in e-health or educational applications), and its harmfulness to competition should be assessed in light of the real benefits it brings to consumers. They also argue that if operators can price the data consumption of different apps differently, then this is beneficial to end users: the more choices the operators can offer, the better they can tailor the products to their customers’ preferences. However, if operators must cut off zero-rated apps when the data limit is reached (as the BEREC guidance requires), then in practice they would not be able to make retail offers based on such differential pricing.

NMHH

In its December and January decisions, the NMHH followed the BEREC’s narrow interpretation. Magyar Telekom offered its mobile customers unlimited video streaming through a wide array of apps, whereas Telenor allowed mobile consumers to use certain music-streaming and chat apps. Both operators slowed down the data speed after customers reached the monthly data cap but made exceptions for zero-rated services. According to the NMHH, this breached the Regulation. Both operators indicated that they are appealing the NMHH’s first-instance decision – and their dispute with the NMHH may well end up in court.

Similar cases are arising across the EU. Will the regulators and courts follow the BEREC’s strict approach to net neutrality, or will they take a flexible approach? In any case, their choice will have a fundamental impact on services provided over broadband Internet throughout the EU.

By Attila Komives, Senior Associate, Tibor Szanto, Counsel, and Felix Seuntjens, Allen & Overy

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Last year delivered some surprises in global politics and economy. It was a year of unexpected voting results, which will no doubt have a serious effect on the global legal and economic landscapes in the long term. The international, regional, and Hungarian M&A market will all be affected. The question is what comes in the year ahead. 

In 2016 the M&A market of the CEE region was led by the Czech Republic, Poland, and Turkey, with Hungary and Romania being next in line. The Hungarian market was reported by Ernst & Young as being stable up until the first half of 2016, with manufacturing, IT and technology, and energy and mining being the leading sectors, and with banking and financial services and real estate still doing well. The market, like in previous years, was dominated by domestic transactions, as in more than half of the deals both the seller and the buyer were Hungarian entities.

The expectations for 2017 are optimistic, as many analysts expect the year to be a turning point in the M&A market. Economists forecast a definite increase in M&A transaction volume in Hungary, especially in the field of venture capital investments. 

In an interesting trend mentioned by major economists, many Hungarian mid-size companies are coming close to a generation change. In many cases there are no potential rising stars at these companies who could take over the ownership and management from the current owners, so the owners are expected to sell these companies. 

On the other hand everyone is being cautious about worldwide economic expectations, arising mainly from Brexit and its potential effect on the Hungarian market. At least two major effects will have to be considered: One is the effect on Hungary of the EU-UK economic relations to be set up in the coming years and the status of EU economics following the withdrawal of the UK, especially considering the budgeting within the EU once the UK stops paying its share. Establishment of a Hungarian-British Business Council at the Hungarian Embassy in London has already been announced in order to help coordinate the presence of Hungarian companies on the British market and British companies on the Hungarian market. The aim is also to ensure that British-Hungarian commercial relations will remain intact and will not be harmed by the effects of Brexit.

The other major concern is the reallocation of currently available EU funds and establishment of a new budgeting mechanism. Several options are already being discussed in this regard. Whether the total budget is to be decreased and fewer funds allocated or the payment portion of each country staying in the EU is to be increased or some other arrangement is settled on in coming years, there will be a serious effect on the Hungarian market. 

It is of course not only Brexit that will have an effect on the M&A market. The 2016 US election, the December 2016 resignation of the Italian Prime Minister, and the upcoming 2017 elections in the Netherlands, France, Germany, and China will also influence the road ahead.

By Viktoria Szilagyi, Partner, Nagy es Trocsanyi

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Creative industries have continued their exponential growth, steadily carving out a larger and larger slice of the market pie. This steady trend brings some changes, however, to their legal needs and expectations.

FinTech and Mobile App Development as the Artery of Copyright 

First, let us look at the current state and the trends of the past year in Copyright Law in Hungary. 

The most prominent trends that may be observed as being on the rise are these: the market is moving away from litigation and towards out-of-court solutions; assignments regarding start-up companies’ needs from the development of a product idea all the way to execution are steadily increasing; and there’s a marked rise in legal services provided to companies developing mobile and web-based applications and various other companies and ventures developing smart technology. 

The most prevalent increase we’ve witnessed this past year is in the field of “FinTech” – the industry sector of companies developing innovative technological solutions which act as intermediaries to the delivery of financial services – the growth of which is currently also being considerably expedited via the provision of financial aid by the government. This cutting-edge and heavily innovative field requires precise legal work because of its deep and diverse connections with Banking and Finance Law, Consumer Law, and various confidentiality concerns, while also posing a wide array of criteria to be met regarding Data Management regulations, all of which are interconnected with the copyright aspects of FinTech services. Sadly, most companies still don’t take copyright into sufficient consideration, which is a deficiency we intend to remedy. 

Trademarks – Decreasing Litigation 

This past year we’ve noted in our Trademark Law practice that trademark opposition procedures and various other out-of-court procedures pursued before the Hungarian Intellectual Property Office continue to be more prevalent and widespread than court proceedings, although we must note that despite the ratio being in favor of out-of-court proceedings, civil litigation cases are still fairly common.

The number of trademark applications and trademark research requests continues to rise, with the filings for national trademark applications traditionally outweighing those of community trademarks, which has, in the last few years, remained fairly standard. In 2017 we expect these tendencies to continue.

Unified Patent Court – Ready, Steady, Go!

In the field of Patent Law, the ratio of litigation to out-of-court settlements and other non-conflictive solutions is relatively high in comparison to the other branches. This ratio has however remained fairly constant over the last few years, and although we hold it as a tendency, it is relatively unchanging. However, we must make an important distinction within the broader category of patents to better reflect on their litigation ratios.

Some patents are specifically applied for as a future protective measure to a product, inherently meant to provide a market edge by way of exclusion, where the patent rights holder expects his/her patent to be infringed upon in the future. Because of this, the ratio of litigation being high is no surprise here. Other patents are applied for to serve more as a mark of quality, where the rights holder uses the patented nature of the product not only as an excluding measure but also as a marketing tool; in this subdivision the litigation ratio is significantly lower than in the first category.

The other dominant tendencies in Patent Law are, firstly, the observable rises in assignments regarding patent license contracts’ drafting, and secondly, the growing number of clients inquiring about the soon-to-be-active Unified Patent Court (UPC) and seeking to prepare early for the UPC’s practice in order to gain a strong market.

What’s to be Expected

Looking back on this past year and its tendencies, we expect nothing but the marked and continuous rise of both the creative industries and IP Law in 2017, with the economic importance of all pertinent legal fields steadily increasing.

By Ildiko Komor Hennel, Managing Partner, Sar and Partners Attorneys at Law

This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

At the end of March 2017, the Hungarian Parliament accepted the amendment to the Building Act, which enters into force on 27 April 2017. According to the current rules, if natural persons start the construction of new buildings which do not exceed the limit of 300 sqm or the extension of existing residential buildings up to 300 sqm, the constructions works have to be carried out by a simple notification instead of a building permit.

As a result of the recent amendment, the simple notification will also be applicable in case of the construction or extension of a building above 300 sqm ensuring own housing purposes and also if the new residential building contains only one complete flat. In addition, the list of unlawful cases had been extended, as in case these conditions are not met, it shall be considered as unlawful construction activity. According to the amendment, after the completion of the construction or extension works, the function of the building may not be changed within 5 years calculated from the issuance of the certificate by the authority verifying the existence of the residential building constructed by simple notification.

The annex of the Building Act containing the amount of the administrative fees for issuing the official certificate has been removed from the Building Act and will now be regulated in a ministerial decree. 

The amendment shall not apply for the building authorization procedures already in process.

By Gabriella Galik, Partner, KCG Partners Law Firm