Category: Hungary

Lakatos Koves & Partners has advised Tokyo Stock Exchange-listed Nippon Paper Industries on a HUF 15 billion green field investment in Hungary including the acquisition and development of an industrial site and the construction of a plant in Vacratot, on the outskirts of Budapest.

Nippon Paper Industries is a Japanese paper manufacturing company.

According to LKT, the plant will “supply carboxymethyl cellulose materials for the production of electric vehicle batteries. CMC is a water-soluble, environmentally-friendly polymer derived from cellulose that is one of the materials used for lithium-ion battery anodes in EVs and a natural raw material that is used as a binder by numerous industries (construction, paper, food, pharmaceuticals, etc.) as a kind of natural adhesive. This CMC raw material is supplied to Nippon’s plant in Vacratot and processed locally. Nippon intends to sell the final product to its partners in Hungary and abroad for use in the future.”

According to the firm, “production at the plant is expected to start in December 2025. The government will support the investment with HUF 2.3 billion and the plant will create close to 60 jobs.”

LKT’s team included Partner Attila Ungar and Lawyers Katalin Losonci and Fanni Balas.

A growing number of employment and consumer protection-related disputes are on the horizon in Hungary, while revised arbitration rules promise swift and more efficient alternative dispute resolution mechanisms, according to Smartlegal Schmidt & Partners Managing Partner Richard Schmidt.

“One of the key developments in Hungary is related to the new arbitration rules of the Hungarian Commercial Arbitration Court, which entered into force in January 2023,” Schmidt begins. “The main objective of the revised rules is to ensure speedy and effective arbitration proceedings.” The key changes, according to him, include a strict 30-day deadline for arbitrators to accept their appointment, more flexible case management conferences, and the possibility to hold remote hearings, among others. He says “the new amendments are quite promising, as there were a number of measures implemented to accelerate court proceedings, and it is natural that arbitration, as an alternative dispute resolution mechanism, should also be brought up to date.”

According to Schmidt, “in January 2023, there was a major modification of the Hungarian labor code, partially aimed at implementing the EU Work-Life Balance Directive.” The most significant areas of improvement, according to Schmidt, are related to flexible work arrangements. “Employees that are raising a child under eight years of age can now submit a ‘modification proposal’ to the employer, asking for home office, part-time work, modification of the place of work and the shift” he notes. “The employer has a 15-day deadline to accept or reject the modification and, in case of rejection, the employee can challenge this decision in court. Given that under Hungarian legislation the burden of proof in a lawsuit lies with the employer, it will be difficult for the employer to justify the refusal to work from home, as the COVID-19 pandemic showed that working from home is a feasible alternative.” Consequently, he says that a rise in labor disputes is expected soon.

Finally, Schmidt highlights new consumer protection legislation. “Last year, in December, the parliament modified the consumer protection act to align with the EU directive, and the amendments come into effect in June 2023,” he says. According to him, “the new law introduces a new type of opt-out class actions, where usually a professional third party, e.g., a public body, like the prosecutor’s office or the consumer protection authority, starts litigation to enforce consumer rights. This opt-out class action mechanism has existed in Hungarian legislation for a while, but it was rarely invoked in practice – as the body entitled to start class action on behalf of consumers was limited to public bodies.” According to him, “the new law, on the other hand, establishes that the qualified entity can be either a public party or a private organization within the EU, which can start litigation not only in domestic courts but also in other courts of EU member states.” Schmidt believes that, consequently, consumer rights protection will be more efficient, and the number of litigation cases will likely increase in the second half of the year.

The entire concept of golden shares can be explained in one sentence: golden shares make the adoption of certain corporate measures as well as decisions on amending certain provisions of the articles of association of a company dependent on the “yes” vote of the holder(s) of the golden shares.

Part 1

As a result, golden shares give the holder(s) a de facto right of veto over certain corporate decisions.

When analysing the role of golden shares, it is important to understand their historical roots. In Hungary, golden shares became relevant during privatisation (when state-owned assets were sold to private investors as part of the economic regime change); therefore we will analyse the concept of golden shares from that perspective.

Within the framework of privatisation in Hungary, the applicable law (Act XXXIX of 1995 on the Sale of State-Owned Entrepreneurial Assets; the “Privatisation Act 1995”) imposed certain obligations on companies which were especially significant for the operational capacity of the national economy. Accordingly, the Privatisation Act 1995 specified the introduction of golden shares in several companies of a strategic nature which had also been approved by the Hungarian parliament.

The rationale for this was that the Hungarian state intended to keep some control over certain privatised companies; in other words, private investors acquired a majority stake, but the Hungarian state still had influence on the decision-making process, as it held a golden share that granted a right of veto. This was especially important to protect privatised companies of a strategic nature (with regard to the safety of public supplies) from hostile takeovers, since golden shares made the target less attractive. This was further reinforced by the fact that after the amendment of the Privatisation Act 1995 in 1998 it was no longer possible to eliminate golden shares from the articles of associations of certain strategically important companies. In addition, the Privatisation Act 1995 stipulated that only the Hungarian state or its affiliated entities were allowed to hold golden shares.

Part 2

On 1 May 2004, Hungary joined the European Union. As a result of the accession (and the entry into force of the EC law in Hungary), the “European Commission has decided to ask Hungary formally to modify its privatisation framework law (Act XXXIX of 1995 on the Sale of State-Owned Entrepreneurial Assets), which it considers to be incompatible with EC law. The Commission considers that the law contains unjustified restrictions on the free movement of capital and right of establishment by conferring special rights for the state in 31 privatised companies in the form of voting priority (“golden”) shares. The Commission’s request is in the form of a reasoned opinion, the second stage of the infringement procedures laid down in Article 226 of the EC Treaty. In the absence of a satisfactory reply from Hungary within two months of receiving the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.” In the absence of a timely reply, the European Commission decided to initiate an infringement procedure against Hungary.

As a response to the infringement procedure, the Hungarian government adopted Act XXVI of 2007 on the Abolition of Golden Shares (the “Golden Share Act”), which came into force on 21 April 2007. The Golden Share Act states that golden shares will cease to exist and will be deemed ordinary shares following the expiry of the 90-day period after the Golden Share Act comes into force, unless during this period the relevant companies have convened a general meeting and have essentially transformed the golden shares into regular voting preference shares issued under the then effective Hungarian Companies Act (i.e. Act IV of 2006 on the Companies Act). The aim of the Golden Share Act was to comply with the provisions of EC law and eliminate the proposed state measure.
Final part

Considering the above arguments and the related historical background, one question remains: whether the continued existence of the golden share can be justified at all.

Every piece of national legislation should be examined on a case-by-case basis. Nevertheless, I am of the firm opinion that the existence of golden shares can be justified under EU law if the following conditions are met:

(i) the golden share is aimed at protecting a specific public interest;

(ii) the golden share only affects certain specified decisions of the management (i.e. it is proportionate); and

(iii) the role of the golden share cannot be reduced to merely protecting the company from hostile takeovers.

This viewpoint was confirmed by the ECJ in Commission v Belgium [C-503/99 Commission v Belgium [2002]] where the ECJ held that “the free movement of capital, as a fundamental principle of the Treaty, may be restricted only by national rules which are justified by reasons referred to in Article 73d(1) of the Treaty or by overriding requirements of the general interest and which are applicable to all persons and undertakings pursuing an activity in the territory of the host Member State. Furthermore, in order to be so justified, the national legislation must be suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain it, so as to accord with the principle of proportionality”.

By Akos Mates-Lanyi, Counsel, Noerr

The new NIS2 Directive will replace the current NIS Directive on security of network and information systems.

Personal scope of the NIS2 Directive

The NIS2 Directive sets the baseline for cybersecurity risk management measures and reporting obligations across all sectors that are classified as “Sectors of high critically” by the directive. Such sectors are the

• Energy,
• Transport,
• Banking,
• Financial market infrastructures,
• Drinking and wastewater,
• Digital infrastructure,
• Public administration, and
• Space sectors.

The new Directive introduces a size-cap rule as a general rule for identification of regulated entities, meaning that for eg. all the entities within the above-mentioned high critical sectors which provide their services or carry out their activities within the territory of the EU, and

1. employ more than 50 persons, or
2. whose annual turnover and/or annual balance sheet total does exceed €10 million fall within the scope of the Directive.

In certain cases, regardless of their size, entities are covered by the NIS2 Directive (for eg. providers of public electronic communications networks or of publicly available electronic communications services, trust service providers, top-level domain name registries and domain name system service providers, etc.).

The Directive also establishes the concept of ‘Other critical sectors’, which are also covered by the NIS2 Directive and include operations such as postal and courier services, waste management, or manufacturing services.

The Directive allows national authorities to determine further entities covered.

The text also clarifies that the Directive does not applies to entities carrying out activities in areas such as defence or national security, public security, and law enforcement. Judiciary, parliaments, and central banks are also excluded from the scope.

The NIS2 Directive, among other provisions,

1. sets out minimum rules for a regulatory framework and lays down mechanisms for effective cooperation among relevant authorities in each member state in order to harmonise cybersecurity requirements and implementation of cybersecurity measures in different member states.
2. has been aligned with sector-specific legislation, in particular the regulation on digital operational resilience for the financial sector (DORA) and the directive on the resilience of criticalentities (CER), to provide legal clarity and ensure coherence between the Directive and these acts.
3. streamlines the reporting obligations on significant incidents in order to avoid causing over-reporting and creating an excessive burden on the entities covered. The entities are obliged to submit (i) an early warning within 24 hours of becoming aware of the significant incident, and (ii) an incident notification without undue delay and in any event within 72 hours of becoming aware of the significant incident.
4. establishes the European Cyber Crises Liaison Organisation Network (‘EU-CyCLONe’), which will support the coordinated management of large-scale cybersecurity incidents and crises.
5. determines the general conditions for imposing administrative fines. The maximum of the amount of the administrative fines shall be at least
    

• in case of essential entities €10 million or 2% of the total worldwide annual turnover in the preceding financial year, whichever is higher.
• in case of important entities €7 million or 1,4% of the total worldwide annual turnover in the preceding financial year, whichever is higher

Member States obliged to establish a list of essential and important entities as well as entities providing domain name registration services by 17 April 2025 and shall review and update such list on a regular basis and at least every two years thereafter.

Member States are required to transpose the provisions necessary to comply with the NIS2 Directive by 17 October 2024 at the latest.

By Tímea Bana, Partner, Dentons

The most prestigious Hungarian permanent arbitration body, the Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry (HCAC) revised its rules of proceedings with effect from 2023. Will the revised rules increase the speed and efficiency of arbitral proceedings in front of the HCAC, or it is just a facelift of the former regime?

In the last 5 years the Hungarian dispute resolution landscape has changed radically, because the new Civil Procedure Code, which entered into force in 2018 brought major structural reforms to the first instance court procedure, and it has significantly reduced the length of civil and commercial litigations in Hungary.

From user’s perspective arbitration is always an alternative to state court litigation, therefore the time has come for the HCAC to review its former rules of proceedings to accelerate arbitral proceedings and increase the effectiveness of arbitral awards, to cope with the growing competition from Hungarian state courts.

The revised rules are applicable from 31 December 2022, and they bring several minor modifications to the arbitral proceedings administered by the HCAC. Instead of presenting an exhaustive list of all of the changes under the revised rules, this article summarises the key changes, and it evaluates the possible effects.
First and foremost, arbitrators will have a strict 30 days’ deadline to accept party appointment.

The provisions governing case management conferences, a procedural technique imported from major arbitral institutions in 2018, will become more flexible, allowing arbitrators to organize the first conference when the respondent’s defence on the merits is already known by all participants.

Based on the COVID19 experience, the option to hold remote hearings, ie. hearing without physical presence of the parties, is crucial in arbitral proceedings. Therefore, filling the lacuna in the old rules, whether it is possible or not without express party consent, was extremely important to avoid the risk of annulment of arbitral award rendered in HCAC proceedings.
Now the revised rules expressly allow the arbitral tribunal to hold a hearing through means of telecommunication in justified cases, which will contribute to the speeding up of arbitration proceedings.

Arbitrators who tend to procrastinate the making of the award now are put under pressure, since the HCAC will be entitled to reduce their arbitrator’s fee, if they fail to deliver the award within 45 days as of the closing of proceedings, without making a preliminary request to lengthen the above deadline.

Last but not least, the new rules regulate dissenting opinions in a more detailed manner, in order to avoid situations where the content of dissenting opinion is used by the losing party to challenge the award in front of state courts.

While it is doubtful whether the deadline for accepting appointment, or the blanket rule about decreasing arbitrators’ fees will have the desired positive impact, the more flexible new provisions regarding the timing of the case management conference, the express regulation of remote hearings and the more sophisticated regime regarding dissenting opinions will presumably contribute to the effectiveness of awards and will potentially increase the speed of arbitral proceedings.

Hopefully due to these minor, but nonetheless, important modifications, HCAC administered arbitrations can stand up to the competition from the Hungarian state courts.

By Richard Schmidt, Managing Partner, SmartLegal Schmidt & Partners

The Hungarian Data Protection and Freedom of Information Authority (NAIH) recently fined a market-leading Hungarian media service provider HUF 10 million (approx. €25,000) for failing to comply with the data processing principles of lawfulness, fairness and transparency in its cookie management solution based on the Interactive Advertising Bureau (IAB) Europe’s Transparency and Consent (TCF) Framework. This is the first time that the Hungarian authority has imposed a fine for cookie management issues and made it public.

The Hungarian authority made a number of important findings and determined that the use of cookies and the assignment of cookie identifiers to website visitors constitutes the processing of personal data. The website operator, as the data controller, is responsible for the modules it uses on its website, the third parties to which it transfers data and the legal basis on which it relies, and must clearly and transparently identify, describe and justify the specific processing purposes and legal grounds for the data processing.

The authority expects the design of the cookie banner to comply with the requirements of fairness and transparency. This requires disclosure of the categories of personal data processed, the relevant cookies, their purposes and functions. In this case, the authority found that an excessively long text on the banner in a small area of the screen and the process for the selection of over 700 data transfer partners also did not meet these requirements. The cookie notice disclosed essentially the same processing purposes for consent and legitimate interest, giving users the false impression that the controller could continue to process data based on its legitimate interest in the absence of consent.

The authority also stated that it must be as easy to withdraw consent as it is to give it. For example, if the button “Reject All” is only available on the second banner level in addition to the button “Accept All Cookies” on the first banner level, this requirement is not met.

The data controller argued that it had based its cookie management solution on IAB Europe’s Transparency and Consent Framework, which, according to the data controller, is a market standard. However, the Hungarian authority did not accept these arguments. The Hungarian authority referred to the decision of the Belgian DPA, which had already found that IAB Europe’s framework was illegal, and confirmed that the findings of that decision applied to this case as well.

This decision provides useful guidance for the design of cookie management solutions. However, the authority did not analyse the issues of dark patterns and international data transfers in the context of AdTech operations, so it is expected that practice may evolve on this point.

By Adam Liber and Tamas Bereczki, Partners, Provaris

Since 2020, EU Member States have been obliged to make specific information on ultimate beneficial owners (“UBOs”) of corporate and other legal entities available to the general public. However, in light of the recent judgment of the Court of Justice of European Union (“CJEU”), this obligation will not remain in effect and thus, changes to the accessibility of the Hungarian UBO register are to be expected.

As part of the fight against money laundering and terrorist financing, the European Parliament and the Council adopted Directive (EU) 2015/849 (“AML Directive”) in 2015 which – among many other requirements – set forth for the Member States to establish and maintain a central register about the beneficial ownership of corporate and other legal entities incorporated within their territory.

While most of the Member States were reluctant to establish the so-called UBO register (until 2017, only a few of them actually created it), in 2018, the EU called upon increasing transparency even more by prescribing in an amendment to the AML Directive (“2018 Amendment”) that information about the identity of the UBOs shall also be made available to the general public from 2020.

Finally, all Member States created their UBO register in compliance with the above requirements and Hungary was one of the last to do so in 2021. The Hungarian UBO register is maintained by the Hungarian tax authority (NAV) and the data included therein shall be updated on a monthly basis by the banks who hold the accounts of the corporate and other legal entities being subject to the relevant Hungarian law (Act XLIII of 2021). In case of opening a bank account or in the event of any changes in the relevant data at a later stage, banks shall require their clients to make a statement about their UBOs and such statements are forwarded by the banks to the NAV for the purposes of maintaining the UBO register. As per Act XLIII of 2021, the Hungarian UBO register shall contain the following information about the UBOs: (i) first name and surname; (ii) first name and surname at birth; (iii) nationality; (iv) place and date of birth; (v) address, or in lack thereof, place of residence; (vi) nature and extent of the beneficial interest held in the legal entity.

The database is primarily accessible by the authorities and service providers obliged to perform AML screening – however, in accordance with the requirements set forth by the 2018 Amendment, information on the UBOs may also be queried by the general public for a certain fee (currently HUF 1,500 per legal entity).

Nevertheless, the Hungarian UBO register system introduced in 2021 may not operate for too long in the current form.

In two separate lawsuits initiated in Luxembourg, it was questioned whether the publicity of the information on the UBOs is necessary and proportionate from a privacy and data protection viewpoint. The question was referred for a preliminary ruling by the CJEU which adopted its judgment in Joined Cases C-37/20 and C-601/20 on November 22, 2022.

In its judgment, the CJEU held that the provision of the AML Directive as amended by the 2018 Amendment whereby Member States must ensure that the information on the UBOs is accessible in all cases to any member of the general public is invalid. According to the CJEU, the general public’s access to information on UBOs constitutes a serious interference with the fundamental rights to respect of private life and to the protection of personal data and such interference is neither limited to what is strictly necessary nor proportionate to the objective pursued. The CJEU pointed out that the information disclosed enables a potentially unlimited number of persons to find out about the material and financial situation of the UBOs. Furthermore, according to the CJEU, the potential consequences for the data subjects resulting from the possible abuse of their personal data are exacerbated by the fact that, once those data have been made available to the general public, they cannot only be freely consulted, but also retained and disseminated.

In light of the CJEU’s judgment, several Member States (including Luxembourg, the Netherlands, Austria, Germany and Ireland) have promptly put an end to the UBO publicity by shutting down their UBO registers. However, in Hungary, there has been no changes in this regard ever since the issuance of the CJEU’s judgment and information on the UBOs may still be accessed by anyone from the Hungarian UBO register. It seems possible that Hungary is waiting for formal instructions from the European Commission or changes in EU law before it reduces public access to its short-lived UBO register.

By Zsuzsanna Lukacs, Senior Associate, Nagy & Trocsanyi

A most vibrant year for the M&A department of Forgo, Damjanovic & Partners was primarily driven by the healthcare, insurance, and energy sectors, according to Managing Partner Zoltan Forgo.

“As our firm has traditionally been focusing primarily on transactional work, it comes as no surprise that our hottest practice has been M&A,” Forgo begins. “Speaking about the sectors that have been our primary drivers of that work, three come out on top – healthcare, insurance, and renewable energy.”

Delving into the first, Forgo remarks that the healthcare sector has been animated in 2022. “At the start of the year, back in the first quarter, we had the privilege to close a transaction on the sale of the DaVinci private hospital – one of the biggest private clinics in Hungary. Given that the healthcare sector has been undergoing a consolidation wave – which we expect to continue in 2023 – so too do we predict that our M&A practice will remain busy in this area,” he explains. 

“When it comes to the insurance sector, our biggest transaction of 2022 was the Talanx Group’s sale to the Hungarian state of a 67% shareholding in the Hungarian Post Insurance Companies – one handling life insurance, and the other dealing with non-life insurance,” Forgo says. According to him, with the acquisition agreement having been signed at the end of 2022, the closing of this transaction will soon take place. “The brio of the insurance sector is primarily driven by a strong desire of the Hungarian state to have clear, direct ownership of more than 50% of the insurance sector by domestic owners. To achieve this, the government, on the one hand, has been using the FDI screening mechanism, whereby it can block transactions between foreign owners. This specifically happened in the proposed Aegon-Vienna Insurance Group sale, where the Hungarian state blocked the sale and, eventually, the Hungarian state itself acquired a 45% shareholding interest in Aegon’s Hungarian operations,” he notes. “On the other hand, the government increased the special tax on the insurance sector twice in 2022, to a painful level, which may result in further foreign owners in the insurance sector wishing to exit the Hungarian market. So further transactions in this sector may come in the foreseeable future,” he explains.

Furthermore, Forgo shares that Forgo, Damjanovic & Partners has been involved in a number of renewables transactions, first and foremost in the solar energy area, “both on the sell and the buy side. Our flagship client in this sector is the Danish solar energy company Obton, which manages EUR 3.5 billion in assets. Due to the soaring electricity prices, solar park sales are a booming area in Hungary, and we expect even more activity in this area for 2023,” he says.

Finally, Forgo says that their firm also noticed two interesting trends when it came to their recent M&A work. “Firstly, it is worth noting that outbound investments are a new phenomenon and that we are seeing more and more local, Hungarian companies seeking to acquire and invest in other parts of Europe – which could mean more M&A work overall,” he explains. “In addition, due to our strengths in dispute resolution, we have worked on a number of corporate disputes in 2022, some of which end in shareholder exists, which ultimately means more work for our M&A department as well – seeing this synergy in action is an interesting development for us,” he shares. “Looking ahead, we have set the bar high in 2022, but I think we have a very good chance to maintain current activity levels and even build further in the upcoming year,” Forgo concludes.

Kapolyi has advised AutoWallis on its acquisition of Hungarian fleet management company Nelson. Lendvai and Partners advised Nelson and its shareholders.

AutoWallis is a car dealership and mobility service provider operating in 14 countries in CEE. It is listed in the Premium category of the Budapest Stock Exchange.

According to Kapolyi, “the total volume of the transaction is HUF 2.98 billion (approximately EUR 7.45 million), of which HUF 335 million (approximately EUR 837,000) will be paid over the next two years. The sellers have provided funds to participate in the AutoWallis Employee Share Participation Program for Nelson employees and officers who have recently joined the AutoWallis Group.”

In 2021, Kapolyi advised AutoWallis on preparing a public share issuance (as reported by CEE Legal Matters on October 27, 2021).

Kapolyi’s team included Senior Attorneys at Law Gabor Horvath and Balazs Jozsef Ferenczy, Associate Zoltan Banki, and Junior Associate Zsofia Somlovari.

The Lendvai and Partners team included Partner Andras Lendvai, Senior Associate Akos Kalman, and Associate Petra Nikolits.

Former Diageo Head of Legal & Operations and DPO Gabor Kukovecz has joined the Phoenix Group in Hungary as the Group Legal Director.

Kukovecz had been with Diageo for over 10 years, first joining the company in July 2012 as the Company Secretary and Legal Counsel Hungary and being appointed to his last role in March 2018. Prior to that, he was a Senior Legal Manager with British American Tobacco between 2011 and 2012. Earlier still, he was a Legal Manager with Invitel International between 2007 and 2011. Kukovecz’s experience includes working as a Senior Associate for Allen & Overy in 2007, as a Legal Advisor for UPC Hungary between 2001 and 2006, and as a Junior Lawyer with Tesco between 1998 and 2001.

“I believe that what I have learned in my past 22 years at various multinational FMCG and CMT companies in various legal roles I could now use it all at the Phoenix Group in Hungary to strengthen their market-leading position,” commented Kukovecz. “I am really pleased that I can work with their professionals, who spent the past decades dealing with the issues of this market and thus they understand every angle of it. This is a fantastic opportunity for me and a merger between Phoenix’s and my capabilities to reach out our next goals together.”

Originally reported by CEE In-House Matters.