Category: Hungary

Lakatos, Koves and Partners, working alongside Clifford Chance’s Munich office, has advised Egeria Capital Behar BV on the acquisition of 100% of the shares of Isoplus. DLA Piper reportedly advised the sellers on the deal.

Egeria Capital Behar is an independent pan-European investment company.

Isoplus, founded in 1974, is a Germany-based provider of pre-insulated piping systems, mainly for district heating. The company operates in eight production locations, employs approximately 1,200 employees, and is active in over 30 countries.

According to LKT, “the investment by Egeria provides the company with the financial backing and operational support to accelerate growth and further grow the company as a leading provider of sustainable services for green heat across Europe.”

LKT’s team included Partners Adam Mattyus and John Fenemore and Senior Lawyers Kornel Dirner and Balasz Rokob.

DLA Piper could not confirm its involvement in the deal.

The European Investment Bank (EIB) will support Hungarian green financing with long-term forint-denominated loans. The cooperation agreement, which was entered into this May and allows the EIB to provide more fixed-rate long-term loans in Hungarian forints to the local economy, aims to boost sustainable economic and social growth, the post-pandemic recovery and climate action in Hungary. It is the EIB’s response to growing market demand for local currency lending in EU Member States that are not part of the euro area.

Consisting of the EIB and the European Investment Fund, the European Investment Bank Group increased its investments in Hungary in 2021 and provided EUR 891m to the local economy, a record volume of investment in the past five years. In 2021 the EIB provided EUR 300m to the Government of Hungary to co-finance the national Home Renovation Programme set up to improve the energy efficiency of homes. The EIB will also cooperate with the Hungarian Development Bank to help provide advisory services to Hungarian project promoters through the European Investment Advisory Hub (EIAH), part of the Investment Plan for Europe. 

The recently concluded cooperation agreement with the Hungarian National Bank is a continuation of these investments and cooperation regarding sustainable economy and will mitigate the exchange risks affecting Hungarian borrowers for a maximum term of 20 years. The Hungarian National Bank unveiled its Green Monetary Policy Toolkit Strategy and decided to launch two new programmes – the Green Mortgage Bond Purchase Programme and the Green Home Programme – to boost green mortgage lending and improve the energy efficiency of domestic housing stock. The agreement with the EIB is another important step towards supporting the financing of domestic green projects.

By Gergely Szaloki, Partner, Schoenherr

The Hungarian Trade Union Confederation (Magyar Szakszervezeti Szövetség, “MASZSZ”) put together in a ten-point manifesto its long-standing demands accumulated over the past few years. The president of the Confederation announced the manifesto on 27 April 2022. As soon as possible after the formation of the new Hungarian government, the Confederation sends its manifesto to all decision-makers and the leaders of the parliamentary parties.

The Confederation emphasises the importance of social dialogue and it urges the strengthening of the collective agreements system at the workplace and at sectoral level, as well as the restoration of trade union rights. The increase of wage levels and the extension of job-search allowance are also important elements of the Confederation’s demands. The Confederation expects the new government to develop a system which facilitates the better reconciliation of work and private life, eliminates discrimination and harassment at the workplace, and to introduce necessary legislation to create equal opportunities for women at work. The reform of the current pension system is also listed among the demands, but the trade unions consider the renewal of education and vocational training to be just as important. The Confederation calls for a meaningful dialogue with the new government and for constitutional guarantees to ensure its stability.

By Eszter Ila-Horvath, Attorney at Law, KCG Partners Law Firm

In 2021, the green financial markets substantially increased according to the Green Finance Report of the Central Bank of Hungary (MNB). Credit institutions launched green lending, and four banks are taking advantage of the MNB’s green capital requirement discount for housing. Among green financing products, the green bonds are very popular both at public and corporate level, and green lending has also been launched on the corporate side. In the investment segment, ESG products are already available, but only to a limited extent.

The HUF 300 billion green loan budget had been exhausted due to the impact of inflation, so MNB suspended the green lending programs. Nevertheless, MNB is still working on how to continue or restart programmes in a context of tightening monetary policy. The deputy governor of MNB explained that the Green Home Program or the Green Mortgage Bonds Purchase Programme would be continued, but the timing depends on price stability. The next inflation report will be published at the end of June 2022, when the Monetary Council will reassess the situation and decide on the next steps.

To increase the liquidity of the corporate bond market, MNB launched the Bond Funding for Growth Scheme (BGS) on 1 July 2019. Within the scope of the scheme, for a facility amount of HUF 1550 billion the central bank purchased bonds with good ratings issued by non-financial corporations as well as securities backed by corporate loans. In the BGS, 16 green bonds were issued for HUF 373,3 billion in the construction industry, processing industry, real estate, commerce, agriculture and electronic sectors. In December 2021 MNB closed the BGS, however, intends to launch further issues in the green corporate bond market later. Government securities are already showing signs of “greening”, that means investors are putting less of a premium on these products.

For investment funds, there is a gap as domestic ESG funds represent only 1.8% of the asset value of capital markets, compared to 42% in the EU. As demand grows and investors become more aware, this area could increase.

By Krisztian Brody, Attorney at Law, KCG Partners Law Firm

At the initiative of the Ministry of Justice, the Hungarian National Bank and the Hungarian Bar Association, the Government adopted a Government Decree in April 2022 regulating in detail the payment of lawyers’ deposits at financial institutions in the event of liquidation and winding-up proceedings. The Government Decree provides that in the event of the winding-up and liquidation of a financial institution, the provisions of the Bankruptcy Act, the Company Registration Act, the Act on Credit Institutions and Financial Undertakings and the Investment Firm Act shall apply with the additions and derogations included in the Government Decree.

As a background, in a letter dated 2 March 2022, the President of the Hungarian Bar Association turned to the President of the National Bank of Hungary regarding the deposits placed in attorneys’ escrow accounts held at Sberbank Hungary Zrt. As already known, that the Hungarian National Bank prohibited Sberbank from paying out amounts exceeding HUF 7 million per client for 30 days from 2 March 2022, revoked the business activity licence of the bank and initiated the winding-up of the company before the court. In his letter, the President of the Hungarian Bar Association recorded that as a consequence, the attorneys are unable to meet their obligations arising from the escrow agreements, and therefore requested the President of the Hungarian National Bank to ensure that the aforementioned restrictions do not apply to the transactions to be carried out on the escrow bank accounts of the attorneys.

As a result, under the Government Decree, the administrator or the liquidator must arrange for the payment or release of assets which are not part of the assets subject to winding-up or liquidation, including the amounts placed at the account relating to a notary, executor, attorney escrow or custody activity administered by the financial institution within 30 days of the order of winding-up or liquidation. The amount must be issued and paid if the purpose of the funds can be clearly established from the contract concluded between the financial institution and the customer. The administrator or liquidator must initiate the transfer of deposit portfolio and other repayable funds, as well as the transfer of the portfolio of payment services framework agreement at the Hungarian National Bank within 120 days from the order of winding-up or liquidation. The provisions of the Government Decree entered into force on 15 April 2022.

By Lidia Suveges, Attorney at law, KCG Partners Law Firm

The Orban & Perlaki law firm has announced it partnered with UK-headquartered Gunnercooke, with the Budapest-based firm rebranding to OPL Gunnercooke.

According to the firm, “unlike most partnerships in the big law universe, OPL has not been acquired, nor will it be a branch or local franchise office of Gunnercooke.” Instead, “OPL is responsible for building up and coordinating a network of Gunnercooke lawyers and offices in the entire CEE region.”

As part of the partnership, a joint venture between the two – Gunnercooke Legal Tech – will provide the global Gunnercooke network and clientele with legal tech solutions from Budapest.

One of OPL’s founders, Miklos Orban, has been appointed to Gunnercooke’s leadership team as Chief Technology Officer and will also serve as Managing Partner of Gunnercooke CEE.

Screening of foreign direct investment (FDI) has been present in Hungarian law since 2019 in relation to certain specific investment-related activities. During the COVID-19 pandemic, additional FDI screening legislation was introduced in May 2020. The 2020 regime has had an impact on a significantly wider range of business transactions and, therefore, this summary focuses solely on the 2020 regime (FDI Rules). Given that a real estate asset deal may also fall within the scope of the FDI Rules, assessing the potential application of the FDI Rules has become an important item on the real estate due diligence to-do list. Below you will find a summary of the applicable regime based on our experience to this date.

Strategic companies and strategic sectors

Any Hungarian limited liability company or company limited by shares that pursues its activities in one of the strategic sectors may qualify as a strategic company and, therefore, may be subject to the FDI Rules. While the relevant provisions of the FDI Rules on strategic companies and strategic sectors are quite vague and allow for a broad interpretation, the NACE codes listed in the FDI Rules may serve as points of reference when assessing whether a certain business activity of a company (or an asset deal in a strategic sector/activity) triggers the application of the FDI Rules. 

As both the main and the additional business activities of companies must be considered, the mere fact that the main activity of a company is buying/selling or leasing/operating real estate (NACE 6810 or 6820) does not necessarily mean that the entity is not going to qualify as a strategic company. This is due to the fact that all activities of the company (including, in particular, activities registered in the company register, encompassing also the additional activities of such company) must also be considered, and those may also trigger the application of the FDI Rules even if such activities constitute a side business to the main business activity and are practically never pursued. Strategic sectors include, amongst others, retail, warehousing, accommodation, food and beverage services, etc. and cover 19% of the real estate transactions DLA Piper Hungary worked on in 2021. We also note that the FDI Rules apply to both share deals and asset deals; therefore, the review of the activities of a given company and the use of a given piece of real estate have become key elements in the due diligence process.

Acquisitions via share deals

It has become common practice in share deals to assess, as a preliminary transactional question, whether the contemplated transaction structure is covered by the FDI rules, considering mainly (i) the residence of the investor and the entity having majority control over such investor, (ii) the ownership structure existing at the time and the shareholding to be acquired in a strategic company, and (iii) the transaction value (if the latter one should be considered at all).

The key point is to determine whether the target entity qualifies as a strategic company. A target company qualifies as a strategic company if (i) it is registered in Hungary and operates as a limited liability company, a private company limited by shares or a public company limited by shares; and (ii) it carries out, as part of its main or additional business activities, one or more of the business activities set out in the Hungarian FDI Rules as being in strategic sectors. 

Acquisitions of real estate via asset deals

The transfer of the title of any infrastructure, equipment and assets that are essential for carrying out activities in certain strategic sectors (as referred to in the definition of ‘strategic company’) may also be subject to the FDI Rules if the acquirer is a foreign investor (as defined by the FDI Rules) or an entity in which a foreign investor has, directly or indirectly, a dominant influence as defined under the Hungarian Civil Code.

The term ‘infrastructure’ is not defined by statutory law, but based on our experience, it is to be interpreted broadly. Therefore, an asset deal involving a piece of real estate required for pursuing an activity in a strategic sector (i.e. hotel building, logistics park, retail park) may also be interpreted as falling within the scope of the FDI Rules, even if none of the companies involved in the transaction qualify as a strategic company. Additionally, it is worth considering whether only a completed piece of real estate, or also ongoing developments may trigger the application of the FDI Rules in cases where the strategic activity concerned will undoubtedly be conducted on the real estate. As a result, the FDI Rules must be analyzed on a case-by-case basis in each asset deal where the target real property may be related to a strategic sector.

FDI reporting rules

If the transaction is subject to the FDI Rules, then the investor/acquirer of the real property is obliged to submit a notification to the Minister of Innovation and Technology and to obtain an acknowledgement from the Minister for the completion of the relevant transaction. The notification must be submitted in writing in Hungarian within 10 days after the conclusion of the relevant agreement or other legal declaration made for the purpose of the transaction. The Minister has 30 business days (which can be extended by 15 days) to acknowledge or reject the notification. 

The Minister inspects compliance with the FDI Rules. If during such inspection the Minister comes to the conclusion that there is a breach of the notification obligation, such breach may render the transaction document invalid, and the Minister may also impose a fine on the investor and/or the acquirer of the real property up to an amount of 200% of the transaction value, provided that, in the case of foreign investors which qualify as legal entities, such fine may not be lower than 1% of the net revenue of the strategic company concerned.

While FDI reporting rules may affect preliminary due diligence tasks and also stretch the transaction timeline, so far we have not experienced any issues around real estate investments being approved by the Minister of Innovation and Technology.

By Angela Toth, Senior Associate, DLA Piper

A sound investment requires an understanding of all the risks involved in the transaction. The main objective of real estate financial due diligence is to thoroughly inspect the fundamentals of the property, financing, seller and compliance obligations to be able to reduce and mitigate financial uncertainties.

Whereas the pricing of transactions is mostly driven by the capitalized NOI approach, further price adjustments have been common in the market in cases where the acquisition target is a special purpose vehicle or other company owning the properties.

Such adjustments are specific to each and every transaction and are typically triggered by the key findings of financial due diligence processes carried out by third-party advisors on behalf of the purchaser. Financial due diligence contributes to a deeper understanding of the transaction perimeter and helps identify potential issues which may not be in line with market standards. As a result, in addition to price adjustment implications, these analyses often highlight matters which need to be addressed in the reps & warranties section of SPAs or regulated in indemnification clauses.

Verifying NOI figures and reconciliation with actual rent roll data are amongst the top priorities of the due diligence process. Collecting and summarizing historic datasets for a 3-5 year period is beneficial for recognizing potential trends, assessing the time required to find new tenants in case expiring leases are not renewed and to get a general overview of the development of NOI over the past years. In-depth analysis also contributes to the elimination of one-off effects and the calculation of a long-term stabilized NOI.

Financial due diligence also targets the quantification of potential service charge leakages or, in some cases, the verification of profit margins applied on service charges. It also assists in calculating the effect of specific contractual terms which may be effective for certain tenants, such as rent-free or discount periods, in quantifying profits or losses on fit-outs or in assessing structural vacancy rates.

Analysing the financing structure of the target is of utmost importance as it contributes to the assessment of related risks and may help identify topics that need to be addressed. Key conditions, such as the currency of related loan facilities and bearing interest at a floating or fixed rate, may all be critical from the purchaser’s perspective when considering a potential transaction.

Overall, there are numerous aspects of real estate transactions which require detailed financial due diligence in order to be able to properly address the specific attributes of the asset or entity subject to the envisaged transaction.

By Aron Kovaloczy, Managing Director, DLA Piper

Growing inflation and budgetary limitations are the key challenges faced by Hungary’s newly elected parliament, according to Jalsovszky Law Firm Partner Tamas Feher.

“Looking at the broader picture in Hungary, we have two major talking points at the moment,” Feher begins. “First of all, as elsewhere, the war in Ukraine has had a major influence on Hungary and the region in general. Secondly, in Hungary’s recent elections, the ruling party led by Viktor Orban won the fourth consecutive term. While the win itself was not entirely unexpected, the extent of the win – that is, again, a two-third majority in the parliament – was quite a surprise for all sides of the political spectrum.”

According to Feher, both the war and election outcome-related ramifications have led to challenges for the new government. “In parts of the business community we could sense some genuine anticipation about the potential change in the political atmosphere,” he reports. “It seemed that some transactions were put on hold, dependent on the outcome of the elections. Also, because of the war in Ukraine, the general outlook of the business community is quite uncertain, which has already influenced the progress of ongoing M&A transactions.”

On top of that, Feher says, “Hungary’s budget is not in a great state. It is very likely that the government will raise some taxes.” He points out “this will most likely not affect the general taxes, yet the government and the National Bank of Hungary have already communicated about the possibility of implementing special tax regimes for certain sectors.” According to him, “the government is trying to increase taxes in a manner that won’t directly affect the population or FDIs, however, service sectors such as telecom and banking might not be able to avoid the new tax regulations.”

Further, Feher notes that growing inflation has been a major issue. “The government responded to it by capping prices of fuel, certain basic food products, household heating, etc.,” he says. “This, on the other hand, led to some economic ramifications, as there have been attempts to benefit from the low prices in these areas,” Feher adds, noting that private companies have seen a significant loss. “It has raised an interesting legal question, whether capping prices is in line with fundamental rights and the EU regulations. Some petrol companies have already initiated a lawsuit against the Hungarian state,” he explains.

Finally, Feher points out that Hungary is in the process of implementing reforms related to company and real estate registration. “The government is aiming to create a more user-friendly procedure for registration, by taking a step toward digitalization and automatization. If implemented sufficiently, this is a positive step forward and, despite the potential increase in work for the legal sector during the initial roll-out phase, it simplifies the procedure in the long run,” he concludes.

Senior Managing Associate Linda Al Sallami has become the new Head of Banking, Finance & Capital Markets at Deloitte Legal’s Budapest office.

Al Sallami joined Deloitte Legal in 2017, starting as a Senior Associate, and became a Managing Associate in 2018 and a Senior Managing Associate in 2020. Before joining her current team, she spent over four years with CMS from 2013 to 2017, also spending six months on secondment to UniCredit Bank in London, in 2016.

Al Sallami holds LLB and LLM degrees from the University of Debrecen.