Category: Hungary

Allen & Overy Counsel Balazs Sahin-Toth Talks About the Deal of the Year in Hungary

CEELM: What was Allen & Overy’s role in the Extreme Digital/eMAG merger?

Balazs: Alongside DLA, we acted for the Naspers Group and their Romanian subsidiary, eMAG, in setting up a joint venture with Extreme Digital. The Budapest office of Dentons acted for Extreme Digital in that deal. After completion, Extreme Digital held 48% of the joint venture company, with eMAG’s Hungarian affiliate holding the remaining 52%. Our main role was to negotiate and draft the shareholders’ agreement, and we also commented on the new articles of association, capital increase, and board-related documentation. The capital increase consisted of new money plus in-kind contribution, including the transfer of purchase price receivables arising from a business transfer agreement, licence fees and a trademark transfer agreement. Through a series of transactions, the parties contributed their assets to Extreme Digital and merged their businesses.

As I said, we were holding the pen on the shareholders’ agreement. This was a relatively complex document that set out a roadmap of which party did what to set up the agreed structure of the joint venture. We also drafted corporate governance clauses, how the business must be conducted, and which information must be provided to shareholders and directors. There are pre-emptive rights on the allotment and issue of new shares, restrictions of transfers of shares, rights of first refusal, tag along, drag along rights, put options and call options, exit support clauses, protection of shareholders, etc. So the full arsenal that you would expect to see in an international joint venture.

CEELM: How did Allen & Overy get the mandate in the first place – why did eMAG choose the firm to assist it in this matter?

Balazs: Our Amsterdam office was instrumental in securing this mandate. Prosus/Naspers is listed in Amsterdam and the relationship is based in Amsterdam. Justin Steer, who is an Allen & Overy partner in Amsterdam, was key to the client relationship and also led the negotiations over the shareholders’ agreement. The shareholders’ agreement is governed by English law, while the parties agreed that the rest of the documentation would be governed by Hungarian law.

Before this deal, we had acted for Naspers on another M&A mandate in Hungary and a number of transactions globally. In our previous deal, we acted for Naspers on the sale of a Hungarian company and our work included drafting and negotiating a share sale and purchase agreement, loan novation, termination of intragroup agreements, corporate documentation, sale of intellectual property rights, mobile applications, etc. Interestingly, on that previous deal, we also worked with Dentons, which acted for the purchaser.

CEELM: What was the significance of the deal, in your opinion?

Balazs: It helped cement the market position of Extreme Digital as a prime digital retail platform. In the past few years, this business has been on the rise and recently received a boost during the Covid-19 crisis as people have been turning to digital retail shopping more than ever before. Completion occurred in the fourth quarter of 2019, which shows that the timing was right.

CEELM: It appears the majority shareholder of Extreme Digital is Steinhoff International, from South Africa, and the majority owner of eMAG is South Africa’s Naspers Group. Did the fact that the owners were both South African affect the logistics of negotiating and structuring this deal in any way?

Balazs: I don’t think so. Steinhoff is at the center of an international scandal and is insolvent. In South Africa the name Steinhoff is very damaged. Given the developments around Steinhoff at the time, their both being South African played no real role. We received instructions mainly from David Fiene of Naspers who is a very professional lawyer and very easy to deal with.

By the way, we generally see much interest from South African investors and financiers as well. For example, we are acting for Scitec, one of the leading manufacturers of sports supplements, its parent company Ascendis and their lenders on various finance matters. The majority of lenders are from South Africa.

CEELM: Finally, congratulations on winning the Deal of the Year Award in Hungary – the most competitive ballot in all CEE countries this year.

Balazs: Thank you and thanks to our client Naspers and our clients in general for their continued trust in us, DLA for the efficient division of work, and Dentons for their cooperation on the eMAG deal. Allen & Overy has had another great year with several good deals under our belt, including this transaction. We are grateful to CEE Legal Matters for awarding Allen & Overy the 2019 CEE Deal of the Year Award for Hungary.

Our business presentation on “Trends in M&A” earlier this year was again a success. It was delivered by our managing partner, Zoltan Lengyel, who shared with our clients and M&A specialists our guidance on recent market trends in M&A documentation based on hundreds of deals which Allen & Overy have been involved in globally in the past year.

We are hopeful for the future too. We lawyers are lucky so far because Covid-19 has not made our jobs redundant. Just the opposite – it has probably brought us more work than we have had to sacrifice. This crisis reminds us of our duty to contribute to the community.

On that note, I trust that the Supreme Court will soon pass a judgment upholding the approximately HUF 100 million in damages awarded for school segregation to 60 Roma students in Gyongyospata, in Northeast Hungary – a landmark case that we are conducting on a pro bono basis, along with lawyers Peter Gardos and Eleonora Hernadi, for the Chance for Children Foundation. This litigation has received much unwanted political attention and the Prime Minister announced that the state would not pay, despite the final and binding judgment requiring payment. We are convinced that the Roma children deserve access to justice and moral damages for their suffering due to segregation and loss of chances to succeed in life due to the poorer level of education that they have received.

This Article was originally published in Issue 7.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Hungarian Parliament is discussing a proposal on the amendment of the Act on Electronic Communications in order to implement the regulations of EU Directive 2018/1972. This latter Directive was adopted by the European Union in December 2018 to set up the European Electronic Communications Code. Member Sates shall implement its regulations until 21 December 2020 after a 2-year long preparation period.

The European Electronic Communications Code establishes common EU rules and objectives on the telecom industry by revising and modernising the pre-existing framework regulation. The new regulation enables the rapid roll-out of 5G and other next generation network technologies throughout Europe, encourages innovation and strengthens consumer protection in the area of electronic communications. The new rules also introduce a public warning system, i.e. a so called “reverse 112” system at national level, which allows states to alert people directly on their mobile phones of major emergencies such as natural disasters or terrorist attacks (which shall be implemented by Member States by 21 June 2022).

The implementing measures of the Hungarian proposal include regulations on end-users’ rights, spectrum management, provisions on encouraging competition and stimulating investment in very high capacity networks, respectively improving consumer protection. The proposal contains provisions on national regulatory authorities and establishes a set of procedures.

The European Electronic Communications Code was designed to implement the changes in markets, consumer trends and technology, which have significantly changed since 2009 when the framework had been last amended. Due to these changes, connectivity and take-up of very high capacity networks, including fixed, mobile and wireless networks, of EU citizens and businesses will be strengthened and encouraged.

By Rita Parkanyi, Partner, KCG Partners Law Firm

Due to the practical difficulties created by the lockdown measures taken against the coronavirus pandemic, the European Council has agreed that the VAT e-commerce package should apply from July 1, 2021, rather than January 1, 2021.

Under the new VAT e-commerce package, all business-to-customer (B2C) supplies of goods to customers in the EU should in principle be taxed at destination. New obligations will be introduced for online marketplaces and platforms and their business users and VAT exemptions will be removed for low-value consignments. The EU will also improve and expand its mini one-stop shop (MOSS) system, practically turning it into a One Stop Shop (OSS) applicable to

• B2C supplies of services other than telecommunications, broadcasting and electronic services
• intra-EU distance sales of goods
• certain domestic supplies of goods facilitated by electronic interfaces
• distance sales of goods imported from third countries and third territories in consignments of an intrinsic value of maximum EUR 150

The new deadline should give Member States and businesses more time to prepare for the new rules.

By Balint Zsoldos, Head of Tax, KCG Partners Law Firm

Due to the practical difficulties created by the lockdown measures taken against the coronavirus pandemic, the European Council has agreed that the VAT e-commerce package should apply from July 1, 2021, rather than January 1, 2021.

Under the new VAT e-commerce package, all business-to-customer (B2C) supplies of goods to customers in the EU should in principle be taxed at destination. New obligations will be introduced for online marketplaces and platforms and their business users and VAT exemptions will be removed for low-value consignments. The EU will also improve and expand its mini one-stop shop (MOSS) system, practically turning it into a One Stop Shop (OSS) applicable to

• B2C supplies of services other than telecommunications, broadcasting and electronic services
• intra-EU distance sales of goods
• certain domestic supplies of goods facilitated by electronic interfaces
• distance sales of goods imported from third countries and third territories in consignments of an intrinsic value of maximum EUR 150

The new deadline should give Member States and businesses more time to prepare for the new rules.

By Balint Zsoldos, Head of Tax, KCG Partners Law Firm

In order to execute the Hungarian Economy Protection Action Plan, some provisions of the Hungarian Bankruptcy Act and the Company Registry Act must be applied differently based on a government decree adopted in the end of May 2020 (Government Decree). As a result, during the state of emergency, a creditor may submit an application for the opening of a liquidation proceeding only if the deadline determined by the creditor in the payment notification and the subsequent 75 days expired without any result. In addition, the amount of the claim must exceed HUF 400,000.

As to the Company Registry Act, following the government decree entered into force (i.e. 29 May 2020), the court of registration may not declare the company as wound up in a judicial supervision procedure. Furthermore, in case the tax authority initiates a procedure for declaring a company wound up due to the final cancellation of the tax number of the company, this procedure must be suspended until 31 October 2020.

The ongoing procedures and the current compulsory cancellation procedures (in Hungarian: kényszertörlési eljárás) must also be suspended until the above mentioned deadline. In case the company verifies for the court of registration during the period of suspension that is has reinstated the legal status and its legal operation, eliminating the violation of the law, the court terminates the compulsory cancellation procedure (contrary to the current provisions of the Company Registry Act). The Government Decree also ensures that if the company did not finish the winding-up within 3 years and did not submitted an application for its cancellation, the commencement of the compulsory cancellation procedure cannot be ordered and the company may submit the application for the cancellation until 31 October 2020.

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

The Hungarian National Authority for Data Protection and Freedom of Information (the “Authority” or “NAIH”) recently imposed a fine of HUF 100m (approx. EUR 285,000) on one of the biggest electronic communication service providers Digi Távközlési Szolgáltató Kft. (“Digi”). This is the highest data protection fine imposed in Hungary since the entry into force of the GDPR and the highest ever fine levied in Hungary for a violation of data protection regulations.

An ethical hacker discovered a vulnerability affecting Digi’s website, based on which it was possible to access a “test database” that contained a significant amount of personal and sensitive data of Digi’s subscribers (e.g. name, data and place of birth, email address and password, bank account number, willingness to pay). The ethical hacker informed Digi of this vulnerability and Digi took corrective action and submitted a breach notification to the Authority within 72 hours as prescribed by the GDPR.

In the mandatory investigation following the notification of the breach, the Authority examined all relevant circumstances of the case. Digi stated that the test database was created in connection with the correction of an earlier error that made subscribers’ personal data inaccessible (Digi’s webserver did not reach the database server). Digi did not encrypt the database because it believed that access restriction and provisioning provided sufficient protection of the personal data concerned. However, it turned out that the ethical hacker was able to access Digi’s database and the user data of the system administrators.

The Authority found Digi to be in violation of the principle of purpose limitation by not deleting the test database after the troubleshooting process and the correction of system errors. As soon as Digi solved the problem, the purpose of the data processing was eliminated and the test database should have been deleted. Thereby, Digi also violated the storage limitation.

In addition, the Authority established that the cause of the data breach was the lack of appropriate data security. According to an IT expert, the system vulnerability uncovered by the ethical hacker could have easily been filtered out by an application which scrutinises the vulnerability by automatism, which was available on the market. The lack of encryption not only increased the risk of a data breach, but made a substantial amount of personal and sensitive data accessible to unauthorised persons, which could result in identity theft. The involvement of system administrators’ user data further increased the severity of the data breach, making it possible to give access to the administration board of the website.

The case has not only highlighted the importance of IT security and the prevention of unauthorised access to personal data as the core part of data protection, but also showed the importance of implementing systems that apply the principles of the GDPR in practice.

By Dorottya Gindl, Attorney at Law, and Daniel Gera, Counsel, Schoenherr

“The most important thing right now is that the state of emergency was terminated,“ says Peter Berethalmi, Partner at Nagy es Trocsanyi in Budapest.

Berethalmi says that the legislative focus of Hungary’s Parliament recently was “on dealing with all the government decrees that were passed during the state of emergency, as the government gave the Parliament back its full legislative power following the end of the state of emergency.“ It is now up to Parliament to decide which decrees should be kept in effect and which rejected.

“A long piece of legislation was adopted by the Parliament already,” Berethalmi reports, implementing “almost word by word“ the May 25 Government decree restricting investments into Hungary from non-EU countries in order to “protect strategic entities deemed vulnerable to takeovers by foreign investors during a time of crisis.“ Berethalmi calls this “probably the most important thing for us as lawyers,“ and explains that the law is “not very clear, and strangely it affects some EU investments” as well.”

“Still,” he says, “the government has loosened some conditions for investment, which previously warranted notifications and approval, likely to avoid being overwhelmed by applications.“ Berethalmi reports that the law “probably catches even intra-group corporate restructurings,“ and that, especially with the recent Brexit, there are cases that are “quite complicated.“ 

Turning to another subject, Berethalmi reports that a new Bankruptcy Code is in the works. “There is draft legislation, which the government filed just last week, so that will definitely be a change.“

Finally, speaking of the COVID-19 crisis, he says that Hungary “cannot suffer any more lockdowns.” According to him, “the governmental measures proved to be appropriate to save lives and protect the economy, which is not in a bad state at the moment,“ but he says that if another wave of the virus comes, leading to another lockdown, more serious problems could arise. “At first, people wanted more straightforward and clear incentives from the government,” he says, “but they came around and accepted that everything that was passed was adequate and timely. Small businesses expected more, but because of the lockdown being relatively short, the economy didn’t suffer that much and they were not hit badly. If another lockdown is to be, however, I’m sure that most businesses will expect more to be done than this time around.“

In the meantime, he says, “the automotive and tourism industries have been hit the most. On the other hand, retail is booming, especially via the Internet.“ Of course, the pharmaceutical sector is going strong too, he says, especially in areas that are directly related to vaccine efforts.

The Hungarian Parliament accepted a bill on 16 June 2020, which would enable the creation of special industrial zones. “The designated special industrial zones will be contributing to the restarting of the economy, creation of new jobs, and also the preservation of the existing jobs” stands in the press release. According to the legislation, the main goal of the regulation is to facilitate a fairer distribution of tax income realized from greater investments as these zones would be no longer under the control of the local council.

Special industrial zones would be territories, where special regulations would apply to the investments planned. These territories would be defined by a Government decree if the volume of the contemplated investment would reach up to HUF 5 billion (~ EUR 14.5 million), which would be of economical importance for the whole municipality and would prevent significant loss of jobs or facilitate the creation of new ones. 

If a special industry zone is set up, the county representative council would exercise the duties and powers of the local council in the given territory. This means that the county representative council would have the right to levy local taxes and to decide upon their distribution. Budapest, as capital would be exempted from the abovementioned rules. 

Many mayors have expressed their dismay in connection with the proposed legislation, as they argue that many local municipalities would be deprived of legitimate tax income, thus their day-to-day operation could be in danger in the future.

By Gabriella Galik, Partner, KCG Partners Law Firm

Andras Fenyohazi has been promoted to Partner at Cerha Hempel in Budapest, where he will head the newly formed Construction Group. 

Cerha Hempel reports that Fenyohazi joined the real estate group in 2014, and he primarily represented clients, both contractors and investors, in construction and civil engineering projects. According to the firm, “with his admission to the partnership, Andras will also act as the leader of the construction group that, thanks largely to his work, has been elevated to the status of a separate practice within the firm. His team is equally at home in the management of contract negotiations concerning construction projects, debt recovery during implementation and in advising and representing clients in litigious and non-litigious construction disputes.“

Fenyohazi holds a Ph.D. from the Eotvos Lorand University in Budapest.

“With Andras’ admission, we are joined by an excellent lawyer with a precise legal mind who, besides his client-friendly approach to practical matters, also places great emphasis on having an in-depth understanding the theoretical underpinnings of everyday legal matters in order to enhance the quality of the services we offer to our clients,” commented Managing Partner Attila Dezso.

Lakatos Koves & Partners has advised the Dubai-based Al Habtoor Group on the sale of Budapest’s Rumbach Center to GalCap Europe, a real estate asset and investment manager operating in Austria and Central Europe. Cerha Hempel advised GalCap Europe on the deal.

According to LKT, “the Rumbach Center is located in the city center of Budapest, within walking distance to Deak Ferenc Ter, the main junction of the Budapest metro lines. With approximately 7,600 square meters of gross lettable space and 72 underground parking spaces, the property is entirely leased to the Budapest Public Transport Authority, which is headquartered there.”

Lakatos Koves & Partners’ team included Partner Attila Ungar and Senior Lawyer Julia Varkonyi.

Cerha Hempel’s team included Partner Wilhelm Stettner and Attorney Ivett Szauftman.