Category: Issue 11.3

With the introduction of a recent omnibus legislative proposition presented to the Grand National Assembly on January 29, 2024, a significant legislative shift will occur in Turkiye’s renewable energy production sector.

This proposal, reportedly aimed at regulating floating photovoltaics and expanding renewable energy capacity by an estimated 80 gigawatts, represents a bold step toward sustainable development and increased renewable energy production by opening Turkiye’s lakes, reservoirs, and seas for solar and wind power projects without zoning requirements. From a legal standpoint, the amendments warrant a nuanced analysis, especially from the perspective of stakeholders in the energy sector such as investors aiming to invest in such projects as well as energy law practitioners and environmental advocates.

The primary aspect of the amendments is the changes made to the Coastal Law, which will allow investors to establish wind and solar power facilities on all aquatic bodies, including seas, reservoirs, and artificial or natural lakes. This is a significant departure from the current approach where the construction of electricity generation facilities is only possible on seawater. Moreover, according to the proposed amendments, the construction of these facilities will be exempt from zoning requirements, which can prove to be a significant hurdle in the current regime where investors must request a zoning order before the construction of the project.

The amendments introduce a novel approach to utilizing natural resources for energy production in comparison to both traditional land-based renewable energy projects and existing regulations in the area. However, while innovative, this approach also raises several legal considerations. First, the absence of zoning requirements for these projects simplifies the bureaucratic process, potentially accelerating the deployment of renewable energy technologies. However, it also necessitates robust environmental assessments to ensure that the ecological integrity of these water bodies is preserved. Therefore, in an environmental context, existing legal environmental frameworks such as environmental impact studies and reports should be given further consideration to prevent potential adverse impacts. It is also important to note that while the projects will not be subject to zoning requirements, they will nevertheless only be able to be constructed in zones that are designated as renewable energy sources.

Secondly, investors looking to establish these plants will have to apply for an electricity production license in line with the Electricity Market Law, in theory ensuring that the utilization of water bodies for energy projects is subject to oversight, aligning with broader objectives of sustainable water management. However, certain projects such as electric infrastructure designed to meet the electricity demand of the State Hydraulic Works or agricultural irrigation collectives will be established with the permission of State Hydraulic Works without the need for an electricity production license.

Moreover, while the proposed amendments allow for the establishment of wind and solar power facilities on aquatic bodies, certain water bodies are nevertheless excluded from the legislation. Particularly, maritime areas covered by the Coastal Law and lakes used as drinking water sources will be explicitly excluded from this possibility. Apart from these exclusions, water bodies or specific zones of a water body will be determined as renewable energy source zones by the Ministry of Energy and Natural Resources and be opened to these investments. 

While the amendments are yet to be voted on by the General Assembly, the omnibus is expected to pass without significant amendments and will take effect as soon as it is adopted and published in the Official Gazette. As the Grand National Assembly prepares to vote on the bill, it is imperative for legal professionals in the area to closely monitor these developments. The new legislation not only represents a significant opportunity for the growth of renewable energy in the country but also poses a range of legal challenges and opportunities. The interplay between environmental sustainability, energy security, and legal frameworks will be critical in shaping the future of renewable energy and the practice of energy law in Turkiye.

By Zahide Altunbas Sancak, Partner, and Aziz Can Cengiz, Associate, Guleryuz Partners

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Despite martial law, Ukraine has significantly advanced its renewable energy agenda over the last year. Ukraine’s trajectory in the renewable energy sector is not merely a response to challenges but a proactive and strategic approach to shaping a greener and more sustainable future.

In terms of numbers, in 2023, “green” energy capacities have increased by approximately 190 megawatts of wind power plants, 500 megawatts of solar power plants, and 100 megawatts of gas power plants. Given the temporary shortage of other generating capacities due to military actions, “green” generation significantly contributed to the power system’s stable operation.

In June 2023, Ukraine adopted the so-called Green Transformation Law, which provided the legal basis for implementing guarantees of origin registry, introduced a net billing scheme for self-consumption, and laid out directions for future renewable energy auctions. As a result, in its recent Implementation Report, the Energy Community praised Ukraine’s progress in approximating the national legislation to the Community’s acquis.

The system of guarantees of origin is a long-awaited development. The obligation to create a mechanism for issuing, using, and terminating guarantees of origin is envisaged by EU Directive 2018/2001, mandatory for implementation in Ukraine. Introducing this mechanism will allow Ukrainian businesses to comply with EU regulations regarding the climate goals of decarbonization, confirm corporate compliance with sustainable development goals, avoid additional costs when exporting goods to EU countries, and attract green financing.

A guarantee of origin issued for electricity will confirm the production of such electricity or its part from renewable sources. Thus, guarantees of origin will be able to verify that offered goods and services leave a smaller carbon footprint.

The National Energy and Regulatory Commission (NEURC) is designated as the issuing body for guarantees of origin for renewable electricity. NEURC is currently exploring possible registry options and is in the process of drafting secondary legislation.

The adoption of the Green Transformation Law also paves the way for market-based renewable support schemes through a feed-in-premium model. Currently, support for renewables capacities continues to operate under an administratively determined feed-in tariff. Under it, the guaranteed buyer – a specially designed state enterprise – is supposed to purchase all volumes of “green” energy eligible for the feed-in tariff. As a result, the guaranteed buyer ended up with significant debts to the energy-generating companies. While the debt has gradually been reduced during the last few years, it has significantly diminished business confidence in the feed-in tariff.

The newly introduced feed-in-premium mechanism allows energy producers to freely trade on the market, with the guaranteed buyer covering the difference between the awarded green tariff or the auction price and the market price. In turn, the producers are obliged to pay service costs once the market price exceeds the green tariff or auction price. The adoption of all relevant by-laws is still pending, yet the scheme is expected to be well-received by businesses.

Additionally, Ukraine is replacing feed-in tariffs for households with a net-billing mechanism. The latter will allow consumers to sell electricity produced by them from small-scale renewable installations to their suppliers. At the end of the billing month, the consumer and the supplier would set off their payments. If the cost of energy consumed from the network exceeds the cost of released energy, the difference is payable by the consumer in favor of the supplier. If the cost of energy supplied exceeds the cost of energy consumed, the difference is payable by the supplier to the active consumer. The net-billing mechanism is supposed to incentivize the installation of generating facilities by domestic and small commercial consumers.

As can be seen, Ukraine’s commitment to a greener and more sustainable energy future positions the country for continued progress in the renewable energy sector. The recent legislative initiatives do not simply address immediate challenges but also lay the foundation for a resilient and environmentally conscious energy landscape in the years to come.

By Maksym Maksymenko, Partner, and Yuliia Pidlisna, Managing Associate, Avellum

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

There are few healthcare reforms that could be called revolutionary. Even fewer have been initiated in the courtroom. Case C-412/23 could be one of those rare cases. On July 5, 2023, the European Commission brought an action against the Slovak Republic for allegedly infringing Directive 2011/7 on combating late payment in commercial transactions by continuously failing in 2015, 2016, 2017, and from 2018 onward to ensure that public entities providing healthcare pay their commercial debts within a maximum period of 60 calendar days.

In early 2023, the Czech Competition Authority published a lengthy report on its sectoral investigation into the distribution of pharmaceuticals. The main issue was whether distribution models in which manufacturers or importers supply medicines directly to pharmacies and hospitals rather than through wholesalers are anti-competitive. The results of the investigation, while interesting, are not the subject of this article. What catches the curious reader’s eye is the graph in the investigation’s report, citing an IQVIA analysis, which shows that the prevalence of direct-to-pharmacy/direct-to-hospital (DTP/DTH) distribution has generally increased between 2018 and 2020: in the Czech Republic, from 6.5% to 7.2% of total pharmaceutical sales; in Austria, from 9.6% to 10.2%; in Poland, from 4.9% to 7.1%; and in Slovakia, from a meager 0.9% to a paltry 1.3%.

DTP/DTH distribution is popular because it is efficient. By controlling the supply chain, manufacturers and importers can negotiate prices directly with end customers, forecast and allocate volumes, prevent shortages, and ensure that products get to where they are needed (yes, I am talking about re-export). Wholesalers are not going out of business – just instead of earning a regulated mark-up as independent resellers, they are remunerated on commercial terms as providers of warehousing and logistics services. So why has DTP/DTH distribution not caught up in Slovakia? Do Slovak wholesalers offer a unique value that their counterparts in other countries do not? Indeed they do. This value is debt holding.

According to 2023 data, the total debt of public hospitals in Slovakia has reached a hellish EUR 666 million. Of this, the largest university hospital in Bratislava owes EUR 207 million, the second largest in Kosice EUR 114 million, and the third largest in Martin EUR 87 million. Creditors include the State Social Security Fund as well as suppliers of products and services. Payment for vital medical equipment supplied to hospitals can sometimes take an astonishing two years.

How did we get there? Some blame low payments from health insurance companies, others inefficiencies in hospital management. One thing is certain: debt is mounting and the government’s response has been notoriously ineffective. According to a decision by the Ministry of Health, state hospitals must include provisions in their supply contracts prohibiting suppliers from assigning their claims to third parties without the Ministry’s prior written consent. Suppliers are therefore stuck with their receivables, unable to transfer them to factoring companies or even use them as collateral. Under a controversial provision of the law, foreclosure of hospitals is only possible if the provision of health care is not jeopardized. A creditor can therefore obtain a judgment ordering a hospital to pay, but the hospital assets that a bailiff can sell to repay the debt are limited to non-essential items – perhaps chairs in the waiting room. In fact, one of Slovakia’s major hospitals is already facing foreclosure, and others are threatened with apparent legal action.

Creditors stuck with unenforceable and unassignable claims have had to resort to a desperate measure: hospital debt relief schemes. In 2018, creditors who waived default interest and offered fixed discounts on the principal were paid by the state. In order to secure a better position in the order of claims released by the state, creditors were encouraged to bid for further discounts from the principal. Then again at the end of 2018, and again in 2019, and 2022. In fact, the history of similar schemes dates back to 2000. Critics of the schemes claim that these extraordinary measures have become part of the business strategy: hospitals order products and services, do not pay for them (or pay with a huge delay), and when the situation becomes unbearable, the state comes to the rescue and pays the hospitals’ debts in exchange for discounts from creditors.

It is clear that a revolutionary reform of hospital financing is needed if Slovakia is not only to benefit from more efficient distribution models but also to avoid the potentially disastrous consequences of suppliers simply withdrawing from the market. The current case before the Court of Justice could be just the trigger the state needs.

By Marek Holka, Partner, Cechova & Partners

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Recently, Slovak legislation underwent a significant change with the adoption of the Act on Transformations of Commercial Companies and Cooperatives. Effective as of March 1, 2024, the act marks a departure from previous regulations within the Slovak Commercial Code, which had grown rather inflexible and outdated in the area of corporate transformations.

With the new act – implementing Directive (EU) 2019/2121 – legislators sought to create a unified and transparent legal regulation concerning mergers, acquisitions, and divisions of companies and cooperatives. It also regulates changes to a company’s legal form and cross-border alternatives. Finally, for the first time, it introduces the option of spin-offs in the Slovak legal system. In general, this new law was very much in demand by the legal practitioners and the M&A market, and its adoption provides a modern and uniform legal regulation in this area.

Spin-Offs

One notable aspect of the new law is the implementation of the legal institute of a spin-off, allowing a company that is being divided to continue to exist while part of its capital/assets is passed to another existing or newly created company. Under the previous regulation, the divided company had to cease to exist, so the new legislation represents a substantive update and follows a more modern and common approach.

The conditions for spin-off implementation are duly defined in the law. A spin-off is exclusively permitted in the case of a division involving a joint-stock or limited liability company. A spin-off is not allowed if (1) the equity of the company being divided is lower than its registered capital, (2) the successor company has a different legal form, or (3) one (or more) of the participating companies is in liquidation.

The spin-off can be implemented as either a merger spin-off or an amalgamation spin-off. A merger spin-off is a procedure where part of the company being divided is transferred to the existing company. An amalgamation spin-off means that the capital/assets are transferred to a company created as a result of the spin-off.

Since this form of demerger is widely used abroad, a high demand for it can be expected in the Slovak jurisdiction, where, until now, a demerger in the form of transferring part of the business or individual assets was widely used instead.

Cross-Border Regulation

The new law also adopts an updated and complex regulation of cross-border mergers and introduces new legal institutes: cross-border division and cross-border change of legal form. The adoption of these new institutes is based on EU regulations and aims to support the mobility of legal persons within the EU market.

These newly adopted cross-border regulations apply if one of the participating entities or the successor entity is a Slovak company while at least one other participating entity or the successor entity is a foreign company. However, unlike in the case of domestic mergers and divisions, the law also introduces several restrictions, in particular in the case of cross-border divisions where only amalgamation divisions are allowed – i.e., a division when the successor entity is an entity newly established as a result of the division.

Furthermore, a change of the legal form allows companies to transform into a different form of a commercial company or into a cooperative. A change in the legal form does not dissolve the company. Instead, it only changes its legal form. In that respect, the new legislation introduces provisions for cross-border changes of the legal form by enabling a company registered in the commercial register of its home EU member state to relocate to another EU member state (by relocating its registered seat) while simultaneously changing its legal form to a different legal form recognized by the law of the receiving EU member state. However, there are certain limitations to this new instrument. In particular, the possibility of cross-border changes in the legal form is limited to Slovak and foreign limited liability companies and joint-stock companies seeking to alter their legal structure across borders.

In general, the adoption of the new complex regulation, implementation of new institutes, and transposition of EU legislation can be seen in a positive light, and new forms and structures of M&A deals, allowing more options and flexibility for the investors, can be expected in the Slovak jurisdiction soon.

By Peter Makys, Partner, and Natalia Polomska, Paralegal, Ments

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The solar power plant market in Hungary became very active lately and it is expected to grow further still. Transactions in this market require more due diligence than, for example, the sale of a business property, and it seems that as of this January, foreign investors will need to consider this further aspect simultaneously when making a business decision on a solar market transaction.

A pre-business decision assessment should include a full due diligence of the strategic company, especially if it has a solar power plant. In this case, a review of the technical content of the solar power plant is inevitable as the location, the site, or even the quality of the installed equipment will largely determine the return on investment and the expected lifetime and operating costs of the solar power plant.

In Hungary, however, another aspect to consider in the future is that the legal environment in solar power capacity is changing quickly, such as the existence and scope of land use and connection contracts and permits, which may be decisive for the planned operation. It should be highlighted that transaction costs for the preparation of the sale and purchase agreement and legal support for a transaction in the Hungarian solar market might reach up to EUR 500,000.

Preparing such a transaction has become even more complex as the energy sector in Hungary changed significantly in December 2023 with the adoption of Government Decree no. 566/2023 and Government Decision no. 1576/2023. With these, the Hungarian Government introduced a pre-emption right for the state, according to which, transactions that are subject to this statutory pre-emption right cover acquisitions of strategic companies by foreign investors where the strategic company pursues solar power plant-related activity with its main or other registered activity being electricity production. This legislation entered into force on January 13, 2024.

The FDI procedures conducted by the Minister of National Economy based on Government Decree 561/2022 (XII.23) (FDI Decree) have been modified and extended for these types of transactions. The process under the new rules can be summarised as follows:

First, foreign investors must file their request for such an acquisition, whereby the Minister of National Economy, upon the notification and the documentation received (to be submitted within 10 days as of the transaction and during the procedure legal representative is required), shall decide whether the notified transaction related to a solar power plant is subject to the FDI Decree.

If the Minister of National Economy establishes that this is the case, the Minister for National Economy will notify the minister responsible for energy politics, who will decide whether or not the pre-emption right is legitimate: the minister can propose exercising the pre-emption right of the state or can propose waiving the pre-emption right.

If the minister responsible waives the pre-emption right or gives no response within 15 business days, the Minister of National Economy will continue its procedure and acknowledge the transaction by issuing a decision on its acknowledgement.

In the event that the state exercises its pre-emption right, it is actually Hungarian National Asset Management Ltd. which proceeds within 60 business days and, pursuant to Government Decision no. 1576/2023, acquires the shares of the strategic companies registered for electricity generation and solar power plant activities.

Companies that have been acquired by the state through the right of pre-emption in the manner described above will be transferred to MVM Energetika Zrt. within six months after the date of their acquisition by the state.

Given that the above legislation entered into force shortly before the writing of this article, the practice is expected to continue to evolve in Hungary going forward.

By Orsolya Kovacs, Executive Partner, and Daniel Nyulasi, Junior Associate, Nagy & Trocsanyi

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Hungary recently adopted the so-called “ESG Act” (Act CVIII of 2023) relating to corporate social responsibility, taking into account environmental, social, and governance aspects, in order to promote sustainable financing and unified corporate responsibility. The act will gradually enter into force for different players within three years but, in general, is applicable as of January 1, 2024. The act is a framework regulation and further detailed rules are to be set out in government decrees yet to be issued to give greater clarity to market participants.

The ESG Act created two sets of compliance obligations: one is sustainability due diligence obligations applicable gradually to public and private large enterprises and public SMEs, and the other is the regulatory framework to register ESG certifiers, ESG reports, ESG consultants, and ESG software developers and distributors.

While the ESG Act also amended the Hungarian Accounting Act by implementing (EU) 2022/2464 Directive on Corporate Sustainability Reporting, which requires all large enterprises and listed SMEs to include a separate sustainability report in the business report of the annual financial statement, the sustainability due diligence obligation is a new compliance and reporting obligation. The new obligation requires the targeted enterprises to screen their supply chain to assess the sustainability of the entire corporate value chain and to produce an annual ESG report on the fulfillment of their obligations in this respect.

Through this legislation, Hungary – following Germany but before the adoption by the EU of the pending proposal for a directive on corporate sustainability due diligence – created a framework to monitor an entire supply chain performance with the obligation to (a) establish an effective sustainability risk management system, (b) develop an internal responsibility strategy and monitoring system, (c) carry out regular risk analyses, (d) establish preventive and corrective measures, (e) comply with ESG reporting obligations, and (f) obtain the declaration of direct suppliers in view of the risks involved.

According to the ESG Act, a sustainability risk management system is deemed effective if it enables the identification and management of significant social and environmental risks with adverse impacts in the activity of the enterprise and in the activities of its direct suppliers, and the prevention, elimination, or minimization of breaches of social or environmental obligations within the supply chain. The operation of an effective sustainability risk management system sets a number of personnel and material criteria, such as appointing an independent risk management officer, including risk management tasks into all relevant business processes (e.g., tendering and procurement, etc.), reviewing the results annually, applying corrective measures in case of actual or impending breaches of environmental or social obligations by the enterprises or its suppliers, and finally extending the whistleblowing system for ESG breaches.

It should be noted that only the ICT system of an accredited supplier that distributes and produces ESG software in Hungary (as defined in the ESG Act) may be used for supply chain due diligence and risk analysis and rating.

The ESG Act created a publicly accessible ESG platform through which enterprises can prepare and submit their ESG reports free of charge to the supervising authority – the Supervisory Authority of Regulated Activities – for publication in a digital form and publish their ESG certificate accompanying the ESG report.

The management of the enterprise is responsible for the preparation and publication of an ESG report in compliance with EU and Hungarian rules within six months from the end of the financial year. The ESG report must be audited by a certified ESG auditor (not necessarily a financial auditor).

The full list of possible breach sanctions is yet to come in the form of government decrees, but a revenue-based fine or exclusion from state subsidy or procurement processes may be expected for non-compliance.

While sustainability reporting is not a novelty in Hungary, through the ESG Act, the regulator meant to train and prepare local enterprises to remain competitive in international markets in the future. While exploring their sustainability self-consciousness, the sustainability due diligence obligation and ESG reporting can be challenging for enterprises in the initial stages. However, ESG reporting may be a requirement to access finance and a condition to remain in business as a responsible supplier by showing environmental and social responsibility to business partners.

By Judit Budai, Senior Partner,  Szecskay

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Hungary’s real estate market has undergone a notable transformation in response to recent economic shocks – war, soaring energy prices, sharp interest rate hikes, and high inflation rates. Initially taking a cautious wait-and-see approach, market players have now shifted toward a more proactive approach, navigating the complex economic environment through innovative strategies. Among these strategies, mixed-use developments have gained traction. They’re seen as resilient to market turbulence but also provide innovative development opportunities and new ways for urban transformation.

Unlike properties designed for single-use, mixed-use properties aim to diversify various property types and functions to exploit synergies between different building types and minimize the risk of project loss or failure. The diversification creates resilient revenue streams, making the project less vulnerable to market turbulence. If one segment faces a downturn, another segment might perform better.

Mixed-use projects can also open new development horizons, providing desirable locations, even on limited real estate development options like brownfield sites. Repurposing existing structures, such as old factory buildings or other superstructures, not only preserves heritage value but can also contribute to the project’s brand identity by adding character to the development.

As external factors and influences are prompting developers to reconsider their strategies and adjust to an evolving environment, there’s a notable trend in reconsidering and revaluating suspended projects, potentially transforming them into mixed-use developments. The key factor driving this shift is the inherent adaptability and versatility of mixed-use spaces, enabling seamless conversions. With a touch of creativity and motivation, former hotels can be repurposed into student accommodation, and offices can be transformed into residential or student hotels. While the feasibility and economic viability of these options may vary, developers with an open-minded approach are increasingly exploring similar opportunities and evaluating viable alternatives.

The appeal of mixed-use projects is in the potential they offer to developers. The flexible use of space will fortify resilience against legal, social, and economic uncertainties. This potential increases the likelihood of successful development, ease of financing, and other positive outcomes. By accommodating various user groups and incorporating elements like residential, retail, office spaces, entertainment venues, and student housing hostels, these projects have the potential to foster functional synergies. They not only offer improved opportunities for residents but also help create vibrant communities enriched with parks, transportation choices, and additional amenities.

Despite the appeal of mixed-use projects, their complexity usually results in significantly higher development costs, especially when dealing with existing historic buildings or brownfield sites. Considerations for building heritage preservation and environmental factors (e.g., potential contamination in the case of former industrial areas) add to the complexity and can also increase development costs. The development process for mixed-use projects is lengthier and involves more intricate zoning and regulatory requirements compared to monofunctional projects. Financing can be challenging as each asset class requires separate valuation with a different risk profile, and the uncertain economic environment adds to the complexity. Post-development operations also need a broader range of expertise due to the specific knowledge requirements of each asset.

Despite these complex challenges, opportunistic investors and developers are still interested in new developments that separate asset types within larger mixed-use projects. In essence, Hungary’s real estate sector is witnessing a blend of cautious optimism, readiness to adapt to the sector’s evolving landscape, and strategic development. Mixed-use projects are a potential opportunity for future developments, offering the possibility to transform existing urban spaces into vibrant, dynamic, and sustainable areas.

By Gabor Borbely, Partner and Head of Finance and Real Estate, and Tamas Balogh, Lead Attorney, DLA Piper Hungary

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

I looked at M&A transactions in the last years using publicly available sources, our own transactions, and information provided by corporate finance advisory partners. I found that in 37% of the cases, purchasers came from Western Europe, in 37% from Hungary (private companies or the Hungarian state), and in 11% from investors in the CEE, while transactions where the purchasers were of US or Asian origin were negligible (US 3%, Asia 4%).

Western-Europe Investors – Selected Purchases and Significant Sales: A clear drop in investments in Hungary by Western European investors can be seen. Sectors that keep attracting Western European buyers are renewable energy, pharma, food, logistics, and construction, with renewable energy, mostly solar, representing a large chunk of the cases. At the same time, Western European investors many times are on the sale side of transactions. Notable recent transactions, where Western European investors were selling to Hungarian buyers or the Hungarian state include the Vodafone sale to 4IG and Corvinus (a 100% state-owned entity), the sale of the majority ownership by the Talanx Group to Corvinus, and the ongoing sale of the Budapest Airport, where the Hungarian state is most probably teaming up with a foreign airport operator.

Hungarian Buyers – Supported by Legislation: Mr. Orban’s government had from the outset a clear vision to increase Hungarian ownership in several strategic sectors, such as media, energy, banking, and telecommunication. Later, further sectors were added to this wish list – retail shops and insurance companies.

To achieve such ambitions, one key tool has been the sectoral special tax, i.e., taxes payable by companies engaged in certain industries only. The last wave of such sectoral taxes came after the COVID-19 pandemic and in the midst of the economic crisis caused by the war in Ukraine. The primary aim has been to aid the state budget – desperately in need of new sources of income. The secondary goal (and effect) has been the provisional deterioration of market circumstances for certain industries, resulting in Western European owners selling their assets to the Hungarian state or new Hungarian owners backed by the government. It is difficult not to notice such a correlation in banking, insurance, energy, telecommunications, and retail.

The other legislative change was the significant toughening of the FDI regime over the years. Originally, the Hungarian FDI regime concentrated on “classic” strategic sectors, such as weapons and ammunition, financial services, energy supply, and electronic communication. During the pandemic, and later after the breakout of the Ukrainian war, more stringent measures have been introduced. We now have a regime where practically every transaction in which foreign investors (even EU-based) purchase ownership interest in a Hungarian company falls under the rules. In the case of a non-EU investor, a 5% ownership triggers the FDI process, whereas in the case of an EU-based purchaser, the acquisition of majority investment. In practice, in most cases, the FDI process is just an addition to the transaction process, so closing has to be postponed by 2-3 months. In some cases, however, the danger of state intervention materialized. The most notable instance was when the Hungarian state blocked the Aegon-Vienna Insurance Group transaction and finally ended up becoming the 45% shareholder of the target company. Clearly, an overly stringent FDI regime decreases the appetite of Western European companies for Hungarian targets.

New legislation that is likely to impact the renewable transaction scene came into force on January 1, 2024. According to it, the Hungarian state will have a right of first refusal for all solar power assets located in Hungary, which it can exercise within 60 days. It is not yet clear to what extent such a right will be effectively exercised, but any prospective foreign investor has to evaluate whether it will be worth spending significant costs on due diligence and transaction execution when they may have to walk away empty-handed.

CEE Investors: CEE investors are up and coming in Hungary. For example, we have seen a transaction where out of the 12 bidders, only a few were from Hungary – the majority were from neighboring countries. It is a logical step for CEE investors to move in – both to complement their businesses in their home country and fill the gap left by more reluctant Western European investors.

US and Asian Investors: Given Hungary’s distance from the US and proximity to Ukraine, it comes as no surprise that US investors’ interest in Hungarian targets is extremely scarce. It is interesting to see that while Asian investors are active in establishing production capacities in Hungary and the Hungarian government is very welcoming in this respect, M&A transactions by Asian investors remained few and far between.

By Zoltan Forgo, Managing Partner, Forgo Damjanovic & Partners

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Important changes entered into force as of January 1, 2024, in the world of designs. As a result, it will be easier, faster, and cheaper to obtain IP design protection in Hungary.

Design protection can be granted to any new and individual product, industrial or craft article, such as a design chair, a coffee machine, or a bag. The rules on the national registration of designs are laid down in Act XLVIII of 2001 on the Protection of Designs, which sets out, inter alia, which designs may be protected, under what conditions, and for how long.

In Hungary, designs are protected by the Hungarian Intellectual Property Office (HIPO) upon application. Hungarian design protection is limited to the territory of Hungary, but applicants have the possibility to obtain EU-wide design protection, which is adjudicated and registered by the European Union Intellectual Property Office (EUIPO).

The EU procedure was already faster and simpler than in Hungary, making it easier for the applicant to obtain protection for their design, but the EU Design Reform made the difference even more striking. However, the amendments that entered into force in Hungary on January 1, 2024, have brought the Hungarian system closer to that of the EU in terms of length, simplicity, and chances of successfully obtaining protection.

The most important change is that as of January 1, the HIPO conducts a substantially narrower examination of designs. It no longer examines ex officio the novelty of a design, i.e., whether it is identical or differs only in minor details from another design that has previously been published anywhere in the world. Also, since January 1, the office no longer examines whether the design has individual character – one of the most important criteria for designs besides novelty.

Moreover, the HIPO examination does not cover the substantive testing of the technical nature of the design. Specifically, it does not assess whether the design is solely the consequence of the technical function of the product. Neither does it examine whether an external characteristic must be implemented in exactly the same form and dimensions to be able to be combined with or placed in, around, or on another product in a way that each product can fulfill its function.

The HIPO examination is therefore limited to the question of whether the application complies with the concept of a design, i.e., it targets the appearance of the whole or part of a product (industrial or craft article), it does not infringe public policy or morality, or unlawfully incorporate any state or official symbol or emblem.

Furthermore, since January 1, 2024,  only upon the request of the applicant does the HIPO issue a patentability opinion during the substantive examination, in which it examines the novelty, individual character, and other conditions of the design. As with utility models, applicants may now request a patentability opinion at any time before or after filing the application.

Another important change is that as of January 1 this year, anyone can review the documents relating to the design application and the patentability opinion on the design, as well as request a copy of the design. It is important because in the patentability opinion, the HIPO examines, among other things, the novelty and individual character of the design. These can be important tools in litigation ¬– for example, in a competitor’s action for invalidation or infringement of the design.

The amendments lead to cheaper and easier protection: the reduction in time limits and the narrowing of the scope of substantive examination by the HIPO should lead to shorter administrative times. This brings the Hungarian practice closer to the EU system, but it also means that the protection of designs applied becomes more formalized and weaker than before in the absence of substantive examination. It also means that applicants and right holders need to prove that their designs are new and individual in the event of litigation, such as invalidity proceedings.

However, designs remain valuable IP assets in the hands of the right holder, as the subject matter of the protection – i.e., the product, its external characteristics, and appearance – cannot be copied or exploited by others without the right holder’s permission. In addition to giving the right holder the exclusive right to exploit the design, the protection also creates a competitive advantage, prestige, and valuable intangible assets such as trademarks.

By Ildiko Komor Hennel, Managing Partner, and Borbala Kovats, Head of IP, Komor Hennel Attorneys

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Hungary’s litigation landscape was shaped by the economic trends, domestic legal reforms, and global crises of the past 10-15 years. From the 2008 economic crisis to the implementation of the new Civil Procedure Code in 2018 and the transformative effects of the COVID-19 pandemic, it has been a rollercoaster ride.

The aftermath of the 2008 economic crisis brought about a surge in the number of commercial lawsuits initiated in Hungary. As businesses recalibrated their strategies during the recession and individuals sought legal redress amidst the economic upheaval, courts have experienced an increase in the volume of cases as a result of the heightened demand for dispute resolution. The economic downturn, characterized by layoffs, bankruptcies, and contractual disputes, fueled litigation activity as stakeholders, having no other options to defend their position and interest, increasingly sought to enforce their claims through court procedures.

Amid the increase in the volume of litigation, Hungary embarked on a path of legal reform aimed at modernizing its civil justice system. The introduction of the new Civil Procedure Code in 2018 resulted in the overhaul of the old structure of civil proceedings, which did not sufficiently facilitate the timely settlement of cases. The new rules implemented significant changes in fundamental procedural rules and mechanisms, with the aim of enhancing efficiency and streamlining the litigation process. The implementation of electronic filing, expedited procedures, and enhanced case management sought to address longstanding challenges and reduce delays in the resolution of disputes.

The entry into force of the new Civil Procedure Code in 2018 had a profound impact on the trends in lawsuits initiated in Hungary. Overall, the reforms led to a significant reduction in the number of new litigation cases. The reason for the decline was mainly caused by the overly restrictive approach of courts applying the revised admissibility requirements (i.e., an excessively high rejection rate of statements of claim). This trend had a deterrent effect on potential claimants. After the legislator corrected this anomaly, stakeholders again gained somewhat greater accessibility in seeking legal redress while keeping some of the efficiency gains compared to the old procedural regime.

Then, the onset of the COVID-19 pandemic as well as the military invasion of Ukraine brought about unprecedented disruptions in the economy, upending the trajectory of litigation trends in Hungary. As the government imposed lockdowns and restrictions, businesses faced operational challenges, and individuals confronted economic uncertainties, the dynamics of litigation fundamentally changed. In particular, certain types of cases, such as those related to contractual disputes (e.g., concerning the impossibility of contracts due to the imposed restrictions, force majeure clauses, etc.) and employment issues, witnessed a surge amidst the regulatory changes brought about by the pandemic. Still, the yearly number of new cases in 2022 at Regional Courts was less than half of what it was in 2017.

In parallel with the impact of the pandemic, another major regulatory reform affecting the landscape of civil litigation was introduced in 2020. Under the so-called “limited precedent system,” former decisions of the Kuria (i.e., the highest court) became binding on the courts, which may only deviate from them in justified cases. The purpose of the legislation was to enhance legal certainty by promoting uniform interpretation and application of the law, thereby creating a more predictable legal environment in which parties to the litigation can anticipate and navigate outcomes with greater assurance. If the hoped-for greater predictability is achieved, it could further enhance the attractiveness of litigation.

In conclusion, the trends in the number of lawsuits initiated in Hungary over the past few years reflect a dynamic interplay of economic shifts, legal reforms, and global crises. As regards expected future trends, willingness to litigate tends to increase in post-crisis periods such as the current one as a clear consequence of the increased tensions and overall risk levels. We therefore expect the number of litigation cases to increase in the coming years. As businesses navigate the complexities of a post-pandemic world and courts gradually develop the practice of applying the new rules, the framework of Hungarian court procedures remains in a state of constant change and adaptation.

By Tamas Feher, Partner, and Peter Szilas, Senior Attorney, Jalsovszky

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.