As M&A lawyers craving for the recovery of the transaction market, it is always exciting to come across challenging projects. Cross-border mergers certainly qualify as such. The process develops in parallel in two jurisdictions until the actual merger takes place which may well generate collisions between the different legal regimes. Predictable challenges are heightened by contingent difficulties that easily increase costs. This applies even to intra-Community transactions, despite the EU Directive 2005/56/EC on cross-border mergers.
X-borders are mainly exploited as an intra-group restructuring tool and Hungary is more of an “out- bound” country in terms that usually it is the Hungarian company absorbing into a foreign one, whereas the local business activity is sustained via a newly set-up branch office as replacement vehicle. The financial sec- tor was particularly active in such restructurings over the last few years (e.g. ING, Citibank, Deutsche Bank).
A key issue is the preservation of business flow so that the new branch office can forthwith take over commercial operation from the x-merging entity. Still, in Hungary it is never as easy as it seems. Let’s take the differentiation between the economical and legal effective dates of the merger (EED vs LED). In most EU jurisdictions it is possible to stipulate a different date for economic effectiveness of the merger, from which point the migrating company is deemed to make transactions on the account of the absorbing one. The EU Directive follows this concept, too. The Hungarian law, how- ever, does not recognize the economical effectiveness theory. Strictly from a legal viewpoint it may be feasible to disregard the EED of the absorbing legal regime, as Hungarian company law does not attribute any effect thereto, whilst the counterparty’s lawyers can act taking into account the EED. Given, however, that in the course of the transaction the participant companies must furnish two-three different financial statements each, not to mention ongoing business operations, the accountants on both sides of the border must pay due attention to avoid discrepancies.
Another topic is the parallel registration acts of the involved national courts. If conditions are met, the Hungarian registry court issues a premerger certificate manifesting legal compliance. This is followed by the registration act of the host country’s court, which normally constitutes the legal effectiveness of the merger. Furthermore, the transferring company has to be can- celled from the Hungarian commercial register, which requires official notification from the host court. Practically, however, the Hungarian commercial register will still enlist the merging company until the foreign court documents are delivered and examined, which can easily take weeks. The result is that the transferring entity remains virtually existent in Hungary yet, by virtue of the foreign court’s act, it has ceased to exist already. This can cause a handful of problems in terms of business continuity between the merging subsidiary and the Hungarian branch office. Any activities subject to administrative authorization require the reissuance of underlying licenses. The sector-specific inferior provisions do not at all regulate x-border mergers and the inherent time
gap given here. This follows that on the legal effective date the branch office will stand empty handed, absent of any Hungarian court document to substantiate legal succession toward the licensing authorities, for instance tax and customs, whilst the already merged affiliate should no longer do any business from an accountancy perspective, although even a one-day breakdown can be crucial businesswise.
Also, there may be tax-driven or labor related considerations that require the use of a shell company into which the affiliate first merges cross-border and which on the same day gets absorbed into the ultimate acquirer. Such duplex mergers represents additional complexity; a practical issue is that the resolution of the Hungarian court cancelling the transferring company indicates only the first successor, which, however, had also ceased to exist at the same legal moment. Therefore the succession chain vis-à-vis the terminated affiliate and the new branch office will not be apparent from the Hungarian court documents, which could be problematic when arguing legal succession before authorities, account holder banks, even business partners.
The list could easily continue. All in all, the efficiency of transaction advisors depends on how well they can anticipate foreseeable hardships and how readily overcome incidental ones. As they are likely to have a fair share of both when it comes to x-borders, successful management of the transaction requires special care, especially when undisturbed business continuity is at stake.
Dr. Andrea Jádi Németh received her JD “summa cum laude” from the ELTE School of Law in Budapest and her LL.M., with a concentration in International Finance, Corporate Finance and Corporate Law, from Harvard University at the Faculty of Law in Cambridge (MA), USA. Elected President at the Hungarian Harvard Club, a forum for alumni and friends of Harvard University who reside in Hungary, she is involved in organizing recruitment events at high schools to push students towards the “unique Harvard experience”. A mother of two, Jádi Németh was elected Second Vice- President of AmCham last year, and is the returning Hungarian Woman of Excellence Award jury chair.
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