The Labyrinth of FDI Screening

Inside View

Judit Budai, Senior Partner, Szecskay Attorneys at Law (left); Adrienn Tar, Partner, Szecskay Attorneys at Law

As the global economy develops, FDI screening rules are having a renaissance worldwide. COVID-19 even helped evolve the sophistication of local market protection rules, enabling states to keep an eye on strategic industry assets and the ownership of operating companies. The complexity of such regulations also derives from COVID emergency “lawmaking,” where there is not much time and resources to place the rules in the legal framework clearly.

In this article, we do not dare to claim that we can give our readers Ariadne’s red ball of thread to find their way out of the Labyrinth; instead, we aim to provide you with the “dos and don’ts” we have experienced so far. 

Since January 1, 2019, Act LVII of 2018 on the Control of Foreign Investments Offending the National Security of Hungary (“FDI Screen Act I”) has been in force. Essentially, this pre-implemented Regulation (EU) 2019/452 of the European Parliament and the Council of March 19, 2019, and established a framework for screening foreign direct investments into the Union, a regional response to U.S. protection measures.

Originally, this rule sought to keep an eye on investors from outside of the EU, EEA, and Switzerland, when they aimed to acquire, directly or indirectly, at least a 25% stake (or 10% in listed entities) in a local company, or establish a company/branch, or modify its activity, or right of operation of infrastructures, facilities, and assets essential for activities within several areas.

These were: Weapons and ammunition, military technology and equipment production; dual-use product production; intelligence tools production; banking, payment investment, and insurance services; certain utilities, inclusive of electricity, gas and water services; electronic communications services; and specific electronic information systems of state bodies and municipalities.

A COVID emergency Government Decree from 2020 extended this regulation to investors from within the EU until the end of 2021. One transaction already known to be caught by this ruling is the contemplated VIG acquisition of Aegon.

FDI Screen Act I entitles the Hungarian Ministry of Interior to advance acknowledgment of the effectiveness of a contemplated acquisition or establishment of a company or operation right within the above scope. The notification needs to be made within 10 days of signing the purchase or establishment deed.

The minister has the discretion to assess whether a transaction violates the national security interests of Hungary. If this is considered to be the case, the minister can issue a prohibiting decision, which can be contested at the Budapest Capital Regional Court. That court can only establish the non-compliance of the decision based on the underlying procedural rules and may revert the procedure to the minister.

If no application is made, the acquisition or foundation cannot be effectively registered, and there may be a fine of HUF 1 million in the case of individuals or HUF 10 million in the case of legal entities. Exercising ownership and operational rights are prohibited too. The ministry can investigate within five years from gaining information on the transaction. The obliged person may need to alienate the unlawfully acquired stake or assets to which the state has preemption rights.

Since May 2020, the Hungarian Government has introduced a special COVID FDI Screening measure, which is regularly debated by the legal community in Hungary. Act LVIII of 2020 (“FDI Screen Act II”) extends to all non-EU investors intending to acquire at least 10%, and EU investors aiming to gain influence (basically a majority control) above an acquisition value of HUF 350 million.

Here the scope of the decision is in the hands of the Ministry of Innovation and Technology when the target company/asset is a strategic Hungarian company or operation. This rule is also applicable until the end of 2021 and operates along similar lines as FDI Screen Act I. Here the discretion of the minister is based on the fundamental economic, strategic interests related to the operability of networks and equipment and the security of continuous supply from the point of view of the national economy, where it is not regulated by sectorial legal regulation of the EU or national law.

To sum up, each M&A or restructuring transaction involving foreign parties remain subject to careful assessment under FDI Screen Act I. and II. until the end of 2021.

This article was first published in the Budapest Business Journal print issue of June 4, 2021.

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