Corporate Governance 2020

Last Updated May 24, 2020

Hungary

Law and Practice

Authors



Lakatos, Köves & Partners (LKT) has nine partners and more than 50 lawyers and is a full-service commercial law firm based in Budapest, Hungary, with a predominantly international client base, offering cutting-edge know-how and matching innovative legal solutions to business needs. LKT advises many corporates on the full range of issues facing them in their operations in Hungary, ranging from general corporate establishment and maintenance through their compliance with all local regulatory requirements (eg, sectoral regulation, competition law) and also issues arising from, eg, FCPA and the UK Bribery Act. Key corporate clients include Mastercard, Mars, Facebook, Energizer, Volkswagen and Daimler. LKT advises on the full range of M&A transactions, usually representing foreign investors both in relation to Hungary-specific transactions and also regional or global transactions. Key M&A clients include Vodafone, Citibank, Triton, Karlovarské Mineral Water, Walmark, Photon Energy, CG Power and Invitech.

The principal forms of corporate organisations in Hungary are the limited liability company ("Korlátolt Felelősségű Társaság" or "Kft") and the company limited by shares ("Részvénytársaság" or "Rt").

The company limited by shares is the most likely choice of corporate vehicle for substantial investments. It is broadly similar to the English plc, the German AG, the French SA or the Russian AO. Whether the company is public (open) or private (closed) must be reflected in its name (ie,, "Nyilvánosan Működő Részvénytársaság" or "Nyrt" (public) or "Zártkörűen Működő Részvénytársaság" or "Zrt" (private).

The limited liability company is broadly similar to the German GmbH, the French SARL, or the Russian OOO. This type of company is generally used for investments where the number of investors is relatively small. A Kft is often used for medium or large operating companies, and is a private company. The procedure for setting up a Kft is simpler and quicker than that for a Rt, but a Kft is not entitled to raise its capital publicly.

The less common forms are the general partnership ("Közkereseti Társaság" or "Kkt") and the limited partnership ("Betéti Társaság" or "Bt"). They are not commonly used by international investors, and are not covered in this chapter.

Where the term "shareholder" is used in this chapter, it covers a shareholder of a company limited by shares and also a member of a limited liability company who, strictly, holds a “quota” rather than a “share” in the company. Where there is a difference between the two forms of companies, this is indicated in the text.

The principal source of corporate governance requirements is Act V of 2013 on the Civil Code ("Civil Code"), which came into force on 15 March 2014 and significantly changed the pre-existing corporate legislation in Hungary.

Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings ("Companies Registration Act") applies to the registration of new companies and changes in the corporate data of existing companies.

Act CLXXVI of 2013 on Transformations, Mergers and Demergers of Legal Entities ("Transformation Act") supplements the Civil Code in respect of transformations, mergers and demergers of legal entities.

The Budapest Stock Exchange ("BSE") has issued its recommendations – "Corporate Governance Recommendations" ("Felelős Társaságirányítási Ajánlás") – for public companies limited by shares. The "Corporate Governance Recommendations" follow a “comply or explain” approach (ie, directors must explain to the shareholders only those points of the annual corporate governance report which conclude that the company did not comply with its objectives set by the Corporate Governance Recommendations).

The Nyrt is the only type of company that is allowed to raise capital in Hungary by public subscription. Only the shares of a Nyrt can be listed on the Budapest Stock Exchange.

The Civil Code imposes special mandatory requirements regarding the governance of Nyrts, which are additional to the ones applicable to private companies and include the following: 

  • a Nyrt shall operate a supervisory board (unless it is run on a one-tier system – see 3.1 Bodies or Functions Involved in Governance and Management);
  • shareholders’ resolutions shall be made available to the public (including proposals before passing and actual resolutions passed);
  • a Nyrt may not issue any shares attaching privileges for the appointment of executive officers or supervisory board members (for a description of share types, see 5.1 Relationship Between Companies and Shareholders);
  • the shareholders’ meeting shall have exclusive competence to set out the guidelines and framework for a long-term salary and incentive scheme for executive officers, supervisory board members and senior employees;
  • convening the shareholders’ meeting has special requirements (see 5.3 Shareholder Meetings); and
  • the board of directors of a company shall present the company governance and management report to the shareholders’ meeting, together with the annual report.

The requirements of the BSE’s Corporate Governance Recommendations are voluntary (they work on a "comply or explain" basis). The company’s governance and management report shall cover the company’s position with a view to sound governance and management in the previous financial year, and shall explain any deviation from the Corporate Governance Recommendations. The report shall be posted on the official website of the Nyrt, and should be approved by a separate resolution of the shareholders’ meeting.

On the corporate law front, the most important and relatively recent novelty introduced by the new Civil Code is that, unlike under the former Companies Act, the members/shareholders of the company may deviate from the provisions of the Civil Code regarding the following:

  • the relationship between the members/shareholders of the company;
  • the relationship between the members/shareholders and the company;
  • the structure and the operation of the company, unless such deviation:
  • is prohibited by law;
  • clearly violates the interests of the company’s creditors, employees or minority members/shareholders; or
  • is likely to prevent the exercise of effective supervision over the company by the court of registration.

A judgment of a Hungarian court of appeal (Cgf. 47076/2014/2) expressly declared that the management of a Kft (limited liability company) may also be carried out by a board of directors according to the approach of the Civil Code referred to in 2.1 Key Corporate Governance Rules and Requirements. This judgement is a significant affirmation of such new approach by the judicial practice, whereby the parties may deviate from the provisions relating to companies in the Civil Code, unless it is expressly prohibited.

Whereas ESG investing is becoming mainstream in Western Europe and in the United States, only younger generation investors appear to be interested in ESG considerations in Hungary at the moment.

Accordingly, there are no general key issues and requirements defined by law for companies in relation to reporting on ESG issues yet.

For listed companies, the Budapest Stock Exchange (BSE) provides corporate governance recommendations relating to responsible and transparent corporate governance. Such recommendations are designed to formulate guidelines facilitating compliance by listed companies with all internationally recognised rules and standards of responsible corporate governance in the course of their operations. These recommendations contain both recommendations that are binding for all issuers and non-binding proposals. Listed companies may derogate from both, however, in case of derogation, they are required to publish and justify the derogation in their corporate governance reports (“comply or explain”).

Update: there have been notable temporary changes to the corporate governance rules in Hungary to address COVID crisis issues which are not covered in this article.

On 10 April 2020 the Hungarian Government issued new temporary legislation (Government Decree No 102/2020) which changes the modus operandi of holding shareholder and board meetings. The new measures, which refer to the COVID-19 related state of emergency (as declared in Hungary by the Government on March 11th), are binding from 11 April 2020, and cover all meetings, including those for which invitations were posted before that date. All legal persons are affected, regardless of their forms of operations.

Meetings of all decision-making bodies are generally covered by the new rules, which includes general meetings, members meetings, meetings of boards of directors or supervisory boards etc. With very narrow exceptions, physical meetings are forbidden. Decision-making bodies which are able to hold meetings without infringing the restrictions on leaving residences may continue to hold meetings.

Electronic devices or a written voting procedure shall be used. Managing directors and boards are authorised to use the foregoing means even if the Company’s articles of association do not allow using them, and they are also authorised to establish within their organisation, including in relation to shareholders’ meetings, the procedural rules for using such means. The decree sets out certain minimum requirements, including identification requirements at shareholder meetings held via electronic devices and procedural requirements for written voting procedures.

As a further temporary procedural rule, boards of directors and supervisory boards are allowed to continue operating and to have a quorum even if the number of members decreases or a member cannot be present as a result of the emergency situation, and in extreme circumstances this may mean one single person passing a valid board resolution.

AGM Competencies May be Taken Over by Managing Directors and Boards

Subject to "Major Shareholder Consent" (see below), unless:

  • a company has a very small shareholder base (up to five);
  • the shareholders holding the majority of votes in companies having between five and ten shareholders initiate holding a shareholder meeting (ie, one held via electronic devices or in writing); or
  • a company has more than ten shareholders and the managing directors or board of directors (or the representative of the State, if the State is a majority shareholder) initiate holding a shareholder meeting (via electronic devices or in writing), AGM decisions may be passed by the managing directors or board of directors, instead of shareholders.

These include the following powers:

  • approval of the annual reports;
  • decision on the payment of dividends; and
  • any decision falling in the competency of shareholders, provided that passing a decision is needed to maintain lawful operations, to manage the emergency situation or to address an economic decision that cannot be delayed.

The following decisions are not included:

  • liquidation;
  • amending the articles (with some exceptions);
  • mergers, demergers, etc; and
  • capital decrease or requiring the members to make additional payments.

Consent Rights Reserved to Major Shareholders

Written declarations of no objections (practically consents) of single shareholders holding more than 50% of the votes is required for the management use of any of the AGM competencies described above. If there are shareholders holding more than 25%, as a precondition to use of these AGM powers, the management is required to obtain declarations of no objection from such shareholders and other shareholders so that the combined level of shareholders not objecting to the management use of AGM competencies reach at least 51% of the votes.

Subsequent Control and Approval Rights for Shareholders

EGMs must be convened within 90 days of the end of the COVID-19 emergency (as such date may be defined by the Government or the Parliament), which EGM may then resolve to change or repeal the decisions previously passed, with the proviso that such resolutions “do not impact rights and obligations arising before the date of such EGM”. The latter provision will require management and shareholders to carefully consider the consequences of their decisions.

Special Rules for Listed Companies

Listed companies must apply the newly introduced measures subject to a number of required deviations, which include that:

  • major shareholder consent rights do not apply;
  • the board of directors can add further items to any previously published AGM agenda; and
  • the board of directors has the power to pass decisions on any items on the AGM agenda.

Subsequent EGM approval is required only if shareholders representing more than 1% of the votes request that in writing within 30 days of the end of the state of emergency (which date will be set in a Government or Parliament decision).

Specific deadlines are also set in the Government Decree for listed companies, including that in any event the annual reports must be approved (by the board of directors) by 30 April 2020. A subsequent shareholder approval of such board decision in an EGM is required only if so requested in writing by 30 May 2020 by shareholders representing more than 1% of the votes, in which case dividends cannot be paid before such EGM.

The general meeting of shareholders is the ultimate governing body of a company limited by shares (Zrt and Nyrt).

A limited liability company is controlled by the meeting of the quotaholders (or resolution of the sole quotaholder). The powers of a quotaholders’ meeting in a limited liability company are similar to the powers of a shareholders’ meeting in a company limited by shares.

The shareholders of the shareholders’ meeting appoint the members of the supervisory board, which companies are required to establish if they employ an annual average of more than 200 full-time employees and the works council did not relinquish employee participation in the supervisory board. If the company has a supervisory board, the governing body (board) may only take a decision concerning the annual accounts if it is in possession of the written report of the supervisory board. In addition, the sector-specific laws may also require setting up a supervisory board (eg, for a financial institution).

The shareholders may resolve to give competencies to the supervisory board for the taking or approving of a decision that would otherwise fall within the competence of the shareholders’ meeting or the management.

Principal Bodies in the Management of the Company

A company limited by shares is managed by a board of directors of at least three persons, elected by the shareholders’ meeting. The board of directors must consist of at least three directors. As an alternative, the board of directors may be replaced by one sole general manager, if that is provided for in the articles of association of the Zrt.

The general manager exercises the powers of the board of directors. Nyrts are required to have both a board of directors and a supervisory board, or may choose to operate with a one-tier system when the duties of the board of directors and the supervisory board are carried out by a single board, the management board ("Igazgatótanács"). Directors of companies limited by shares and managing directors of limited liability companies are collectively referred to as executive officers.

In a Kft, the default set up is that there is no board of directors. The company is managed by one or more managing directors, who are responsible for the day-to-day running of the company. Generally, the managers do not form a body, although the companies – in articles of association – may deviate from this provision (see 2.2 Current Corporate Governance Issues and Developments).

Managers are either individually or jointly authorised to act on behalf of the company, and to represent the company vis-à-vis third parties.

The Principal Duties of the Governance Bodies in the Company

The principal duty of the shareholders’ meetings is to adopt decisions on the fundamental business and personnel issues of the company. Accordingly, certain rights may only be exercised by the shareholder’s meeting, such as:

  • the approval of the annual accounts;
  • decisions on the distribution of profits; and
  • decisions on enforcing claims for damages against the company’s shareholders/members, executive officers, and supervisory board members, etc.

The Principal Duties of the Management Bodies in the Company

The board of directors/managing director is responsible for the day-to-day running of the company and for presenting the annual report of the company to the shareholders’ meeting; they are also obliged to prepare a report on the management, the financial situation and the business policy of the company at the intervals set out in the articles of association, or at least once every year for the shareholders’ meeting, and at least once every three months for the supervisory board (if there is one).

Decision-Making Process by the Shareholders’ Meeting

The shareholders’ meeting is generally convened by the management of the company. It must be convened and held at least once a year and, in addition, if it is deemed necessary with a view to the interest of the company or if so prescribed by law. Annual meetings are to be held to approve the annual accounts.

The deadline for publication of annual accounts is the end of the fifth month starting at the end of the business year concerned (eg, companies with a financial year identical to the calendar year generally hold their yearly meeting in May).

Resolutions are passed by voting. Hungarian corporate law does not provide formal requirements relating to voting, but the parties are able to set such rules in the articles of association. The number of votes per ordinary voting share must be determined by the articles of association.

As a general principle, all shareholders enjoy the same rights in the same share classes. Different types of share classes can provide different rights (see 5.1 Relationship Between Companies and Shareholders). However, it is the articles of association, and not the shareholders' agreements, that can provide specific rights to particular classes of shares.

Voting rights attached to shares are determined by the nominal value and type of those shares.

Decision-Making Process by the Executive Officers

Generally, the executive officers shall manage the operations of the company independently, based on the primacy of the interests of the company. The executive officers may not be instructed by the shareholders (with the exception of sole-member Kft, where the quotaholder may instruct the managing director in writing).

If a Kft has more than one managing director, said directors shall be entitled to handle management issues individually. The board of directors shall exercise its rights and perform its duties as an independent body. However, any restriction of the representation rights vested in members of management, or rendering such member’s actions conditional or subject to approval, shall generally not be effective against third parties.

The executive officers (ie, managing director(s) in a Kft) or a board made up of executive officers (ie, directors in a Zrt/Nyrt) conduct the management of the company. Hungarian law does not differentiate between directors and officers in a company.

Board of Directors

As referred to in 3.1 Bodies or Functions Involved in Governance and Management, there is no board of directors in a Kft. With respect to the dispositive rules of the Civil Code, the quotaholder(s) may establish a board for operating the Kft.

The management activities of Zrt and Nyrt are carried out by the board of directors, which must consist of at least three directors, appointed by the shareholders in the general meeting. The board of directors shall appoint the president of the board of directors. As an alternative, the board of directors may be replaced with one sole general director.

Committees

The board of directors in companies limited by shares is not required to have a committee system, except for the establishment of an audit committee, which is mandatory for public companies limited by shares. For example, the board of directors may establish a remuneration committee that establishes the remuneration policy of a Nyrt based on Corporate Governance Recommendations.

It is not common practice to have a committee system in Hungary, except for the largest companies.

Supervisory Board

Generally, the competence of the supervisory board is to supervise the board of directors in order to protect the interests of the company. The supervisory board must have at least three members. In the case of a Zrt, a supervisory board shall be established upon the request of a group of shareholders controlling at least 5% of the voting rights.

With regard to a Nyrt, a supervisory board shall be set up unless the company operates with a one-tier system. A supervisory board with decision-making power having the power to either handle or approve certain management matters may only be established in a Zrt.

The articles of association of a Nyrt may contain provisions to confer management and supervisory functions upon the board of directors (this is called the "one-tier system" operation). Such companies have no supervisory board, and the members of the board of directors are treated as executive officers. This type of corporate governance system is not common in Hungary.

Management of the Company

The executive officers shall operate the daily business of the company (eg, convening the shareholders’/quotaholders’ meeting). Each member of the board of directors in an Rt and each managing director in a Kft enjoy the same rights and responsibility for their activities (see 4.7 Responsibility/Accountability of Directors). 

In an Rt, the management board shall exercise its rights and perform its duties as an independent body (ie, it is not influenced by the shareholders and third parties). The board of directors shall adopt its decisions by a simple majority of the votes of the members who are present at the meeting of the board of directors.

Under Hungarian corporate law, there is no concept of a member of a board of directors being “non-executive”, but, such distinction is not prohibited by the Civil Code.

Representation Rights

The board of directors shall represent (individually or jointly) the company towards third parties. The articles of association may restrict the representation rights of the members of the board of directors; however, any restriction of representation rights vested upon the legal person’s authorised representative shown in the registry of companies, or rendering such representative’s actions conditional or subject to approval, shall not be effective against third parties, unless the third party knew, or should have known about the restriction or about the condition or approval requirement, and the lack thereof.

The Civil Code defines the requirements for executive officers as follows:

  • the executive officer must be above 18 years of age and must have full legal capacity in the scope required for discharging their functions;
  • if the executive officer is a legal person, that legal person shall nominate a natural person to discharge the functions of the executive officer in its name and on its behalf; and
  • the executive officer shall operate personally.

The Civil Code defines the grounds for exclusion as follows:

  • any person who has been sentenced to imprisonment by final verdict for the commission of a crime may not be an executive officer until they are exonerated from the detrimental consequences of having a criminal record;
  • a person may not be an executive officer if they has been prohibited from practising that profession. Any person who has been prohibited by final court order from practising a profession may not serve as an executive officer of a legal person that is engaged in the activity indicated in the verdict; and
  • any person who has been prohibited from holding an executive office may not serve as an executive officer within the time limit specified in the prohibition order.

Executive Officers

Executive officers may not acquire any share in a company – except for the shares of public limited companies – that is engaged in the same economic activity as the main activity of the company in which they hold an executive office.

In the event of accepting a new executive office, within 15 days of accepting such office the executive officer shall notify any other company in which they already serves as an executive officer or a supervisory board member. With the exception of everyday dealings, an executive officer and their close relatives may not conclude any contract falling within the scope of the main activities of the company on their own behalf or for his own benefit. The articles of association of the company may deviate from these rules.

Corporate Governance Recommendations

Under Corporate Governance Recommendations, the board of directors/management board shall request a confirmation of independence from the independent members and shall include it in the annual report; the Nyrt shall make public those guidelines on the basis of which independence is measured in connection with the independence of the members of the board of directors; and the Nyrt shall not nominate any person in the supervisory board who has been a member of the board of directors/management board in the five years preceding the appointment.

There are no restrictions on non-Hungarian nationals becoming members of the board of directors or the supervisory board.

The principal duty of the shareholders’ meeting is to adopt decisions on personnel issues. The directors are appointed by the shareholders. The executive officer shall accept the appointment in a declaration of acceptance, and shall declare in the same document that there are no excluding or conflict of interest conditions pursuant to the Civil Code and other acts that could prevent him/her from accepting the appointment.

Under Corporate Governance Recommendations, the nomination and election procedure for members of the board of directors in a Nyrt shall be transparent. The shareholders shall be informed about the professional experience of nominees and their relevant experience that makes them appropriate for the membership of the board.

The mandate of a director shall terminate in the following circumstances:

  • upon expiry of the designated term of office;
  • if the mandate is rendered subject to some condition for termination, when the condition is met;
  • by dismissal;
  • upon resignation;
  • upon the death or dissolution of the director without succession;
  • if the legal capacity of the director is limited in the scope required for discharging his functions; and
  • upon the occurrence of any grounds for exclusion or any reason giving cause to a conflict of interest (eg, if they are prohibited from practising such profession).

There is no general legal requirement that companies must have an independent director or a third-party director. The only exception is when a public company limited by shares is operated in a one-tier system (ie, the duties of the board of directors and of the supervisory board are carried out by one management board), in which case the majority of the directors must be independent. A director is considered to be independent if he/she has no other legal relationship with the company other than his/her board membership.

In addition, with respect to public companies, the Corporate Governance Recommendations are testing independency – please refer to the penultimate paragraph of 4.3 Board Composition Requirements/Recommendations.

The general principles of directors' liability are that the directors must perform their management duties with the due care and diligence generally expected from persons in such positions, and give priority to the interests of the company. However, in cases of threatened bankruptcy, directors shall act in the interest of creditors in precedence over the interests of the company.

For a co-operation featuring a common business strategy, at least three (controlled) companies and one (dominant) company may conclude a “domination agreement”. The companies entering into such domination agreement are referred to as a recognised company group. Under a domination agreement, the management of the controlled company has to perform its activities giving priority to the interest of the recognised company group.

The principal legal duties of directors may be differentiated in three ways: (i) duties towards the company, (ii) duties towards the shareholders, and (iii) liability of directors towards third parties and creditors.

Duties Towards the Company

A director/manager must play an active role in the management of the company, rather than being a passive observer. This includes regular attendance at board meetings.

Directors are liable to the company for damages caused by a violation of law, breaches of the company's articles of association, or resolutions of the company's supreme body or their management duties, such as reporting obligations to the court of registration.

Upon the request of a director, the general meeting shall annually evaluate the performance of the directors for the previous business year and decide whether to discharge them of liability for that particular business year ("felmentvény").

Such discharge confirms that the directors have, in the relevant period, fulfilled their tasks in the primary interest of the company. However, it may be challenged and declared void if the court later establishes that information on the basis of which the board member was discharged of liability was false or incomplete.

Specific Corporate Law Liability Towards the Company

Beyond the general requirements, there are other grounds of liability for a director. Unless expressly permitted by the shareholders’ meeting, the Civil Code prohibits the directors from the following:

  • the acquisition of shares or a stake in another company that pursues similar activities to the company, except in public companies limited by shares;
  • being a director in another company that pursues similar activities to the company;
  • the conclusion of transactions by the director or its close relatives in their own name or for their own benefit, that fall within the scope of the company’s activities; and
  • the director or its close relative being a member of the company’s supervisory board at the same time.

A claim for damages by the company as a result of a breach of these obligations may be made within one year of the damage being incurred.

Duties Towards the Shareholders/Quotaholders

A director cannot be instructed by the shareholders of the company to carry out or refrain from any activity (except in the case of single-member companies and recognised company groups). Directors/managers shall act as representatives of the company and not of the individual shareholders.

Upon request by any of the shareholders, directors must provide information on the affairs of the company and allow inspection of its books and documents. However, directors may deny the request if the exercise of such right infringes the business interests or trade secrets of the company, or qualifies as an abuse of rights, or if the shareholder refuses to make a confidentiality declaration.

If directors do not comply with a request for information by the shareholders, the court of registration may, upon request, require the company to provide the relevant information.

Following the cessation of the company without legal successor, claims for damages may be brought against the executive officers by those who were quotaholders/shareholders at the time of the deletion of the company from the companies register, within a period of one year following the time of deletion, proportionate to the assets distributed to others upon the termination of the company.

Liability of Directors Towards Third Parties and Creditors

Generally, the company shall be liable toward third parties for any damage caused by its executive officers acting as an officer of the company. However, if the damage was caused by the wilful conduct of the directors, the directors and the company will be jointly and severally liable.

In a breach of obligation by the executive officer, they shall be liable for damages caused to the company, and shall reimburse the damage. The board of directors may take a decision for the enforcement of claims for damages against the executive officers.

The company shall be liable for damages caused to third parties by the executive officer in that capacity. Liability for any damage caused intentionally by the executive officer lies with the executive officer and the company jointly and severally.

Besides the abovementioned liabilities, directors may incur liability under labour law if they are employees of the company, in which case they shall be subject to liability for damages caused by any breach of their obligations from the employment relationship stemming from their failure to act as might normally be expected in the given circumstances.

Directors may also incur criminal sanctions for violations of certain specific requirements concerning the organisation and operation of the company. Examples of crimes that could be committed by executive officers include crimes of corruption, crimes against properties, breach of accounting regulations, fraudulent bankruptcy, etc.

If the articles of association render certain decisions of managing directors subject to prior approval by the supervisory board, and the supervisory board refuses to approve the managing directors’ proposal and the managing directors stand by their proposal nonetheless, the directors shall be entitled to turn to the company’s general meeting for a decision. If the supervisory board approves the director’s proposal, the directors and supervisory board members that voted for the proposal shall be jointly and severally liable for damages caused to the company under the provisions on liability for breach of contract.

The Civil Code

The Civil Code also recognises liability for wrongful trading, which means that, in the event of the cessation of a company without succession, creditors may bring actions for damages for their claims outstanding against the company’s executive officers on the grounds of non-contractual liability if the executive officer affected fails to take the creditors’ interests into account in the event of an imminent threat to the business association’s solvency.

According to the Civil Code, in cases of threatened bankruptcy, directors must take into account the interests of creditors as well as the interests of the company. The determination of the time when the threat of insolvency has occurred is difficult. In the course of the insolvency process, creditors may bring an action for the establishment of the director’s liability and the amount of the indemnification. The judgment of such litigation can be enforced after the completion of the insolvency procedure if the company’s assets are not sufficient to satisfy the creditors’ claims.

Creditors may have claims against not only the directors but also those who had actual influence on the management of the company (so-called ‘shadow directors’). Such shadow directors can be, for example, the directors of the parent company or an influential shareholder of the company, who have actively influenced the acts of the directors.

In certain circumstances, the shareholders/quotaholders may absolve a director or manager of liability for a breach of duty by ratifying the wrongful act.

Directors' liability can also be covered by insurance or, in certain circumstances, an indemnity from the shareholders.

The remuneration of the directors, supervisory board members, and independent auditor is determined by the shareholders’ meeting. The articles of association of limited liability companies or private companies limited by shares may contain provisions enabling the supervisory board to determine the remuneration of the board of directors/manager(s).

Under Corporate Governance Recommendations, a committee established by the shareholders’ meeting of a Nyrt or the governing body may set out a remuneration guideline concerning the assessment of the work of the board of directors/management board/supervisory board. This remuneration guideline is commented on by the supervisory board, and must be approved by the shareholders’ meeting. Establishing the remuneration and controlling the efficiency of the operative managers is in the scope of board of directors or the management board (including but not limited to the bonus, stock options and other remunerations). If the remuneration of operative managers is atypical, it must be approved by the shareholders’ meeting.

A remuneration declaration shall be issued by the company, in which the board of directors/management board and the supervisory board shall inform the shareholders of the remuneration principles and the actual remuneration of operative managers. The remuneration of members of the board of directors/management board is also included in the remuneration declaration.

Companies are established and owned by one or more shareholders/quotaholders. A company is a legal person established for the pursuit of business operations, with financial contribution provided by its shareholder(s) (Rt) or its quotaholder(s) (Kft). The shareholders/quotaholders have rights to the profit of the company. 

Companies Limited by Shares

The company limited by shares has a share capital divided into shares of a predetermined amount and nominal value.

A company limited by shares is controlled through its general meeting of shareholders (or, instead, the resolutions of the sole shareholder). The general meeting of shareholders is the governing body of a company limited by shares. Its principal duty is to adopt decisions on the fundamental business and personnel issues of the company.

Only a company limited by shares (a Zrt or Nyrt) can issue shares. As a general principle, all shareholders enjoy the same rights in the same share classes. Different types of share classes can provide different rights. However, it is the articles of association, and not the shareholders' agreements, that can provide specific rights to particular classes of shares.

  • Ordinary shares – the aggregate nominal value of the ordinary shares must exceed half of the share capital (that is, the aggregate nominal value of all other shares, if issued, cannot reach half of the share capital). As the name suggests, these are the ordinary shares of the company limited by shares with no special rights or restrictions.
  • Preference shares give the shareholder greater rights than those who hold ordinary shares. The following preferences can be given:
    1. preference related to dividends – holders of these shares receive their dividends first and/or in a higher amount than the ordinary shareholders from the annual dividends available for distribution, as defined in the articles of association;
    2. preference related to voting rights – there are two different types of preference-related voting shares under the Civil Code;
    3. preference related to liquidation proceeds – if a company limited by shares terminates without succession, preferred shareholders can have a prior entitlement before the ordinary shareholders to the assets to be distributed;
    4. preference related to the appointment of board members or supervisory board members – holders of these shares can appoint one or more members of the board and/or the supervisory board; and
    5. preference related to pre-emption rights – the holder of these shares is granted the right of pre-emption for any type of shares of the private company limited by shares when they are offered for sale. Shares providing pre-emption rights cannot be issued for public companies limited by shares (Nyrt).

Regarding preference related to voting rights, the first type provides multiple voting rights, and the second type provides a veto right, which is also called a "golden share". Shareholders of Rts can exercise multiple voting rights to the extent defined in the articles of association. However, the voting rights attached to one preference share cannot exceed ten times the voting rights corresponding to the nominal value of the share, and any provisions in the articles of association which are contrary to this provision will be null and void. If the articles of association so require, the general meeting can pass a resolution on specific issues determined in the articles of association, upon the majority vote of preference shares related to voting rights.

Further, related to point d), above, these shareholders are also entitled to remove the members they have appointed. Preference shares related to the appointment of board members or supervisory board members can only be issued for Zrts.

A company limited by shares can issue shares combining the aforementioned preference rights, and it is also possible to issue preference shares carrying the right to exchange the preference share held to another type of preference share or ordinary share.Employee shares – a company limited by shares cannot issue employee shares at foundation, but only later in the event of a capital increase.

  • Interest-bearing shares up to 10% of the share capital can be issued, entitling their holders to a pre-determined rate of interest. No interest can be paid if the equity would drop below the share capital as a result of the payment.
  • Redeemable shares can be issued up to 20% of the share capital, providing there is a call option to the company limited by shares and/or a put option to the shareholder according to the terms outlined in the articles of association.
  • Other types of shares – a company limited by shares can issue other types of shares if its articles of association define that type. The Civil Code also allows the combining of the characteristics of the type of shares defined by it to create other types of shares.

Regarding employee shares, they can be provided to full and part-time employees at a discounted price or free of charge (in the first case, the capital is paid in fully or partly by employees, while in the latter case the company pays in the full capital from the equity exceeding the share capital). Employee shares are transferable only among employees or (if provided by the articles of association) former employees of the company.

A shareholder may exercise its shareholders’ rights towards the company only if it is registered in the register of shareholders kept by the board of directors of the company.

Ownership of shares is evidenced by share certificates, which must be in a registered form and need to be produced in a printed or electronic form (the register of shareholders can also be maintained in electronic form).

Limited Liability Companies

Owners in a Kft hold "quotas", not shares. Each member can have one quota only, which embodies all that member's proportional rights and obligations vis-á-vis the Kft. Quotaholders are also referred to as members of a Kft. Unless the constitutive document of a Kft (articles of association) provides otherwise, the transfer of quotas to non-member third parties is subject to statutory pre-emption rights, the beneficiaries of which are any other member of the Kft, the Kft itself or a person appointed by the members' meeting (in that order). A Kft member's liability is limited to its initial investment and any other contributions required under the Kft's articles of association.

Generally, the shareholders are not involved in the management of the company.

The articles of association may maintain specified management matters for the shareholders, which would fall within the competence of the management of the company.

In a sole-member Kft, the sole member may issue instructions to the executive officer, which the executive officer is required to carry out.

The liability of the shareholders is limited to the payment of the nominal or issued value of their shares, whichever is higher. A court, however, may declare the liability of a shareholder holding more than 75% of the votes in the company to be unlimited in certain situations – for example, where a dominant shareholder makes the company pursue a business policy that is detrimental to the company and it causes the cessation of the company.

The articles of association may provide matters that fall within the exclusive competence of the shareholders’ meeting. These matters are usually significant in the operation of the company, but there are no legal requirements that would exclude any type of matter from the scope of the shareholders’ meeting. The articles of association may maintain specified matters that fall within the exclusive competence of the specified director or directors.

The shareholder meetings of a company is required at least once a year, and if it is deemed necessary with a view to the interest of the company, or if so prescribed by law.

The invitation of shareholders to the shareholders’ meeting shall contain the agenda of the meeting. In the case of private companies limited by shares, the invitation shall be sent at least 15 days in advance, unless otherwise provided for in the articles of association. In the case of public companies limited by shares, the shareholders’ meeting is convened by way of a public notice published in accordance with the articles of association – published on the company’s official website as a minimum requirement, or by other means – at least 30 days in advance.

The shareholders’ meeting may only discuss any issues that were not included in the agenda sent with the invitation (public notice) if all shareholders are present at the meeting and unanimously agree to discuss such issues on the agenda.

Shareholders' Control

If a group of shareholders together controlling at least 5% of the votes in a private company limited by shares proposes certain additions to the agenda, the matter proposed shall be included on the agenda if such proposal is delivered to the shareholders and the board of directors of the company within eight days of receipt of the invitation to the general meeting.

If a group of shareholders together controlling at least 1% of the votes in a public company limited by shares proposes certain additions to the agenda, or tables draft resolutions for items included or to be included on the agenda, the matter proposed shall be included on the agenda if such proposal is delivered to the board of directors of the company within eight days following the time of publication of the notice for the convocation of the general meeting, and the management board publishes a notice on the amended agenda or the draft resolutions tabled by shareholders upon receipt of the proposal. The matter published in the notice shall be included on the agenda.

The articles of association may allow a shareholders’ meeting to be held in a way that allows the shareholders to participate by way of electronic means of communication, designed to handle dialogues between shareholders and providing adequate facilities for debates without any restriction whatsoever. The articles of association may specify certain specific issues that may not be debated in this manner.

Holding a Shareholders' Meeting

Shareholders’ meetings may be attended by the shareholders of the company, the proxy holder if they are registered in the shareholders' book before the beginning of the shareholders' meeting and – without voting rights – any person invited according to the applicable legal provisions (eg, the auditor in certain cases) or the articles of association. Shareholders may be accompanied by legal or other counsel.

Meetings are generally chaired by a director elected by the shareholders’ meeting.

The articles of association of Kfts and Zrts may define the matters that may be resolved without having to hold a meeting, where the decision of the shareholders is fixed in writing or by any other means containing authentic proof about the statements made in the decision-making process. The draft of a proposed decision shall be conveyed to the shareholders in writing, allowing at least eight days for making a decision, unless a shorter period is prescribed in the articles of association. Shareholders shall cast their votes in writing or in some other verifiable manner.

See 4.8 Consequences and Enforcement of Breach of Directors' Duties.

Notification is required both to the issuer and to the Hungarian securities regulator within two calendar days if voting rights directly or indirectly reach, exceed or decrease below the following thresholds: 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75%, 80%, 85%, 90%, 91%, 92%, 93%, 94%, 95%, 96%, 97%, 98%, and 99%.

For the calculation of voting rights held either directly or indirectly by a shareholder, the following voting rights must be taken into account:

  • voting rights that can be exercised by the shareholder himself or by a company being controlled by the shareholder on the basis of:
  • an agreement between the shareholder and a third party acting in concert;
  • a temporary transfer of the voting rights;
  • shares that are deposited to the shareholder as security; and
  • an agreement on rights of use, under which the shareholder is entitled to exercise the voting rights attached to the shares that are owned by the company;
  • voting rights exercised by the shareholder acting as a custodian;
  • voting rights exercised by a third party on behalf of the shareholder;
  • voting rights exercised by the shareholder acting as a proxy without having specific instructions; and
  • voting rights attached to shares belonging to a stock or portfolio managed by a fund management company, an investment service provider or a credit institution.

If the entities holding these shares are controlled by the shareholder, they need to be calculated together, as long as they exercise the voting rights on the basis of direct or indirect instructions received from the shareholder or a company controlled by the shareholder.

Credit institutions and investment service providers are exempted from notification requirements in respect of shares recorded in the trading book in the following circumstances:

  • if they ensure that voting rights cannot be exercised by anyone;
  • if they do not participate in decisions appointing or removing members of the managing, supervisory or decision-making bodies of the issuer; and
  • if voting rights attached to the shares recorded in the trading book do not exceed 5%.

Shareholders are exempted from notification requirements if the notification is performed on their behalf by their parent undertaking.

When shareholdings reach at least 75% of voting rights (direct or indirect) disclosure must be made to the court of registration and published in the Companies Gazette within 30 days.

The executive officers shall present the annual report of the company to the shareholders’ meeting, and shall prepare a report on the management, the financial situation and the business policy of the company at the intervals set out in the articles of association, or at least once every year for the shareholders’ meeting, and at least once every three months for the supervisory board (if any).

Under the Civil Code, there is no requirement to disclose their corporate governance arrangements in the annual financial report.

Under Corporate Governance Recommendations, a Nyrt shall disclose the aim of the company, the result of the activity and the financial management of the company, principles regarding the election and appointment of the members of the management and the boards, and the principles regarding the compensation of the members of the management and the boards, risk factors influencing the operation of the company, and relevant information concerning the employees, the structure of the company management and the structure of the ownership.

Companies are required to make the following filings with the companies registry and such filings are publicly available:

  • the company name;
  • the registered office of the company;
  • the deed of foundation (or the changing date of deed of foundation);
  • the scope of activities of the company (including the main activity);
  • the registered capital of the company;
  • the person(s) authorised to represent the company;
  • the auditor (if any);
  • the tax number;
  • the bank account number; and
  • the shareholders (members). 

The shareholders may resolve to change the registered corporate data of the company. Based on such resolution, a registration procedure shall be initiated by the company at the registry court. Generally, the shareholders may define the effective date of the changes (with notable exceptions, including the effective date of a change in the registered capital, etc).

It is mandatory to appoint an external auditor in the following circumstances:

  • if the company’s annual net revenue (calculated for the period of one year) exceeds HUF300 million (approximately EUR950,000) on the average of the two financial years preceding the financial year under review, and the average number of full-time employees of the company of the two financial years preceding the financial year under review exceeds 50 persons;
  • if the articles of association provides so; or when sector-specific laws require the appointing of an auditor (eg, in the case of financial institutions).

The auditor is responsible for carrying out the audit of financial documents, including the determination of whether the annual report of the company conforms with legal requirements, and whether it provides a true and fair view of the company’s assets and liabilities, financial position, and profit or loss. Auditors may be appointed for the maximum period of five years. An auditor may be appointed for successive terms.

Public companies limited by shares are required to have an audit committee consisting of three members elected by the shareholders’ meeting from the board of directors, or from the independent members of the supervisory board, where applicable. At least one member of the audit committee must be a professional accountant and/or auditor. The scope of activities of the audit committee consists of, inter alia, the monitoring of the following:

  • the audit of the annual report prepared according to the act on accounting;
  • the services of the auditor other than auditing the annual report; and
  • the effectiveness of the internal monitoring and risk management.

The articles of association may confer additional duties upon the audit committee.

There are no special requirements under Hungarian corporate law; however, the executive officers shall operate the company on the basis of the general principles of the Civil Code (eg, duty of care, good faith, fair dealing).

Lakatos, Köves & Partners

Madách Trade Center
H-1075 Budapest
Madách Imre út 14.
Hungary

+ 36 142 91 300

+ 36 142 91 390

info@lakatoskoves.hu www.lakatoskoves.hu
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Law and Practice

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Lakatos, Köves & Partners (LKT) has nine partners and more than 50 lawyers and is a full-service commercial law firm based in Budapest, Hungary, with a predominantly international client base, offering cutting-edge know-how and matching innovative legal solutions to business needs. LKT advises many corporates on the full range of issues facing them in their operations in Hungary, ranging from general corporate establishment and maintenance through their compliance with all local regulatory requirements (eg, sectoral regulation, competition law) and also issues arising from, eg, FCPA and the UK Bribery Act. Key corporate clients include Mastercard, Mars, Facebook, Energizer, Volkswagen and Daimler. LKT advises on the full range of M&A transactions, usually representing foreign investors both in relation to Hungary-specific transactions and also regional or global transactions. Key M&A clients include Vodafone, Citibank, Triton, Karlovarské Mineral Water, Walmark, Photon Energy, CG Power and Invitech.

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