Private Equity 2021

Last Updated September 14, 2021


Law and Practice


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Despite the modest slowdown of overall deal activity during the COVID-19 pandemic, Hungary continues to be a popular investment destination within the Central and Eastern European (CEE) region for private equity M&A transactions and deals. Although the Hungarian government still clashes with EU institutions and other Western European governments, investors also seem to favour Hungary’s long-lasting political stability, the healthy condition of its macroeconomic environment and its stable budgetary status.

As several major private equity players have long been focusing on expanding their existing portfolios in the CEE region, the potential sizeable targets available for them in Hungary have thinned out, to some extent. Nonetheless, there has been healthy activity among smaller regionally focused players, as well as among domestic funds that continue to see opportunities in Hungary during the COVID-19 pandemic. Accordingly, in contrast to global trends, deal-making going forward in Hungary is expected to be dominated by domestic M&A activity.

For the remainder of 2021, it is foreseeable that the mid-market and lower mid-markets will continue to weaken, as potential targets in those segments that are the intended beneficiaries of government relief measures are afforded reasonable protection for owners against market turbulence. For the same reason, market observers have not yet seen genuine distressed deals in Hungary.

Foreign investors also closely monitor the macroeconomic environment of Hungary, such as the inflation rate or the base rate of the National Bank of Hungary, which could have a significant impact on foreign direct investments.

The COVID-19 pandemic pushed retail and consumer service sectors towards online sales, but other segments equally had to adapt to the changing market environment pointing to the new norm. Accordingly, to date in 2021, the largest transactions have been in the online services and IT sectors, although special sectoral transactions, such as in energy (photovoltaic renewable energy, in particular) have continued to be among the busiest, due to the favourable dynamics of the underlying regulatory regime in Hungary. Apparently, the COVID-19 pandemic also accelerated consolidation within the Hungarian banking sector and sparked transactions on the local insurance market.

Looking ahead, the local market sentiment is that deal activity is likely to remain reasonably stable in Hungary in the second half of 2021, despite uncertainties across global markets and slower trends elsewhere in Europe reflecting a more cautious and less active deal-making environment. However, negative predictions about the effect on the local transactional market of COVID-19-related legislation in Hungary, which requires the screening and prior ministerial approval of foreign acquisitions of certain Hungarian companies engaged in selected industries (see 2.1 Impact on Funds and Transactions for more details), appear to have been fulfilled.

Temporary Legislation

COVID-19-related temporary legislation from 2020, which substantially expanded the requirements for all foreign investors to seek prior ministerial approval for their investments in Hungarian companies engaged in certain strategic industries, was extended for 2021. The scope of the industries covered by the screening requirement remains wide-ranging, and goes far beyond the previous scope of Hungary's FDI screening requirements.

Activities covered

The activities covered by the sweeping Hungarian legislation include manufacturing and chemicals, food and agriculture, health and medical, waste and building materials, transport and logistics, and even all retail and wholesale activities, as long as they are conducted by Hungarian-registered legal entities engaged in the energy, transport or communication sectors, or otherwise considered strategic in the context of the framework of Regulation (EU) 2019/452 of the European Parliament and Council.

Relevant rules

The relevant rules require that all investors, from either inside or outside the EU, the European Economic Area (EEA) and Switzerland, file for prior approval if they intend to acquire, directly or indirectly, an "interest" with any of the following parameters:

  • at least 10%, with a deal value of at least HUF350 million (approximately EUR1 million);
  • at least 15%, 20% or 50%, irrespective of the deal value in each case;
  • as a result of which their shareholding, combined with stakes already held by other foreign investors, would exceed 25%, notwithstanding the size of the "interest" newly acquired or its deal value; or
  • which will otherwise be sufficient to ensure effective control over any Hungarian legal entity in the industries concerned.

Affected deal structures

In addition to the straightforward acquisition of shares, the deal structures that are also captured include the acquisition of convertibles or rights in usufruct, as well as corporate transformations, asset acquisitions, capital injections and even in-kind contributions, irrespective of whether the deal is for good consideration or for free.

Ministerial approval

Without the minister's approval, a transaction is considered null and void under Hungarian law, and no changes can be entered into any relevant public registries (such as the corporate registry), nor will the acquirers be permitted to be entered in the relevant books of shareholders. Furthermore, the minister can impose administrative fines for any breach of the approval requirement in the amount of at least 1% of the acquirer's annual net turnover and up to double the transaction value.


With respect to the procedural aspects, the filing must be made within ten days of concluding the relevant agreement. The ministerial decision must be rendered within 30 days thereafter, which can be further extended by an additional 15-day review period if circumstances so require.

It remains to be seen if any of these screening requirements will be firmly solidified in Hungarian law after 2021.

New Legislation

A new piece of legislation from 2020 clarifies that venture capital fund managers and the venture capital funds managed by them, as well as AIFMs managing private AIFs in which the sole investor is the AIFM or its affiliated companies, are exempted from the regulatory supervision of the National Bank of Hungary.

Hungary has long been considered a jurisdiction that is closely aligned with the key policy principles and follows the leading precedents regarding regulatory reviews and the resulting decision-making relevant to private equity funds and transactions that are generally applicable in the EU regulatory environment.

Regulatory Requirements

Accordingly, M&A dealmakers will face the same conventional regulatory requirements, in terms of designing and completing their acquisitions, as elsewhere within the EU. Sectorial consent requirements in banking and insurance or energy and infrastructure are coupled with merger control review and the newly introduced requirement for the screening of foreign direct investments in selected strategic sectors by investors whose background is outside the EU or the EEA (see 2.1 Impact on Funds and Transactions for more details).

In the context of merger control regulations that apply to business combinations and private equity-backed buyers, transactions with a Hungarian angle that otherwise do not meet the EU’s relevant turnover filing thresholds and require antitrust approval from the European Commission will still need to consider any filing requirement with the Hungarian national competition authority.

The merger control clearance requirement in Hungary may be triggered by purchases of assets forming a going concern, acquisitions of minority shareholdings coupled with veto rights, the setting up of joint ventures, or changes in shareholder voting structures, provided the relevant local filing thresholds are exceeded.

Merger Control Thresholds

The relevant Hungarian merger control thresholds are based on the parties’ Hungarian net turnover. When calculating the "net turnover derived from Hungary" thresholds, only net turnover derived from Hungary must be considered. The practice of the Hungarian competition authority regarding the method of calculating the relevant turnover and the allocation of such turnover among the members of groups of undertakings is fully in line with that of the European Commission in the context of the EU merger control rules.

The long-existing turnover-based notification threshold test in Hungary requires a transaction to file for prior clearance from the Hungarian competition authority if:

  • the combined net turnover of all undertakings concerned (including companies controlled jointly by members of the groups of undertakings concerned) derived from Hungary in the previous financial year exceeded approximately EUR47 million; and
  • at least each of two of the undertakings concerned derived net turnover from Hungary in excess of approximately EUR3 million in the previous financial year.

Merger Control Review

In addition, according to an alternative filing test that has applied since 2017, a merger control review will also be necessary for the implementation of a concentration if it is not obvious that the concentration does not result in any significant impediment to effective competition in any of the relevant markets, and the undertakings concerned have a combined aggregate net turnover derived from Hungary that exceeds approximately EUR15 million. This alternative filing test is intended to capture mergers concerning new emerging technology markets that are not necessarily generating the levels of net turnover that would trigger a merger filing requirement under the old filing thresholds.

Conditions and Obligations

Although there is no longer any filing deadline under Hungarian law, the parties are required to refrain from giving effect to the transaction prior to the merger clearance. A notification form must be lodged with the Hungarian competition authority following the signing of the contract or the acquisition of control (whichever is earlier), or, in the case of a public offer, following the publication of the public offer.

The Hungarian competition authority may attach conditions or obligations to its approval, which must be met by an appropriate deadline. The approval may be amended if the company does not fulfil an obligation or meet a condition prescribed by the decision for a reason which is not attributable to it. Unless the conditions are met, the approval is ineffective, and the Hungarian competition authority may initiate measures to recreate a state of effective competition on the market.

The Hungarian competition authority has the right to prohibit a concentration if it constitutes a significant impediment to competition in the relevant market, particularly as a consequence of creating or strengthening a dominant position.

Tax Regulations

In respect of tax, tightening tax regulations such as the Anti-Tax Avoidance Directive (which provides for a comprehensive framework of anti-abuse measures aimed at preventing companies from exploiting national mismatches to avoid taxation) has an influence on the economic and legal effects of private equity deals. Therefore, private equity buyers need to put significant effort into structuring their deals and providing substance to local investment vehicles.

An M&A practitioner would see all of the different approaches to the level of legal due diligence conducted in Hungary. Foreign private equity buyers, as well as the larger local funds, are less inclined to leave out any key area of focus for their legal due diligence and, accordingly, would instruct their local legal advisers to conduct their reviews into all conventional areas of law. Depending on the amount of information made available to them (these days almost exclusively in a structured virtual data room) or the field of industry with which the targeted business is concerned (which may involve a massive amount of legal documentation, eg, customer or employee contracts), private equity buyers would usually consider introducing materiality thresholds in order to streamline the review process.

Another typical approach to due diligence in private equity deals is to divide the review into phases, first allowing a more general review of selected areas that prove relevant for the potential buyers’ initial valuation and then opening ways for an in-depth legal review to be conducted by selected preferred bidders only in a subsequent phase.

Smaller local funds, on the contrary, will be more prepared to select a handful of key areas of focus for the legal due diligence in their homeland transactions.

In each of these approaches, however, a private equity investor will commission a report on red-flag issues only.

In terms of problem areas, recent surveys among private equity investors suggest that antitrust compliance was the most commonly raised review challenge by respondents (75%), followed by intellectual property law (62%) and tax compliance (61%).

Vendor due diligence is becoming a more common feature of transactions for private equity sellers in Hungary, in order to expedite the transaction timeline in a competitive tender sale scenario involving only a limited number of preferred bidders. Vendor due diligence often boils down to the preparation of a legal fact book, instead of providing a formal vendor due diligence report to bidders via a data room.

As the advisory markets in Hungary have long been considered mature, transaction advisers will typically provide credence to the vendor due diligence report prepared by any carefully selected and well-established advisory team in Hungary. This feature of the transaction mechanics is unsurprisingly combined with the preference of the buy-side (advisers as well as providers of any acquisition finance) to have some level of reliance on the vendor diligence reports, again further simplifying and expediting the review process for the buy-side. The specific terms of any such reliance, if available, would be carefully negotiated among all the relevant parties.

Acquisitions by private equity funds in Hungary are predominantly carried out through negotiated sale and purchase agreements. Other acquisition structures, such as court-approved schemes or administered tender offers, are substantially less frequent in the private equity field in Hungary, although Hungarian law recognises each of these transaction methods.

Sellers' preference to maximise the target's value, however, opens up ways in an increasing number of instances to set up an auction sale process for private equity fund buyers. The Hungarian civil code provides the general framework rules for auctions of any kind of asset, although the seller will have relative freedom to determine the specific rules and procedures of the auction, depending on the circumstances of the transaction, such as the transaction size, the number of bidders or the size of the stake in the target offered for sale. Sales of companies by auction are usually co-ordinated by corporate finance or transaction advisory firms. Depending on the terms and conditions announced for the tender sale, the seller is either obliged to accept the highest bid or, if so provided in the tender terms, may be required to review all (non-binding) bids and proceed with choosing the most favourable one in subsequent rounds.

In terms of structuring an acquisition in Hungary by private equity-backed buyers, one would need to distinguish between smaller local funds and bigger regional (international) players. The former are still often directly involved in the acquisition (or sale) of their target companies (acting through their fund managers), whereas the more sizeable players that are set up abroad almost exclusively transact in Hungary through their acquisition structure's involving SPVs. Ultimately, the acquisition structure is designed with a view to maximising any tax advantages, complying with any financing requirements and anticipating all relevant liability, co-investor or exit considerations.

The most commonly used form of consideration in Hungary is cash (equity), either funded by the buyer directly or (partially) from debt. Public companies may also opt to issue shares to acquire funds for acquisitions, which could also be combined with other elements (cash or debt). Other types of consideration (rights, receivables, real estate) are less common, although they can be negotiated by the parties for transactions involving private companies.

Seller and Buyer Preferences

Factors in the choice of the form of consideration may be the seller's preferences, the financial/economic conditions of the target company or the result of the parties’ negotiations. The seller and buyer will obviously have different preferences: the seller will want to opt to receive the purchase price in cash upon immediate sale, or to remain engaged in the business with the use of a joint venture set-up or incentivised combined business; whereas the buyer will prefer to pay a consideration in the course of a post-completion period and so introduce partial payment (which may be combined with share schemes to incentivise retained owners as management) or purchase price retention mechanisms, or even try to set up an earn-out mechanism with the relevant (usually complex) review and business integrity requirements.

Certainty of Funds

The contractual certainty of funds from a private equity-backed buyer is becoming a more frequent requirement from sellers in Hungary. When the acquisition is financed fully from own equity, which is very often the case for smaller local funds, especially if the fund is prepared to hold a minority stake in the target, the seller would usually request an equity commitment letter. In larger scale transactions involving international players who deploy third-party financing and in which therefore the financiers are involved at some point of the negotiations, the certainty of funds appears to be less of an issue for the seller.

In cases where external financing is involved in Hungarian transactions, such debt is provided in the form of senior debt, mezzanine debt or institutional debt.

Transactions involving a consortium of private equity sponsors are generally uncommon in Hungary; likewise, co-investment by other investors alongside the private equity fund is also not common. Market practice does see such multiple investor set-ups involving passive stakes provided by external private co-investors, usually in venture capital (VC) seed phase transactions. Otherwise, passive stakes are structured for limited partners through the private equity fund in which they are already an investor, alongside the general partner. Genuine “club deals” aimed at maintaining a diversified portfolio of investments and allocating risks and costs are taking place at an international level rather than in domestic transactions in Hungary.

Regarding the predominant forms of consideration structures used in private equity transactions in Hungary, locked-box consideration structures have undoubtedly gained dominance over the more conventional completion account or similar purchase price adjustment consideration structures. This apparently follows the trend observed in other CEE markets very closely, although there were certain indications during the COVID-19 pandemic that volatile market circumstances made the parties consider less risky completion accounts in their deals. The combination of any of these structures with an earn-out mechanism or other forms of deferred consideration is very rarely seen in private equity-driven transactions in Hungary.

The preference of private equity funds for locked-box consideration structures is even greater when such funds appear on the sell-side of the transaction. Conversely, any earn-out elements or deferred consideration structures would only be seen in cases where the private equity fund is buying. Accordingly, the involvement of a private equity fund in M&A transactions would have a significant impact on the type of consideration structure ultimately agreed between the parties.

There is no substantial difference between the level of protection a private equity party is willing to provide in relation to the various consideration mechanisms as compared to that customarily afforded by a corporate party. Obviously, locked-box consideration structures are combined with a seller’s no-leakage covenants and warranties, the covenant that the business of the target company will be conducted in the ordinary course, and a euro-for-euro indemnification of the buyer with respect to any leakage that is otherwise not permitted, as well as with the relevant expert review and dispute resolution mechanism with respect to instances when a payment is contested (see 6.3 Dispute Resolution for Consideration Structures).

As locked-box consideration structures are commonly used in private equity transactions in Hungary, the question of whether interest should be charged on any non-permitted leakage and/or whether leakage in excess of a particular amount should lead to a walk-away right is equally often negotiated between the parties. The outcome of any such negotiation will usually depend on the other deal parameters.

It is most typical to see a dispute resolution mechanism in place for both locked-box consideration structures and completion accounts consideration structures in private equity transactions in Hungary. However, there are substantial differences in terms of the degree of detail and the level of sophistication of such dispute resolution mechanisms in various transactions. In some instances, the parties will be able to confine their dispute to independent expert determination proceedings becoming final, whereas in other cases, the lack of a sufficient level of trust between the parties will require any disagreement with respect to such an independent expert view to be further escalated to review in formal arbitration proceedings.

The typical level of conditionality in private equity transactions in Hungary is limited to the legal mandatory minimum, including obtaining all relevant (suspensory) regulatory approvals, such as antitrust clearance or seeking shareholder approvals (to the extent they are prescribed in the relevant corporate constitutive instruments or other shareholder arrangements) or other third-party consents (required on the basis of change of control clauses included in contracts with key account business partners material to the continuation of the target’s business). Certainly, a recent condition is the need to obtain foreign direct investment screening approval from the competent minister. Other conditions to completing a private equity transaction in Hungary, such as material adverse change provisions, are substantially less frequent and routinely trigger sensitive discussions between the parties. It is very apparent that deal certainty has become an even more important feature for the parties when discussing conditionality in their acquisition agreement and, whenever possible, simultaneous signing and closing  are preferred.

“Hell or high water” undertakings in the context of private equity M&A transactions subject to the seeking of prior regulatory approval for completion, would commit the buyer to undertaking any obligations (including divestments, reshuffling contract positions or other market behavioural remedies) that are imposed by a competent regulator in order to obtain the required regulatory approval. A private equity-backed buyer in Hungary would heavily negotiate, if not reject, such a clause in an M&A transaction agreement with the seller, even though the regulators encourage and the laws often facilitate negotiation-type discussions during the review period, which give the buyer considerable room to manoeuvre around the most burdensome commitment and hence mitigate the relevant regulatory consent risk.

In this context, private equity buyers normally agree in the transaction agreements to promptly make the relevant filings and to reasonably involve the seller in the review process. In other instances, the transaction parties are able to negotiate certain thresholds or other specific criteria in their agreement (eg, identifying particular assets or contracts to be offered to the regulator for divestment) in order to more precisely quantify and allocate the risk associated with the regulator’s review.

In conditional deals with a private equity-backed buyer, a break fee in favour of the seller is not at all common in Hungary, although a seller usually prefers to mitigate its transaction cost risk in case the deal falls apart and/or to increase deal security in the face of the conditional elements. The main reason for this is that private equity deals are ultimately subject to a very limited number of objective (eg, regulatory) conditions to closing, which reduces the room for sellers to argue around subjective deal certainty elements. The same observation is valid in respect of reverse break fees, for exactly the same reasons.

To the extent that Hungarian law is agreed upon to govern the transaction agreement, it must be noted that the courts (upon the motion of the aggrieved party) are allowed to reduce break fees that are agreed at levels that are considered unreasonably high against the particular circumstances of the transaction.

A private equity seller or buyer would typically only be allowed to terminate the acquisition agreement in Hungary under very limited circumstances, if at all. Generally, transaction agreements in private equity-backed deals do not offer the parties any right to terminate. Instances in which termination rights are reserved for any of the parties are limited to matters of mandatory law, which cannot be excluded by agreement, such as lack of any mandatory regulatory approval for completion.

In an M&A transaction in Hungary where both the seller and the buyer are private equity funds, one would almost exclusively see a locked-box consideration structure, which applies mostly objective criteria to how the parties ultimately allocate risk between the locked-box date and the closing date under the relevant restrictions on conduct of business, as well as the no-leakage covenants and associated warranties.

Limitation of Liabilities

In terms of seeking remedies for breach of any of these contract provisions, the discussion between the private equity-backed parties turns to limitation of liability provisions in the transaction agreement. General concepts of Hungarian civil law (such as the obligation of the aggrieved party to mitigate loss) as well as the concept of known risks fairly disclosed to the buyer (generally in the data room or specifically in the seller’s disclosure letter) will limit the scope of the seller's liability. The parties will further negotiate specific limitations, such as time limitations for raising claims (normally one year, except for title and tax matters, where statute of limitation periods are usually considered), financial limitations (such as caps, baskets, de minimis claim exclusions, overall capped at some percentage of the total consideration), or the exclusion of liability for special damages (such as indirect and consequential losses or punitive damages).

Specific Indemnity Protection

As long as it has identified any particular area of concern that carries substantial and quantifiable risk to the business in the course of its due diligence, the buyer will prefer to receive specific indemnity protection from the seller. Any such indemnity eventually agreed between the parties will be subject to time and value limitations, if any, different from those applied to other breaches of contract. The same distinction usually applies to selected fundamental warranties, such as claims for a breach of title, tax or anti-bribery warranties.

Such allocation of risk is not substantially different if neither the seller nor the buyer is backed by private equity, although a trade seller would be expected to be better prepared to agree to longer liability periods or to offer any special indemnity cover for the buyer.

Limitation of Warranties

Private equity-backed sellers are primarily interested in offering as few warranties and indemnities to any seller as possible in order to remain able to recover the deal consideration for their investors in a clean exit. Typically, the private equity seller will provide limited warranties to a buyer on exit regarding title and incorporation, solvency, financial statements, material agreements, real properties and key assets, financing, litigation and compliance (see 6.8 Allocation of Risk regarding the typical limitations on liability for any such warranties).

The management team will provide warranties to a buyer only if they are required (and agree) to remain with the targeted business as co-investor alongside the buyer, in which case, their warranties will usually match what has been agreed between the private equity seller and the buyer.

Disclosure against Warranties

The concept of disclosure against the warranties is widely recognised in Hungary, although the private equity buyer’s preference is usually not to allow full (and hence blunt) disclosure of the entire data room (especially if it is not well structured and includes fragmented information) but to confine the seller to specific disclosures by way of preparing its disclosure letter against specific warranties well ahead of signing the transaction agreement. Furthermore, the concept of “fair disclosure” is often discussed between the transaction parties in the interest of the buyer, who would then face limitations on (or even exclusions of) the seller’s liability only against risk areas that are very specifically described and hence reasonably quantifiable by the buyer.

Other protections usually contained in the acquisition documentation in deals in Hungary include specific indemnities in certain selected matters, such as title and tax or hold-back and other escrow arrangements to secure certain selected claims under the acquisition agreement (see 6.9 Warranty Protection).

In order to bridge the gap between the warranty and indemnity cover the seller is prepared to offer in light of its interest in limiting its exposure and achieving a clean exit on the one hand, and the private equity buyer’s preferred cover for its protection and recourse requirements on the other, parties in Hungary often discuss taking out warranty and indemnity insurance. Such insurance is the preferred alternative to other means of warranty and indemnity protection for the buyer, which are not as common in private equity-backed transactions in Hungary, such as retaining a portion of the purchase price in escrow as a hold-back.

Litigation is becoming more common in connection with private equity transactions in Hungary, although the number of cases closely follows the performance of the private equity markets and the performance of the target businesses. The most commonly litigated provisions include the consideration mechanics (price adjustment, leakage amounts, leakage adjustments and earn-outs) and breaches of the seller’s warranties.

In terms of conducting these lawsuits, while statistics show that the judiciary system in Hungary is among the most reliable and effective in the CEE, a considerable number of investors say that it was somewhat difficult for them to enforce contract claims in their most recent Hungarian deals. Therefore, private equity-backed parties often select arbitration for resolving their transaction disputes, so that the resulting contentious proceedings remain hidden from the market.

In recent years, some private equity funds and other non-public companies have become active on the Hungarian capital markets and acquired public companies. In the first instance, they purchased ailing public companies, which then served as a basis for them to undertake subsequent transactions. With the assistance of the Hungarian public companies they have brought under their control, the funds and private companies are in a position to acquire even larger public companies, in a process that usually goes hand in hand with certain consolidation trends. During consolidation, some of the acquired Hungarian public companies with the same controlling shareholder have merged into such a shareholder (and have hence become private), or have merged into each other. However, this trend seems to have slowed down due to the COVID-19 pandemic and the limited number of public companies available.

Shareholders of a Hungarian public company (either direct or indirect owners of the issued share capital of the given public company, or entities directly or indirectly holding any voting right in such public company) must report to the National Bank of Hungary and to the issuer if their voting rights or shares to which voting rights are attached reach, exceed or fall below 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75%, 80%, 85%, 90%, 91%, 92%, 93%, 94%, 95%, 96%, 97%, 98% or 99%.

In their notification filed with the NBH, shareholders must disclose the identity of the company or person acquiring the shareholding, the date of the transaction, the relevant thresholds and the details of the securities. If the shareholder has not complied with its obligation to file the notification with the NBH and the issuer, it may not exercise its voting rights in the Hungarian public company.

The acquirer must make a public takeover offer if:

  • it acquires 25% of the shareholding interests in a Hungarian public company and, apart from the acquirer, no other shareholder holds more than 10% of the voting rights; or
  • it acquires 33 % of the shareholding interests.

These provisions do not apply if the takeover is made during a formal restructuring or bankruptcy process.

The form of consideration is based on a commercial agreement between the bidder and the shareholder, although in Hungary one would typically see a cash consideration or a combination of cash and shares more often than just shares. If the bid reaches or exceeds the mandatory offer threshold, the bidder must offer cash for the shares upon the request of the shareholder.

Takeover rules in Hungary are rather restrictive and only permit a bidder to withdraw from its bid if the participating interest to be acquired is less than 50%, or if the Hungarian competition authority has not cleared the takeover of the target company from an antitrust perspective in the meantime.

Takeover offers in Hungary cannot be subject to any financing out, as the bidder is expected to provide evidence that it has sufficient funds available to cover the entire consideration payable for the shares. The funds can be cash, government securities issued by any member state of the EU (as well as an OECD member country) or a bank guarantee issued by a credit institution that is established in any member state of the EU (or any member country of the OECD).

Deal security measures (eg, break fees, match rights, force-the-vote provisions and non-solicitation provisions) are not acceptable pursuant to mandatory Hungarian laws.

If the bidder has reserved the right in the bid documentation to launch a squeeze-out mechanism and has successfully acquired at least 90% of the shares in the Hungarian public company, and further verifies that it has sufficient financial means to cover the purchase price, such bidder will legally be allowed to exercise a call option with respect to the remaining shares of the minority shareholders within three months of the last day of the acceptance period.

The put option reserved for minority shareholders must also be taken into consideration when a bidder acquires at least 90% of the shares of the Hungarian target company. In this case, the minority shareholders are entitled to offer their shares for sale to the bidder within three months of the date on which the target company published the acquisition.

In addition, Hungarian law allows that if the articles of association of the Hungarian target company provide for this, a bidder that has acquired at least 75% of the shareholding interests may convene a general meeting in order to amend the articles of association and remove and appoint board members. At this general meeting, any special rights of the other remaining shareholders will not be applicable. As compensation for the requirement to waive these special rights, the remaining shareholders will enjoy a put option vis-à-vis the bidder within 90 days of the date of publication of the acquisition of voting rights reaching or exceeding 75%.

Equal Treatment of All Shareholders

As a general rule, Hungarian law on takeovers requires the bidder to treat all shareholders equally. In practice, this means that the terms of an offer must be the same for all shareholders (taking the share classes into consideration), and no more favourable arrangement is permitted with any selected shareholders.

It is very common for the bidder to acquire shares from the principal shareholders of the Hungarian public target company before launching a mandatory bid for the rest of the shares. This sale-and-purchase agreement includes the typical contractual clauses concerning representations and warranties. Irrevocable commitments by the principal shareholders of the Hungarian target company would be applied in this context, which is permissible but not at all customary. However, any such agreement, including irrevocable commitments, must be drafted with a view to ensuring that none of the shareholders is placed in a more favourable position than the others. There is no common practice in Hungary for irrevocable commitments, so the parties would be free to arrange for their withdrawal or termination.

Need for Confidentiality

During negotiations, the bidder must ensure that utmost confidentiality is maintained, since an unintended information leak would trigger its obligation to launch a mandatory takeover offer.

A hostile takeover offer is permitted under Hungarian law but has not been seen recently in practice. Applicable Hungarian laws and takeover regulations grant robust rights to the board of directors in order to defend against hostile takeovers. The board of directors is authorised to take actions and adopt decisions – without the approval of the general meeting – aimed at preventing the bidder from gaining control of the Hungarian target company. Defence tools are further assisted by the rule that allows the Hungarian target company to own up to 25% of its own shares.

Furthermore, the articles of association of the Hungarian target company can stipulate that more than a simple majority of shareholders’ votes is required at the general meeting for the removal of any member of the board of directors. There are special provisions concerning strategically important companies in the Hungarian energy and utilities sectors, in which the members of the board of directors may only be recalled by a qualified majority of the shareholders.

In Hungary, equity incentivisation of the management team is becoming a more common feature of private equity transactions. The purpose underlying the various incentive schemes is to retain the management’s commitment to the business after a change in control over the target company. Hungarian law further offers certain tax benefits when incentivising management through equity ownership programmes, for both the business concerned and the management members personally.

The management team is usually allowed (required) to take a combined equity ownership interest at a level of around 5% of the registered capital, although the actual level of shareholding will largely depend on the specific circumstances of the acquisition, such as the size and structure of the target business, the availability of relevant management competence from other portfolio companies and, ultimately, the private equity buyer’s own preference.

If any shareholding where participation is available to the management team in Hungarian private equity transactions as a retention tool, the resulting structure will mainly be driven by tax considerations, and will ultimately depend on the private equity buyer’s preferences and ability to align those preferences with the management team members’ own preferences.

Investment Options

There are instances when the management team is given the opportunity to invest in the same instruments acquired by the private equity buyer ("institutional strip") in order to ensure full alignment of the interests of the management with those of the buyer. More often, however, the management is required to invest at the target company level, and the structures deployed for that vary from vesting options in ordinary stock to profit participation rights without any voting rights (see also 6.9 Warranty Protection for more details on the context of warranties provided to a buyer by the management team on exit).

Simplification of Shareholding Structure

In order to further simplify the shareholding structure and streamline the interests of the management team with those of the private equity buyer, all stock attached to the management participation scheme is pooled in a vehicle, so the private equity investor has to deal with only one co-investor in Hungary. Such stock would furthermore be encumbered with transfer restrictions, pre-emption and/or drag rights for the private equity buyer and a call option in the event (any member of) the management team becomes a “bad leaver” (see 8.3 Vesting/Leaver Provisions for more details on “bad leaver” provisions).

Typical leaver and vesting provisions for management team shareholders in Hungary distinguish between so-called "good leaver" and "bad leaver" provisions. The good leaver provisions, such as termination by the company without cause, illness or expiration of term, usually allow the management members concerned to retain their favourable pricing (and even vesting) terms. Reasons other than those (eg, termination by the company for cause or termination by the management member without cause) usually trigger bad leaver provisions, which are substantially worse than the favourable good leaver terms.

The restrictive covenants most customarily required from (and agreed to by) the management shareholders in Hungary entail non-compete, non-solicitation and non-disparagement undertakings. To the extent the management shareholders assume their managerial roles in Hungary on the basis of employment or services agreements, Hungarian law would mandatorily require them to obey certain non-compete and non-disparagement obligations throughout the term of their positions.

Following the termination of a services agreement, restrictive covenants remain enforceable according to the terms and for the period of time as originally included in the relevant agreement. To the extent that the restrictive covenants (in particular, the non-compete undertaking) are included in the employment agreement of the management shareholder concerned, their enforceability under Hungarian law would be confined by time (usually not to exceed two years after termination) and subject to the payment of fair compensation by the beneficiary of the restriction (at a level not lower than one third of the average compensation of the management shareholder for the period concerned).

The law in Hungary allows manager shareholders to potentially obtain a wide range of minority protection tools from the private equity buyer in addition to the statutory minimum, which is triggered at a combined 5% shareholding in the target company, and includes:

  • the right to convene the general meeting with a specific agenda;
  • the right to request independent auditing of a business matter of the target company; and
  • the right to launch a claim by the target company against its shareholder, management member or auditor.

These additional minority protection tools would include anti-dilution protection, veto rights through their equity ownership in certain selected matters, such as the appointment of management, and other corporate or business matters involving the business or the holding structure. Furthermore, manager shareholders can obtain rights to control or influence the exit of the private equity fund, such as tag rights (see 10.3 Tag Rights).

A private equity fund shareholder would typically secure full control over its portfolio company in Hungary, notwithstanding the mandatory minority protection rights that are afforded to any other co-shareholders holding at least a 5% stake in the company (see 8.5 Minority Protection for Manager Shareholders).

However, deal structuring would customarily allow the Hungarian target company to be solely acquired by a special vehicle that is set up by the private equity fund in a jurisdiction offering utmost control over the corporate governance of such a special vehicle (see 5.2 Structure of the Buyer). The sole shareholder of the Hungarian target company will then enjoy far-reaching instruction rights vis-à-vis the management and, in general, control all business matters of the target company. In particular, any such sole shareholder will be allowed to appoint and/or remove any member of the local management, and can instruct the management (who will then be legally liable to follow such instructions) to implement certain measures. However, these controlling shareholder rights remain confined by specific exceptions prescribed by mandatory Hungarian law relating to the insolvency situation of the Hungarian portfolio company or other abuses of limited liability by its controlling shareholder, when the corporate veil would be pierced (see 9.2 Shareholder Liability).

Subject to specific exceptions prescribed by Hungarian law relating to the insolvency situation of the Hungarian portfolio company or other abuses of limited liability by its controlling shareholder (when the corporate veil would be pierced), private equity fund majority shareholders are not liable for the obligations of their Hungarian portfolio companies (see 9.1 Shareholder Control). Accordingly, the general liability of the shareholders for the debts of their Hungarian portfolio company is limited to their contribution to the registered share capital (or the amount they agreed to pay for the shares, as appropriate).

As a general rule, portfolio companies can be held liable for creditor claims to the extent of their own assets. However, there are three distinct situations under Hungarian law when the corporate veil of a Hungarian portfolio company can be pierced.

  • Firstly, the controlling shareholder (holding a qualified majority interest) can be held unlimitedly liable for any unsatisfied creditor's claim if such unsatisfied claim derives specifically and directly from the wilful abuse of shareholder limited liability.
  • Secondly, if the Hungarian company terminates without legal succession, creditors with unsatisfied claims may pursue the satisfaction of such claims from the (former) controlling shareholder of the company within a five-year limitation period after the deletion of the company from the Hungarian companies’ registry and up to the amount of the face value of the share the respective shareholder held in the company.
  • Thirdly, if the Hungarian company comes under formal insolvent liquidation proceedings, the controlling shareholder can be held unlimitedly liable for obligations that arise in excess of the respective company assets available to satisfy registered creditor claims, provided it is established by a competent Hungarian court that the creditor’s claim results directly from the continuous and disadvantageous business policy imposed by the controlling shareholder.

Any such matter would need to be resolved by the competent Hungarian court on a case-by-case basis.

As the relevant mandatory laws are tightening and the resulting regulatory frameworks are becoming more stringent globally, it is in the best interest of private equity fund shareholders to ensure that their appropriate compliance policies (intended to detect and prevent violations of applicable laws and ethical standards by officers and employees) are imposed equally on their Hungarian portfolio companies, as required.

The usual holding period for private equity investments in Hungary before they are disposed of is less than five years. The most common forms of private equity exits in 2020 in Hungary were trade sales (ie, sales to strategic investors) and secondary transactions (ie, sales to other financial investors). Other typical forms of private equity exits, such as initial public offerings (IPOs) or dual track transactions (ie, an IPO and a sales process running concurrently), are practically non-existent in Hungary. Such exits are observed at an international level in large-cap transactions and in jurisdictions with a more favourable IPO environment.

Whether a private equity seller will reinvest upon its exit in Hungary will largely depend on whether any suitable next target can be identified and whether the investment terms and other investor commitments can accommodate the particular private equity fund.

Shareholder arrangements over Hungarian portfolio companies would very typically include share transfer obligations, such as drag rights, for minority co-investors or other minority shareholders (eg, management shareholders enjoying equity incentivisation). These drag mechanisms are customarily utilised by the private equity sellers if the transaction circumstances so demand. A sale of at least 50% of the portfolio company (or 50% of the private equity owner’s majority stake in that) would be the typical drag threshold, but the exact percentage will depend on the portfolio company’s exact ownership structure and the parties’ relative bargaining power. The private equity owner obviously needs to consider that the same percentage required to trigger its drag right will probably become the threshold to trigger the minority shareholder’s tag right (see 10.3 Tag Rights).

Management shareholders enjoying equity incentivisation are usually able to negotiate tag rights into their shareholder arrangements over a Hungarian portfolio company of a private equity-backed controlling shareholder, especially if such shareholder arrangements contain drag mechanisms for the benefit of the controlling shareholder. A sale of at least 50% of the portfolio company (or 50% of the private equity owner’s majority stake in that) would be the typical tag threshold, but the exact percentage will depend on the portfolio company’s exact ownership structure and the parties’ relative bargaining power (see 8.5 Minority Protection for Manager Shareholders and 10.2 Drag Rights).

An exit for a private equity seller by way of IPO in Hungary is unrealistic in practice (see 10.1 Types of Exit).

Wolf Theiss

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Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE), offering unrivalled local knowledge and strong international capability. The whole firm is made up of more than 340 lawyers from a diverse range of backgrounds, working in offices in 13 countries throughout the CEE/SEE region. Wolf Theiss has a highly diverse cultural footprint, with more than 25 different nationalities, and capability in more than 30 different languages. 

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