I. INTRODUCTION

During the past decade a reversal has taken place in the concentration of capital in Hungary. The process may be characterized as reversed in comparison with processes in most developed market economies because during the nineties, parallel to establishing democracy, Hungary witnessed capital being divided into small fragments and the Hungarian economy being reformed on the basis of private ownership. As of today, after the above-mentioned initial process, there is a clear need for the concentration of capital in the Hungarian economy which is an essential element of business development and the operation of capital.

In the years to come a significant increase in the number of M&A transactions and a substantial concentration of capital can be expected in the Hungarian economy, in which foreign investors will take on a preferred role due to the complete openness of the economy.

II. BACKGROUND TO BUSINESS HISTORY

At the end of the eighties the Hungarian economy was rather unsegmented due to the communist business policy and ownership structure. The proportion of state ownership was 95%; the agriculture, industry and the service sectors were centralized in the hands of a couple of state monopolies. Banks were also state-owned, there was barely any capital movement and even the limited amount of capital movement which existed was centrally conditioned and directed.

The direct consequence of the above was that the primary goal of the changes in the business system accompanying the political changes which aimed to achieve democracy was the establishment of an economy based on private ownership. By the beginning of the nineties the transformation of the ownership structure and the establishment of business organizations as known in all market economies had begun. Privatization aiming to reduce state ownership also served the above goals. This period can be described as the time for the "manufacturing of owners" in Hungary.

The business effect of the above processes was that there are now more than 10,000 enterprises (business organizations) in a relatively small country with only ten million inhabitants, the partial markets (reszpiacok) also have many players/ participants and there is intense competition among them. The operating capital is strongly divided among the many participants in the market, resulting in a lack of capital and a lack of concentration of capital in the economy ever more often.

We are of the view that the business characteristics described in this article strongly support the need for the concentration of capital in Hungary. These business characteristics of the Hungarian market are similar to those of more developed market economies which unify diverse organizational structures; consequently they must lead to a significant increase in the number of M&A transactions.

III. LEGAL BACKGROUND

A) General Characteristics

Hungarian law is completely open for foreign investors. The above principle naturally also applies to investors who are interested in achieving a concentration of capital in the market but are not primarily interested in the establishment of new companies, rather in M&A transactions.

All the business structures and business organizations known in developed economies are also known and widespread in Hungary. The legal characteristics of such business organizations are fairly similar to those known under German law.

There is a well-developed legal infrastructure which functions well in parallel with the Hungarian law of business organizations . This applies to the entirety of private law, the law of accounting, the law of liquidation, labour law, antitrust and unfair competition law etc.

Foreign investors enjoy the same treatment as Hungarian entrepreneurs in Hungary. International treaties along with Hungarian laws and regulations guarantee the protection of foreign investment and ensure, inter alia, the free repatriation of profits in the currency of the initial investment. The Hungarian government may also grant tax benefits to foreign investors in individual instances. One way of providing tax support to M&A transactions for example is the rule pursuant to which foreign investors do not have to pay taxes on their dividends in Hungary provided they invest the dividends in a new company in Hungary or in the acquisition of an interest in an already existing company.

In Hungarian law the following general legal structures characterizing M&A transactions are well known.

B) Cartel Law

The structure of cartel law in Hungary is similar to the law of the European Union and primarily analogous to German law. -. However, the rules of cartel law at the moment relate only to companies limited by shares but, pursuant to pending amendments to Hungarian company law, the regulation will be extended to apply to other business organizations as well. The cartel rules identify different types of shareholdings/interests in companies, e.g. significant (above 25%), majority (above 50%) and reciprocal (above 25% reciprocally) shareholdings. The institution of direct control (a shareholding exceeding 75%) is also known under Hungarian law.

Cartel rules do not impede organizational concentration, their only role being to set rules which are intended to protect minority shareholders and creditors in accordance with international standards.

C) Acquisition Of Companies

Hungarian law does not hinder company buy-outs. It is possible to transfer ownership of or interests in all types of business organization with the exemption of shares in limited partnerships, which are not transferable under Hungarian law.

Asset deals in which not the actual share/interest in the company is transferred but rather only the assets (e.g. goodwill, business relations etc.) are also known in Hungarian legal practice. This legal structure was used in 1994 during the buy-out of a famous Hungarian salami factory. Pick Rt. bought out Hertz salami factory, an individual production unit, which was not a separate legal entity, of a big Budapest meat industry group.

D) Mergers

The rules of mergers and their antitrust control is contained in the law of antitrusts and unfair competition. The Hungarian Competition Office examines mergers in the following instances and will authorize or prohibit them:

  • Two or more previously independent enterprises merge or one amalgamates into another or
  • one enterprise acquires control over one or more other enterprises or
  • several previously independent enterprises together establish an
  • enterprise to be jointly directed by them and in which they unify their previously similar or supplementary activities.

In each of the above types of merger a licence has to be requested from the Hungarian Competition Office if the joint net revenue of all the enterprises involved exceeds HUF ten billion (approximately USD 60,000,000), provided that the net revenue of the amalgamating enterprise or the enterprise over which control is acquired or the two or more enterprises affected by the merger exceeds HUF 500,000,000 (approximately USD 3,000,000).

In practice the Hungarian Competition Office has so far - in view of the business background analyzed above - had only an insignificant number of merger control cases . This naturally does not apply to the total number of M&A transactions about which we have no specific information but applies only to cases in which a licence was required

Table No. 1

MERGER PETITIONS TO THE HUNGARIAN COMPETITION OFFICE

Period           Number of Merger     Ratio in % of all petitions
                    Petitions              filed with HCO

1991                    5                        6,5
1992                    8                        7,8
1993                    3                        3,0
1994                    3                        2,6
1995                   24                       16,9
1st semester of 1996    7                       10,0

Total                  50                        8,0

The Hungarian Competition Office (HCO) has found only one merger to be a restriction on competition; the licensing was therefore refused. The merger would have endangered the mass provision of food to children in Budapest (Gastro-Chain and Unio Rt. merger matter).

Table No. 2

MERGERS SUBJECT TO/NOT SUBJECT TO LICENSING

Period        Not subject to     Subject to      Licences refused/not  
                licensing        licensing        granted out of all 
                                                  resolutions subject 
                                                     to licensing

1991                1                4                      -
1992                5                3                      -
1993                2                1                      -
1994                -                3                      -
1995               10               14                      1
1st semester
of 1996             -                7                      -

Total              18               32                      1

The Act on Antitrust and Unfair Competition regulates mergers affected by foreign investors as follows: in the case of foreign companies, mergers are subject to licensing only if the foreign enterprise had a net income either from the sale of goods or from the provision of services in the previous business year in Hungary. This also means that the first appearance of a foreign investor on the Hungarian market and his investment (e.g. M&A business) does not fall under the rules of merger control. Accordingly there has been a positive discrimination (affirmative action) shown towards foreign investors, e.g. in the case when CEREOL acquired a majority share in the Hungarian plant oil industry or during the privatization of the Hungarian energy industry. This explains the great number of petitions - not subject to licensing - in the above table, which have been filed although not required by law.

The Hungarian state considers the concentration of capital in the market as outright beneficial in certain cases. This was the view expressed by the Hungarian Competition Office during the concentration of the Hungarian sugar industry. Previously there were 11 different sugar producing companies in the Hungarian market. During their privatization two foreign investors acquired a determinative majority shareholding in several sugar factories, due to which there are now two major players each with a 30% market share of the sugar industry. In this case the Competition Office authorized/licensed the merger of 5 different enterprises (each with about a 5% market share), as in the Competition Office's view such a merger created a more favourable climate for competition.

The Hungarian Competition Office supports the concentration of capital in all cases, in which the enterprise to be established by way of the merger increases the international competitiveness of the Hungarian economy or in which the concentration of capital has a beneficial effect on the number of consumers. This was the principle established by the Competition Office during the licensing of the merger of the Hungarian salami factories.

The acquisition of shares in companies is supported by the Competition Office in all cases, in which the primary goal of the acquisition is the establishment of reorganization and the avoidance of liquidation (or the reduction of the number of market participants).

IV. CONCLUSIONS

Due to the changes in and the evolution of the Hungarian economy there are a great number of companies present on the Hungarian market which consequently results in capital being divided into many smaller segments. A condition precedent to economic growth is the concentration of capital in the market.

Hungarian rules and regulations and Hungarian legal practice are generally prepared to assist processes in which capital is concentrated. Hungarian law does not place unreasonable hurdles in front of such processes.

Based on the above it seems that the future of M&A transactions in Hungary is very bright. Its realization will depend only on the number of capital strong investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information please contact: Dr Lenard Darazs, Beiten Burkhardt & Mittl Wegener Lawyers, Jozsef Nador ter 9, H-1051 Budapest, Tel: (36)(1)2661810, or enter a text search "Beiten Burkhardt Mittl and Wegener" and "Business Monitor".