Corporate / M&A

The New Hungarian Civil Code to Change Financial Assistance Rules

From 15 March 2014, public companies limited by shares may provide financial assistance to third parties if certain conditions are met. But no restriction on assistance will apply to private companies limited by shares.

From 15 March 2014, Hungarian law will permit that public companies limited by shares provide financial assistance for acquisition of their shares if certain conditions are met. At the same time, restrictions will no longer apply to financial assistance provided by private companies limited by shares.

Current law on financial assistance

The current law categorically prohibits any type of companies limited by shares from granting loans, providing securities, or making payments before the due date with a view to the acquisition of their shares by third parties. The prohibition equally applies to public companies limited by shares (nyilvánosan működő részvénytársaság; Nyrt) and private companies limited by shares (zártkörűen működő részvénytársaság; Zrt).

There are only two exemptions from the prohibition: (i) transactions concluded by banks and other credit institutions in their ordinary course of business and (ii) transactions facilitating the acquisition of shares by the company’s employees, which also includes employees of a subsidiary under the majority influence of the company or an organisation founded by the employees for this purpose.

What does the prohibition mean in practice?

Financial assistances rules must be taken into account in a number of cases when structuring an M&A transaction. The relevant provisions typically become a point to consider if the share acquisition is financed from a bank loan. Lending banks usually insist on receiving security for the loan, and investors happily use the target company’s assets for such purposes, especially if they do not have real estate or similar valuable assets acceptable for the bank as collateral.

Under the current law, all companies limited by shares are categorically prohibited from such security granting. The above structure is permitted only if the target company operates in another company form, such as a limited liability company (korlátolt felelősségű társaság; Kft).

Provisions of the new civil code

The new law, effective as of 15 March 2014, will not restrict the provision of financial assistance by private companies limited by shares (Zrt). Moreover, the new civil code permits financial assistance by public companies limited by shares (Nyrt) if the following conditions are met:

  • the financial assistance is provided at fair market conditions;
  • the financial assistance is provided from funds that could be distributed to the companies’ shareholders as a dividend; and
  • the company’s shareholders’ meeting, based on the proposal of the board of directors, has given its consent to the contemplated measure by a decision passed with at least a two-thirds majority.

What constitutes a financial assistance under the new law?

The new legal provisions on financial assistance allow more flexibility for business participants when structuring an M&A transaction. At the same time, the new provisions are rather generally worded, leaving significant room for interpretation.

The new civil code deals with “financial assistance” without giving a definition or examples of transactions considered financial assistance under the above rule. So court practice may broaden or eventually narrow the scope of application of the financial assistance rules as compared to the current scope covering the provision of loans, granting of securities, and payments before due date.

This lack of clarity may make it more difficult for market participants to assess whether a certain action constitutes financial assistance. And the uncertainty may force companies to ask for expert advice.

This lack of clarity may make it more difficult for market participants to assess whether a certain action constitutes financial assistance.