Nowadays important business opportunities often require immediate decisions. Such opportunities may arise at companies to be acquired, during, for example, the few months between the signing of an acquisition agreement concerning the company and the closing of the transaction envisaged by said agreement.
Acquirers are, for a few months, still in a comfortable position in Hungary when they intend to ensure that target companies operate properly and do not miss opportunities during the interim period between the signing of the acquisition agreement and the closing of the transaction. For example, they can replace the target's management with their own people, can get involved in strategic decision-making, and can even integrate the target into their own group. There is no suspension obligation or mandatory waiting period under Hungarian merger-control law, so the parties are allowed to implement the transaction prior to the receipt of approval from the Hungarian competition authority (the “Gazdasagi Versenyhivatal”, or "GVH"). Obviously, acquirers run the risk that the GVH will eventually decide to prohibit the transaction, but in most cases where the concentration does not raise significant competition-law concerns, the risks are minimal in practice.
However, a recent amendment introduced a suspension obligation into Act LVII of 1996 on the Prohibition of Unfair Market Practices and the Restriction on Competition (the "Competition Act"), setting out Hungarian merger-control law, to take effect July 1, 2014. Transactions concluded after this date must not be implemented in the absence of (i.e., prior to the receipt of) the GVH's approval. In this context, for example, acquirers must not exercise any voting rights attached to the ownership interests to be acquired, and they must not exercise their right to appoint or elect the target's executive officers. Further, the target's business decisions must be adopted and the business relations between the parties must be operated on the basis of the pre-transaction situation – i.e., the acquirer and the target must remain independent. This prohibition remains in force until the completion of any condition possibly attached to the GVH's approval. The GVH may impose a fine for early implementation (for 'jumping the gun' as it is called in EC practice) by the acquirer.
There are certain exceptions to this general prohibition:
- public bids, or
- the conclusion of the transaction agreement, or
- other agreements and statements on the basis of the above, provided that the actions do not result in the exercise of the acquirer's controlling rights, or
- transactions classified as strategically significant by the Government.
Further, consent can be sought from the GVH for the pre-clearance exercise of controlling rights, e.g., to preserve the value of the investment, and the GVH may set conditions to, or may impose conditions for, its consent.
To be fair, this change merely brings Hungarian merger-control law in line with EC Merger Regulations and most EU member states' merger-control laws, which all contain a suspension obligation. However, companies should keep this change in mind when planning and structuring their deals. There are many practical solutions by which unintended violations can be avoided and the target's proper operation during the interim period can be ensured. For example, an observer can be appointed, the transaction agreement may prescribe how the target should operate during the interim period, or a consent can be requested from the GVH for the pre-clearance exercise of controlling rights. The GVH will presumably only rarely grant its consent, and only for certain actions, and the conditions of such consent are yet to be developed in practice.
Therefore, parties may prepare for such suspension obligations and for the interim period between signing and closing if the transaction lawyers adopt international practice.
However, target companies' business partners face significant legal risk, often without even being aware of it, during the interim period. The Competition Act's Section 29/A (4) expressly provides that deals and statements violating the suspension obligation and/or the terms of the GVH's consent are null and void if the GVH prohibits the concentration. This means that the target company's business agreements concluded during the interim period on the basis of the acquirer's illegal control over its business decisions are null and void, even if they are lawful in all other aspects. Although the acquirer can not refer to the nullity, the target company, for example, may do so vis-á-vis its business partners. Such business partners can then only sue the acquirer for damages.
In summary, the introduction of the suspension obligation into Hungarian merger-control law will not materially alter day-to-day M&A practice, but parties should prepare for the interim period by including provisions on the supervision of the target's business into the transaction agreement. The amendment also increases the legal risks for target companies' business partners. Such legal risk can be mitigated by inquiring about any possible concentrations involving business partners and by seeking expert legal advice in order to assess the legal risks resulting from the merger-control process.
By Peter Voros, Partner, Kajtar Takacs Hegymegi-Barakonyi Baker & McKenzie
This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
