The entire concept of golden shares can be explained in one sentence: golden shares make the adoption of certain corporate measures as well as decisions on amending certain provisions of the articles of association of a company dependent on the “yes” vote of the holder(s) of the golden shares.
Part 1
As a result, golden shares give the holder(s) a de facto right of veto over certain corporate decisions.
When analysing the role of golden shares, it is important to understand their historical roots. In Hungary, golden shares became relevant during privatisation (when state-owned assets were sold to private investors as part of the economic regime change); therefore we will analyse the concept of golden shares from that perspective.
Within the framework of privatisation in Hungary, the applicable law (Act XXXIX of 1995 on the Sale of State-Owned Entrepreneurial Assets; the “Privatisation Act 1995”) imposed certain obligations on companies which were especially significant for the operational capacity of the national economy. Accordingly, the Privatisation Act 1995 specified the introduction of golden shares in several companies of a strategic nature which had also been approved by the Hungarian parliament.
The rationale for this was that the Hungarian state intended to keep some control over certain privatised companies; in other words, private investors acquired a majority stake, but the Hungarian state still had influence on the decision-making process, as it held a golden share that granted a right of veto. This was especially important to protect privatised companies of a strategic nature (with regard to the safety of public supplies) from hostile takeovers, since golden shares made the target less attractive. This was further reinforced by the fact that after the amendment of the Privatisation Act 1995 in 1998 it was no longer possible to eliminate golden shares from the articles of associations of certain strategically important companies. In addition, the Privatisation Act 1995 stipulated that only the Hungarian state or its affiliated entities were allowed to hold golden shares.
Part 2
On 1 May 2004, Hungary joined the European Union. As a result of the accession (and the entry into force of the EC law in Hungary), the “European Commission has decided to ask Hungary formally to modify its privatisation framework law (Act XXXIX of 1995 on the Sale of State-Owned Entrepreneurial Assets), which it considers to be incompatible with EC law. The Commission considers that the law contains unjustified restrictions on the free movement of capital and right of establishment by conferring special rights for the state in 31 privatised companies in the form of voting priority (“golden”) shares. The Commission's request is in the form of a reasoned opinion, the second stage of the infringement procedures laid down in Article 226 of the EC Treaty. In the absence of a satisfactory reply from Hungary within two months of receiving the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.” In the absence of a timely reply, the European Commission decided to initiate an infringement procedure against Hungary.
As a response to the infringement procedure, the Hungarian government adopted Act XXVI of 2007 on the Abolition of Golden Shares (the “Golden Share Act”), which came into force on 21 April 2007. The Golden Share Act states that golden shares will cease to exist and will be deemed ordinary shares following the expiry of the 90-day period after the Golden Share Act comes into force, unless during this period the relevant companies have convened a general meeting and have essentially transformed the golden shares into regular voting preference shares issued under the then effective Hungarian Companies Act (i.e. Act IV of 2006 on the Companies Act). The aim of the Golden Share Act was to comply with the provisions of EC law and eliminate the proposed state measure.
Final part
Considering the above arguments and the related historical background, one question remains: whether the continued existence of the golden share can be justified at all.
Every piece of national legislation should be examined on a case-by-case basis. Nevertheless, I am of the firm opinion that the existence of golden shares can be justified under EU law if the following conditions are met:
(i) the golden share is aimed at protecting a specific public interest;
(ii) the golden share only affects certain specified decisions of the management (i.e. it is proportionate); and
(iii) the role of the golden share cannot be reduced to merely protecting the company from hostile takeovers.
This viewpoint was confirmed by the ECJ in Commission v Belgium [C-503/99 Commission v Belgium [2002]] where the ECJ held that “the free movement of capital, as a fundamental principle of the Treaty, may be restricted only by national rules which are justified by reasons referred to in Article 73d(1) of the Treaty or by overriding requirements of the general interest and which are applicable to all persons and undertakings pursuing an activity in the territory of the host Member State. Furthermore, in order to be so justified, the national legislation must be suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain it, so as to accord with the principle of proportionality”.
By Akos Mates-Lanyi, Counsel, Noerr
