This article is written by Sayantan Dey, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Introduction 

India has always maintained a robust relation with Hungary. S&T is a key focus area in India-Hungary relations with the current bilateral cooperation being executed through 2 agreements – between Indian National Science Academy (INSA) and the HAS and between Department of S&T and NIH, Ministry for National Economy. There has been significant Indian investment in Hungary in recent years with India being the largest Greenfield investor in Hungary for 2014. Major Indian companies in Hungary include; Apollo Tyres, SMR Automotive, Sun Pharmaceuticals, Orion Electronics Ltd., Sona BLW, Cosmos and major IT service providers TCS, WIPRO, Cognizant and Tech Mahendra. 

It can be inferred that many Indian companies view Hungary as a viable place to conduct business and corporate transactions are an important part of any business. Indian entrepreneurs willing to set up businesses in Hungary or Indian executives working for Indians based companies in Hungary need to be aware of the Merger control regime of Hungary to ensure transactions for respective companies can proceed in a smooth manner without complications. In the light of this, it will be interesting to understand the merger control regime of Hungary, the legislative framework around it and a few prominent cases.

Merger control regime

Merger control is a regulatory process by which competition authorities of a particular nation impose checks and balances by way of competition legislation to ensure that mergers and acquisitions taking place at any given time in any given market do not lead to any form of Appreciable Adverse Effect on Competition (AAEC). This enables the respective regulators to not prevent the formation of monopolies by big corporations trying to acquire smaller but high performing companies to capture higher market share in a given market thus wiping out free competition in the process which leads to degradation of small business and an indelible negative impact on the economy.

Merger: Definition 

The Hungarian competition legislation clearly explains through its provisions contained in Article 23(1) the nature of transactions which would constitute a merger. The following transactions would be categorised as a merger under Hungarian competition law;

1. i)  When two or more independent entities would undergo a merger or a specific part or section of an independent entity would merge with another entity which would have been previously independent. 
2. ii)  When a single undertaking or multiple undertakings jointly would possess some form of control whether in a direct or indirect manner over one or more undertakings which would previously have been independent. 

iii) When independent entities go on to form a jointly controlled venture which would function thereon bearing all the characteristics of a normal fully functioning joint venture. 

Definition of control 

Control in Hungarian competition regulation is defined on the basis of rights, contracts or other means which either separately or in a combination enable a company to exercise decisive influence over an undertaking by way of;

• Holding over 50% of the shares, stocks or voting rights in the controlled company;
• Having the power to designate, appoint or dismiss the majority of the executive officers of the other company;
• Having the power, by contract, to assert major influence over the decisions of the other company; and
• Acquiring the ability to assert major influence over the decisions of the other company (de facto control).

Control can also be of two categories, such as;

Positive and negative sole control 

• Positive sole control arises under Hungarian competition law when a single shareholder has the ability to influence decisive decisions in a given target company usually by acquiring 50% or more of voting rights in the target company.

• Negative sole control arises under Hungarian competition law when a single shareholder has the ability to block essential management decisions of a target company. Generally, a single shareholder would not be capable of withholding such decisions without the joint consent from other shareholders of the company but would be able to block all other decisions. 

Positive and negative joint control 

• Positive joint control arises when 2 or more entities jointly controlling a target company would have the ability to influence decisive company decisions.

• Negative joint control arises when 2 or more entities jointly controlling a target company would be able to block important management decisions which they could accomplish by coming to an agreement with each other.

Joint ventures

Any joint venture which has the capacity to perform all business activities emulating that of any independent business perennially then it would fall under the purview of merger control. 

Joint ventures which are structured to enable coordination of the joint venture partners however are not assessed in line with cartel provisions.

Merger control in Hungary

Regulatory framework

The primary regulator for Merger control in Hungary is the; Hungarian Competition Authority (Gazdasági Versenyhivatal or GVH), the GVH consists of a decision making body by the name of the Competition Council. A key feature of the GVH is that it is an independent state administrative body that is not answerable to the government but only to the Hungarian parliament. The decisions dispensed by the GVH may be challenged before the Budapest Capital Administrative and Labour Court. 

The merger legislation in force is derived from the Hungarian Competition Act 1996 on the prohibition of unfair and restrictive market practices. With a specific focus on Part I Chapter 6 of the aforementioned act which lays out substantive and procedural rules for merger proceedings. The GVH is bound by the Public Administration Act 2004, the general procedures all apply to the GVH if the Competition Act does not bear a particular solution to a specific situation. Essential guidelines are termed “position statements” and notices such as notice to “differentiating between concentrations subject to authorisation in simplified or full procedure”. 

Filing for merger 

Filing for every merger is a mandatory process that all companies must abide by if they breach specific thresholds laid down in the Hungarian competition legislation.

Article 24(1) of the Hungarian competition Act constitutes provisions that point out the necessity of filing for mergers that hit specified thresholds.

Article 24(4) of the Hungarian competition act on the other hand constitutes provisions that can be said to be mostly voluntary in nature.  Filing under Article 24(4) although seems to have an obligatory aspect to it under the Hungarian competition act, the provisions it entails would suggest otherwise. The Hungarian competition authority does not bear the power to impose penal provisions on failure to notify under the provisions of Article 24(4) as well as being incapable of starting a trial on any entities that have consummated a merger under the aforementioned article and 6 months have lapsed ever since the merger was conducted. 

Due to the lack of any defined repercussions on failure to fine with respect to Article 24(4) of the Hungarian competition act it is considered widely as a voluntary provision. 

Thresholds 

Hungarian competition law describes 2 distinct forms of thresholds with one being based purely on turnover of companies while the other would have mixed aspects to it. 

Article 24(1) of the Hungarian competition specifies as to when any form of merger needs to be notified if certain particular circumstances are met –

1. The collective turnover of all businesses related to the merger exceeded the amount of HUF 15 billion in the previous business year. 
2. A minimum of 2 entities in Hungary at least having collected HUF 1 billion each in turnover in the previous business year. 

If these specific sets of thresholds cannot be applied to a certain merger, then that merger will still have to comply with the second set of thresholds under Article 24 (4) under Hungarian competition law. 

The thresholds under Article 24(4) have both a mixed turnover and market aspect attached to them. The circumstances mentioned under these thresholds are stated as – 

1. The collective turnover of all businesses related to a merger exceeded HUF 5 billion in the previous business year. 
2. It cannot be ascertained clearly that a particular merger will not lead to loss of competition in some for a given market due to reinforcement of a dominant position by a company.

As mentioned, one of the thresholds set by the Hungarian competition authorities is not based on a specific quantifiable limit but rather on a self-assessment exercise to ascertain the fact that it can be clearly proven that the merger does not lead to any form of loss in the competition. The GVH clearly lays down situations under which it can be proved beyond any doubt that a merger does not lead to any loss in the competition. Situations may be stated as;

1) The merger would not lead to any horizontal, vertical or portfolio (conglomerate) effects;   

2) For a horizontal merger, the parties’ joint market share should remain less than 20%;

3) For a horizontal merger, the market share increment remains to be insignificant (a few percentages); in a vertical or portfolio merger, the market share of any of the parties in any of the related markets remains below 30%.

GVH also entertains confidential discussions with parties to a merger and advises them after analysing the transaction whether its need to be notified or not, such advice is not however legally binding. 

Exemptions

Temporary change of control 

The GVH only considers mergers to be notifiable if they would lead to a permanent or lasting change of control from one company to the other.

A transaction whereby a company is acquired by any entity only for it to be split and sold to another entity subsequently in such a situation only the latter part of the transaction is considered to be a notifiable one. The GVH does not consider an interim change of control transactions to be notifiable if there is sufficient proof that such a transaction is part of a larger transaction scheme that is legally binding. 

Specific transactions

The Hungarian competition act provides certain exceptions to transactions falling under specific situations which may include;

• The purpose of the acquisition is to prepare for a subsequent sale.
• The entity assuming control does not take full control of the acquiring company or does so to the minimum level stipulated by the law for a sale. 
• Duration of control does not exceed a year.

Regulatory proceedings

Pursuant to the applicable rules, the parties to the proceeding may access the files at any time during the proceeding. Third parties may also access the non-confidential version of the file after the end of the proceeding. Moreover, third parties may also have access to the file prior to the end of the proceeding if they can prove a legal interest (such as the enforcement of their rights or compliance with an obligation). In order to protect commercially sensitive information, the parties to the proceeding must specifically request, with detailed reasoning, for each piece of data or information to be treated as confidential, i.e. that third parties access to the provided documents or to the making of copies thereof be limited.

The competition council ends the phase 1 and phase 2 process with a decision either clearing the transaction or prohibiting the transaction. The GVH’s decision may be challenged by the parties within 30 days from receipt of the decision. It is also possible that the applicant withdraws the filing or that the GVH establishes that no authorisation was required. In this case, the proceeding ends with a decision of the GVH on the termination of the proceeding.

Notification procedure

Phase	Duration/deadline
Pre-notification phase The function of the pre-notification phase is to define the data which is critical for the purposes of the notification, as well as to discuss issues of market definition and competitive assessment. Prenotification discussions can be proceeded by the same parties who can submit the merger filing. Even if the discussions are oral, the parties must provide a draft of the notification or a written memorandum, or a detailed presentation.	There is no strict set duration or deadline in terms of pre-notification procedures.
Following successful pre-notification proceedings, the GVH may expedite proceedings, provided that it is obvious that the merger will not substantially lessen competition on any market.  Expedited proceedings are concluded with the issuing of a Certificate that testifies that the parties are entitled to implement the merger.  The Certificate is a one-page document, and it is not a fully reasoned decision but it has the same legal effect as a fully reasoned clearance decision. If the certificate cannot be issued within 8 days following the submission of the complete notification, the GVH proceeds to open Phase I proceedings.	8 days following submission of a complete notification.
Phase I proceedings If the GVH, on the basis of the original notification, cannot decide on the question of whether or not the notified transaction could benefit from the expedited proceedings (i.e. whether or not it is obvious that the merger will not substantially lessen competition on any markets),  Phase I proceedings shall be initiated. In practice, Phase I proceedings are for the assessment of those mergers, where the post-merger market shares of the parties and/or the effects of the merger would not be significant according to the statements and calculations presented by the parties, but the GVH find it (for any reason) necessary to request the opinion of third parties relating to the size of the relevant markets or turn to its fellow-authorities (eg. the Hungarian Central Statistical Office) who might dispose of official/relevant databases.	30 days upon initiating Phase I proceedings which deadline can be extended once by 20 days. It is also important to highlight that every single request for information (issued by the GVH either to the parties or any third parties) stops the clock, thus, Phase I proceedings usually take about 2 months in reality.
Phase II  If the GVH, based on the original notification or as a result of its Phase I proceedings, finds that it is not obvious that the merger will not substantially lessen competition on any markets, Phase II proceedings shall be initiated. In practice, Phase II proceedings are for in-depth competition analysis of the effects of the merger, which necessitates market tests, economic analyses and a detailed review of the relevant markets concerned by the transaction.	4 months upon initiating Phase I proceedings which deadline can be extended once by 2 months. As every single request for information by the GVH stops the clock, thus, Phase II proceedings usually take between 4-8 months in reality.

What is gun jumping?

The Hungarian competition authority had in 2015 imposed a fine of HUF 1 million (approx EUR 3,200) on CEE Holding Group Limited and Olympic International Holdings Limited, for implementing a concentration prior to authorisation by the HCA. Moving forward with this transaction without clearance from the Hungarian competition authority meant that the applicants in question had breached the standstill obligation contained in the Hungarian competition act. 

The HCA was notified 64 days in a voluntary fashion after shares were transferred already between the applicants. 

Prohibition to proceed with a transaction without notifying the HCA was only introduced recently in 2014 by bringing the Hungarian competition law in line with before which Hungary was one of the few countries where there were no penalties levied on parties who proceeded and completed a transaction without prior approval of the HCA who only analysed a transaction after it was completed. A 10% fine is generally levied if such infringement is found with regards to the annual turnover of a previous business year although if transactions are voluntarily notified after being completed then a nominal penalty is levied on the parties.

Budapest Bank Case

The Budapest Bank Case was a great example of the functioning of competition law in Hungary. In 1996 it was found that several banks had adopted a unified MIF (Multilateral Interchange Fee) which is an amount charged by the cardholder’s bank to the merchant for every transaction which is completed. A unified MIF was announced for both VISA and Mastercard credit card systems. The HCA found such an agreement to be diminishing competition through object and effect and also stated that there was an infringement of art 101 of the TFEU (Treaty on the Functioning of the European Union). On 2nd April 2020, the Court of Justice of the European Union (CJEU) delivered an important judgement concerning the stated matter and provided clarity to the concept of restriction of competition by object.

The CJEU firstly stated that any court or competition authority had the necessary powers to classify any agreement to be anti-competitive by way of restriction by object but that would not mean that the court or competition authority in question would not have to support the proper documents or evidence required to prove their actions. The court or competition authority would also need to support to what extent would each piece of evidence lead to restriction of competition. Secondly, the CJEU states that an agreement could not be considered to be causing any adverse effect on competition by object restriction unless there is sufficient experience of occurrence of such an event. 

The CJEU also refers to the judgement of Groupement Des Cartes Bancaires to specify that the concept of diminishing competition by object restriction ought to be viewed restrictively and will only be considered as such if there is proof of sufficient harm being caused to competition. The CJEU finally states that it does not believe that the MIF agreement contained any anti-competitive elements and that the agreement was constructed to provide parity to the issues and acquisition activities. The CJEU concludes the judgement by stating that the evidence submitted by the HCA is not sufficient enough to prove that there is sufficient experience of the agreement to have caused any harm to competition in the main proceedings. 

Instances of prohibited transactions 

(I) On 20 February 2017, the Hungarian Competition Authority (“GVH”) prohibited the merger between Magyar RTL Televízió Zrt., a Bertelsmann Group company, and Central Digitális Média Kft, an online content provider and advertising business.

The transaction was originally notified on 15 October 2016. The prohibition by the GVH follows the 24 January 2017 refusal by the Hungarian Media Council on media plurality grounds to give its special administrative approval to the deal. Under Hungarian media law (Act CLXXXV of 2010 on Media Services and Mass Communication), the GVH is required to seek administrative approval from the Hungarian Media Council in certain media mergers.  Moreover, the GVH is bound by the resolution of the Media Council refusing a special administrative approval.

(II) On 2 May 2017 the Hungarian Competition Authority (HCA) revoked its foreign-to-foreign merger clearance decision granted in January 2017 to Infineon Technologies AG for the acquisition of Wolfspeed (i.e. the Power and RF division of Cree, Inc.) due to misleading information provided in the application. The HCO also imposed a fine of HUF 75.8 million (EUR 242,000/USD 263,000) on Infineon.

Following the HCA’s clearance of the Infineon/Cree merger on 10 January 2017, the Federal Trade Commission (FTC) sent the HCA various documents relating to the notification of the same transaction in the US. On reviewing those documents, the HCA noticed that Infineon provided different worldwide turnover data and different market share data to the FTC and to the HCA and did not disclose the vertical relationship between the relevant products to the HCA. The HCA says that if the data provided to the FTC had also been provided to HCA the review process of the HCA would have had to go into more detail, and a Phase II procedure should have been launched.

The HCA opened a new investigation to investigate the inconsistencies, during which Infineon argued that the information provided to the HCA was not misleading and that the same information was provided to the German and Austrian authorities. The HCA did not accept those arguments and revoked its earlier clearance.

Conclusion

Hungary is one of the most well-planned countries in the European Union and has shown tremendous economic growth and stability among eastern European countries since it has joined the EU. The nation is the biggest export market for Hong Kong in eastern Europe and has also seen a steady rise of its GDP in the 21st century with a 4% rise in the latter part of the 1990s. Hungary’s accession to the EU has only served to further advance its already liberal business environment which is more liberal when it comes to business activities than any western country. 

The advanced financial and legal environment of Hungary means it is at the forefront of finance, trade and business in central and eastern Europe. Hungary has also seen considerably large to medium-sized M&A deals occur in 2020 like the acquisition of Aegon in Hungary by Vienna Insurance Group which amounted to 550 million Euros. Considering the ease of doing business and looking at recent transactions that have taken place within Hungary it can be understood that the Hungarian regulatory environment has not been structured to not impose any undue limitations on companies so that they can thrive actively which is also observed in the competition regime of Hungary which although bearing penal provisions and a multifarious process of notification does not seem to be limiting in a large way to companies especially in post notification scenarios. It is crucial for the Hungarian competition regime to evolve in the coming years with the rising business and financial transactions of the country so as to ensure economic growth and advancement while preserving a free and competitive market for all consumers and entrepreneurs. 

References

• https://www.schoenherr.rs/uploads/tx_news/LI_HU_First_gun_jumping_decision_of_the_Hungarian_Competition_Authority.pdf
• https://info.hktdc.com/emergingmarketguide/2-2.htm#:~:text=Notably%2C%20its%20better%20business%20infrastructure,steadily%20in%20the%20last%20decade

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