The Technology M&A Review: Hungary
As in other Central and Eastern European (CEE) countries, Hungary's technology M&A transactional landscape is fundamentally determined by the activity of two market segments with significantly different characteristics: venture capital (VC) and private equity (PE)-backed technology investments, and large-scale acquisitions by strategic players, mostly from the telecommunications sector.
In 2019, VC and PE-backed deals not only produced the second-highest annual result in terms of total value in the past 15 years, amounting up to almost €3 billion, but also reached an all-time high in terms of the number of deals by funding more than 450 companies in the region.2 Even with such increased deal activity, the technology sector was considered the prime target of the investors, as information and communication technology companies represented more than 40 per cent of the companies that received VC and PE funding in 2019.3
The Hungarian technology M&A market has reflected the above tendency in respect of the number of deals: almost 200 Hungarian companies were the targets of VC and PE investment in 2019. However, it has also witnessed a dramatic drop of 61 per cent in the total annual value of transactions as compared to 2018. This arguably suggests a shift in focus towards seed and startup stage deals.4 Despite the decline of total transactional value in 2019, investors' appetite for Hungarian technology companies clearly remained steady, as approximately 37 per cent of all VC and PE funding was allotted to the sector.
Highlights include technology companies targeting large, scalable markets such as secure cloud solutions provider Tresorit, which successfully completed Series B funding of €11.5 million; mobile app development platform provider Bitrise, which also successfully secured Series B funding in an amount of US$20 million; and recruitment process innovator Talentuno, which received €4 million in Series A funding. On the other hand, investors seeking Hungarian technology startups focusing on niche markets found valuable targets as well, such as computer-aided design modelling software developer Shapr3D, and IT developer training company Codecool.
Being the other pillar of the Hungarian technology M&A market, strategic acquisition by large market players has also generated unprecedented investment value in recent years. Most of the transactions have, however, been dwarfed by one deal where Czech investment holding PPF acquired Telenor's entire CEE operation, including Hungary for €2.8 billion in 2018. One year later, the Hungarian state-owned telecommunications company, Antenna Hungária, acquired a 25 per cent minority stake in PPF's newly purchased CEE portfolio, thereby creating a major new player in the CEE telecommunications market.
As we explain in Section IV.iv, the most important regulatory development in the Hungarian market was clearly the enactment of the new Foreign Direct Investment (FDI) Act.5 The FDI Act takes a catch-all approach that requires the parties of any transaction to, at the least, consider whether a deal is to be notified to the competent authority.
Finally, the covid-19 global pandemic undoubtedly has had a negative impact on the Hungarian M&A market: for instance, the total number of VC and PE-backed transactions in Q1 2020 fell by 44 per cent compared to Q1 2019, and by 28 per cent compared to Q1 2018. However, the amplitude of the pandemic is still not clear, and certain factors might mitigate its detrimental effect, as we explain in Section XI.
Year in review
When it comes to technology M&A in Hungary, three deals certainly drew the attention of both investors and entrepreneurs recently.
First, AImotive, the automated driving technology pioneer with branch offices in the US, Europe and Japan, secured another investment round of US$20 million led by Lead Ventures, a Budapest-based growth capital investor, in June 2020. As a result, AImotive has become the largest VC-backed automated driving technology company in Europe, with total funding of US$75 million. The company's investor roster includes both traditional VC funds, such as B Capital Group, Prime Ventures and Draper Associates, and corporate venture funds, such as Robert Bosch Venture Capital and Samsung Catalyst Fund.
Second, in Q2 2020, network systems installation and maintenance services provider Gloster successfully raised capital through an initial public offering (IPO) on BET Xtend.6 Gloster became the second technology small or medium-sized enterprise (SME) on the platform after cyBERG corp, a revolutionary food tech company that went public in 2019. This arguably suggests that mature technology SMEs are now willing to consider public equity financing for expansion purposes in addition to the traditional ways of minority or majority acquisitions by financial or strategic investors.
Finally, MCI Group, a leading Polish private equity firm, partially sold its majority stake in Netrisk, the market leader online insurance brokerage company in Hungary to US growth capital private equity firm TA Associates for €55 million. Considering Netrisk's historical expansion strategy, which includes the acquisition of its main competitor, biztositas.hu, this transaction is likely to spur further deals in the online brokerage market of CEE.
Legal and regulatory framework
Hungary's principal source of legislation governing M&A transactions is the Civil Code,7 especially Book Three of the Civil Code (Legal Persons), which sets out the general rules applicable to all types of legal persons, including high-level rules on the transformation, merger and demerger of legal persons.
The provisions constituting the legal framework for transactions implemented by way of transformations, mergers and demergers are set out in the Transformations Act.8 This contains the procedures to be followed in the case of a company transformation, and the documentation, transparency and financial requirements of mergers, demergers and spin-offs. In the case of a company participating in a merger that is not domiciled in Hungary, but in another Member State of the European Union, in addition to the provisions of the Civil Code and the Transformation Act, the rules laid down in the Cross-Border Mergers Act9 will also be applicable.
The Companies Registration Act10 sets forth the procedural aspects of registering corporate changes in relation to M&A deals in Hungary. The Companies Registration Act sets out the specific documents to be prepared and submitted to the competent registry court to register an acquisition or a merger, as well as the applicable procedural requirements.
Special rules are applicable to companies operating in the media and financial sectors. The acquisition and transformation of such companies may also require the prior approval of the competent regulatory bodies, setting additional preconditions and requirements for carrying out a successful merger. The competent authorities for these sectors include the National Media and Info-communications Authority (NMIA) and the Hungarian National Bank (HNB).
M&A transactions reaching a certain market threshold should be reported to, or approved by, the Hungarian Competition Authority (HCA), regardless of the industry or sector concerned.
Key transactional issues
i Company structures
The vast majority of technology M&A deals are private deals with the involvement of one or more VC or PE firms in most cases. The most common company forms involved in private M&A transactions are the limited liability company (LLC) and the private company limited by shares (PCL). The two company forms are very similar in terms of internal organisational structure and operation. The most significant difference is that the registered capital of an LLC is divided into quotas, while the registered capital of a PCL is divided into shares.
Despite the constantly growing interest in PCLs, most investors still prefer LLCs. The main reasons for this include the fact that it is easier and faster to set up an LLC than a PCL, and also the fact that the Civil Code gives greater flexibility to members as to how they want to organise the corporate structure of their company. However, foreign investors need to be careful when utilising this corporate form as they might find that certain features of LLCs may require creative structuring during a transaction.
For instance, as a general rule, one quotaholder may hold only one quota, which can represent various quotaholder's rights and can also be created, for instance, as a non-voting quota, or a quota to which various preference rights can be attached. However, a quotaholder may only hold more than one quota if those quotas are representing different preferential rights. Furthermore, no derivative equity instrument, such as a stock warrant, can be issued in connection with an LLC. As seen in practice, quotas have their share of limitations in terms of flexibility compared to shares, but they are still capable of meeting investors' needs in terms of preferential rights associated with investors' equity interest, since such issues can well be addressed in shareholder agreements and articles of association, but consultation is certainly recommended when it comes to the creative structuring of share classes and shareholder rights.
ii Deal structures
Unless they have been set up shortly before an investment, VC and PE-backed technology deals almost always include the establishment of a new holding company to which all the crucial tangible and intangible assets will usually be transferred at the conclusion of a deal. Such transactions are mostly implemented by way of capital increase, which often includes the issuance of shareholding units carrying certain preference rights, such as a voting preference, veto rights in key issues or a dividend preference. The main document for such transactions is the investment and shareholders' agreement. which can be conveniently updated in any upcoming investment round.
However, one may find it difficult to provide a comparable general description of the features of strategic majority acquisitions, as parties to such deals usually customise the terms of such transactions to the highest extent possible.
In line with Section I, public technology deals are quite rare in Hungary as the market is predominantly determined by VC and PE investors and large telecommunication companies, mostly operated in private corporate forms. Nevertheless, this might change in the near future, as going public is becoming simpler even for medium-sized technology companies due to the Budapest Stock Exchange's new trading venue, BET Xtend.
Finally, regardless of whether a deal is private or a public, transactional advisers are typically involved in the preponderance of technology M&A deals in Hungary. While global investment banking power houses are mostly substituted with local boutique corporate finance advisers or transactional advisory teams of big four firms, most US and UK law firms have branch offices in Hungary.
iii Acquisition agreement terms
In general, technology M&A deals in the Hungarian market share some characteristics that differentiate them from transactions in other industries.
First and foremost, and especially in early stage technology investments, the application of vesting schedules is common, as one of investors' primary goals is to keep key employees together. This is crucial, as the value of a technology company's assets, typically software or other intangible assets, is considerably lower if it is not backed by a team of knowledgeable employees. Moreover, key employees' employment contracts frequently contain rigorous non-compete and non-solicitation provisions, while their relationship to any product of the technology company protected by IP laws is regulated in a highly sophisticated manner. Another highly distinctive element of such transactions in this regard is that the key representations and warranties also heavily focus on IP protection. In line with the above, asset deals are rather uncommon in early stage or VC and PE-backed Hungarian technology M&A transactions.
In contrast, in large-scale strategic telecommunication transactions, acquirers seem to be focusing primarily on the assets and operations of a target; therefore, even the highest level of management is replaceable. In such transactions, it is recommended for investors to consider whether governmental approvals or permits, such as the approval of the NMIA or that of the HCA, are required so that a share purchase agreement may be supplemented by additional conditions precedent.
In technology M&A deals, parties almost exclusively use cash consideration, while share swaps or other non-cash considerations are rare. In addition, in most transactions following international trends, parties prefer to apply a locked-box completion mechanism rather than the post-closing price adjustment method. Recently, most probably due to the risks of the global pandemic, permitted leakage provisions are becoming more stringent. Accordingly, business as usual covenants have started covering a broader range of business decisions, and more sophisticated acts of god and force majeure provisions have been in implemented.
Finally, if a deal involves third-party funding, for instance through the financing programmes of the HNB,11 various further terms are to be considered by the parties when negotiating the transaction.
The way the acquisition of a technology company is financed usually depends on the business lifecycle of both the buyer and the target company, as well as the type of the acquiring entity. As already mentioned in Section I, VC and PE-backed technology investments and large-scale acquisitions by strategic players are the two typical types of deals in the Hungarian technology sector. Transactions involving seed or startup technology companies are mostly carried out and financed by VC funds from their own equity; however, a broader scope of financing options (also including bank debt) may be available to financial or strategic buyers investing in or acquiring later-stage technology companies.
In the past decade, a significant part of domestic VC transactions has been financed by utilising funds provided under the Joint European Resources for Micro to Medium Enterprises (JEREMIE) initiative of the European Commission and from state funds provided by Hungary. The latter is becoming increasingly important given that the fundraising period for JEREMIE funds is now closed. These transactions are carried out by JEREMIE funds (overall, 28 were established during the period), or state-backed VC funds (e.g., by VC funds managed by Hiventures Zrt, a state-owned alternative investment fund manager).
The financing programmes of the HNB, the funding for growth scheme (FGS) and the bond funding for growth scheme (BGS) can also be considered as financing options. The FGS enables SMEs to obtain term loans from a credit institution for, inter alia, the acquisition of a company, and such term loans are refinanced by the HNB at a preferential interest rate. While the FGS seeks to support SMEs, the BGS aims to help large companies by building new types of financing channels outside of bank lending. Within the framework of the BGS, non-financial companies with a credit rating of at least B+ may issue bonds if their registered seat is in Hungary. If the conditions of the BGS are satisfied by the issuer company, up to 50 per cent of the issued bonds are purchased by the HNB on the primary market (which may go up to 70 per cent on the secondary market), and only the remaining part has to be purchased by institutional investors. If a buyer wishes to fund an intended transaction through the FGS or BGS, or through both, a thorough analysis of the underlying terms is necessary to arrange the transaction in a way that satisfies its conditions.
In addition to the EU and state-backed equity schemes, larger technology companies may have access and seek funding for transactions from an IPO on either the stock exchange or the multilateral trading facility, both operated by the Budapest Stock Exchange Ltd (BSE) in Hungary. Technology companies listed on these trade venues can fund their acquisitions by issuing new shares either to raise capital, or to pay partially or entirely with the issued shares for a target company. Such transactions may require the drawing up of a prospectus under the Prospectus Regulation,12 and obtaining the approval of the HNB for the prospectus if no exemptions apply.
Although 2019 saw a reverse IPO carried out by a large domestic technology company on the BSE stock exchange, BSE Xtend market, the multilateral trading facility of BSE is becoming increasingly popular among domestic technology companies looking for alternative financing sources. The primary reason behind this is the more flexible conditions that apply to the BSE Xtend market in terms of the need for a prospectus, different reporting obligations, and the admission and listing fees compared to the BSE stock exchange.
v Tax and accounting
Mergers are not taxable at the level of the shareholder provided that the conditions of the EU Merger Directive13 are met. At their discretion, merging companies may revalue their assets and liabilities to fair market value. If they revalue their assets, this may create a taxable gain. However, no capital gains tax and transfer tax liability arise if a merger qualifies as a preferential merger within the meaning of the Merger Directive and certain other conditions are also met. In general, VAT liability should not arise in the case of a merger, except for cross-border mergers, which in certain circumstances may trigger VAT liability.
Tax on capital gains in the case of a sale
In the case of a share sale, if the seller is a Hungarian company then the capital gain arising from the sale, under the general rules, will be subject to corporate income tax at a flat rate of 9 per cent currently. A special tax rule, however, makes it possible for the capital gain realised on certain investments to be tax-exempt. Accordingly, if a taxpayer holds at least 10 per cent of the registered share capital of a domestic legal entity or foreign entity for at least one year, the amount of gain deriving from the sale of such reported shares may be exempt from corporate income tax, provided that the taxpayer has reported its election for tax-exempt treatment to the tax authority within 75 days after the original share acquisition. The capital gain derived by a non-Hungarian entity or person selling shares in a Hungarian company is not taxable in Hungary unless the shares are of a real estate holding company.
In the case of an asset sale, corporate sellers will be subject to a flat 9 per cent corporate income tax on the gain in the value of the assets. An exemption may apply to gains realised on the sale of intellectual property (IP) provided that the seller reported the acquisition or development of the IP to the tax authority, and meets the one-year minimum holding period. The after-tax profit can then be distributed to the company's shareholders tax-free. If assets are transferred as a business (namely, they constitute an autonomous unit capable of operating on its own), then the whole transfer can be treated as a non-VAT-able transaction if certain conditions are met. If, however, the assets are not transferred as a business, the VAT consequences should be examined separately in respect of each asset.
vi Cross-border issues
Although the government has had the right to scrutinise foreign direct investments since 2018, this has rarely caused any headache for foreign investors and their advisers as such right, in line with the applicable EU rules, has only been exercised in very limited cases.
However, in order to protect strategically important companies from the perils of the global covid-19 pandemic, the national legislator, similarly to that of other EU countries, enacted a new law on foreign direct investment: the FDI Act.14 The FDI Act's catch-all approach, however, might easily trigger a notification requirement in atypical cases as well.
The market considers ambiguity to be the single biggest issue of the FDI Act, as certain material provisions, such as the scope of the Act and the range of industries to be protected, are difficult to interpret, which might affect foreign investments in a negative way.
First, it is not clear which specific industries the FDI Act intends to cover. Similarly to FDI laws of other EU jurisdictions, the FDI Act's scope covers industries that are traditionally considered to be strategically important, such as military, energy and utilities and healthcare. However, taking a literal interpretation, one can conclude in some cases that, for instance, the acquisition of an educational software provider might also fall under the scope of the Act. In addition, the wording of the FDI Act is not clear either as to what type of transactions are under governmental scrutiny. Even a capital increase in a given information technology company by its current foreign shareholders may trigger the application of the FDI Act, if, again, one takes a rather literal interpretation. Finally, although still unprecedented, certain market players are complaining about the possibility of a lengthy administrative procedure as, theoretically, the government may prolong its investigation by up to three months.
Promisingly, the government has expressed its intention to discuss the issues that investors and other market participants have experienced in connection with the new FDI Act to foster further investment into Hungary.
Hungary is a member of the two major international IP conventions, namely the Berne Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of Industrial Property. Furthermore, Hungary is also a member to the Patent Cooperation Treaty, the European Patent Convention and the Madrid Agreement Concerning the International Registration of Marks. As a Member State of the European Union, Hungary is also covered by European Union trademarks. As a result, the legal background of IP rights is robust in Hungary, and the relevant provisions are harmonised with EU laws and international treaties.
In technology-related M&A transactions, the main issue is always the ownership of IP. As far as registered IP rights are concerned, such as patents, trademarks and designs, this is a relatively easy exercise, as a buyer only needs to check the registers of the relevant IP offices. Unregistered IP, such as copyright and know-how, is a more challenging exercise. This consists of two steps:
- first, a buyer should be sure that the chain of title of IP rights is not broken: that is, agreements and policies were put in place with the individual authors and inventors on transfer of the IP they created (e.g., invention fee agreements in the case of patentable inventions); and
- second, the wording of these agreements must address remuneration in a way that such individuals cannot raise a claim for additional remuneration in the future.
In the case of share deals, the buyer should also be sure that a change of control does not affect the IP, in particular existing licence agreements. In the case of asset deals, an additional task is to ensure that the IP assets can be legally assigned to the buyer. If this is not possible, a broad licence can be a workaround.
The question of whether a target company (or seller) has the proper ownership of the relevant IP depends on its contractual structure, with its inventors and developers responsible for creating the IP. The 'work made for hire' principle under US law is not recognised in Hungary. As far as copyright is considered, Hungary, like many other European countries, differentiates between moral rights (i.e., the right to be indicated as an author, right to integrity) and economic rights (such as the right to reproduction and distribution). Moral rights cannot be assigned or validly waived by an author. As a general rule, the same applies to economic rights, but of course these may be licensed. There are, however, exceptions under which economic rights can be assigned, such as in relation to software, databases, works created for advertisement purposes, or works created in the course of employment or a similar relationship.
As far as software is considered, it is easier to carry out a due diligence exercise if the seller (target) employed the developers, as in this case the economic rights are automatically vested in the employer if the job description was correctly worded. However, if the developers were sub-contractors, it is often difficult to trace the chain of title back to the developer, especially after a longer period.
Tech companies' best practice to avoid uncertainty over IP ownership is to have proper employment contracts with their developers, where the job description is clear and contains all relevant software development activities. This is necessary, as the Hungarian Copyright Act15 states that a work may only be considered as a work created in an employment relationship if it is created as a duty originating from the employment relationship. If a developer is not an employee of a company, then a separate assignment or licence agreement is necessary.
In the case of inventions, whether disclosed in patent applications or kept as confidential know-how, the ultimate question is if the target (seller) put in place invention fee agreements and related policies. Otherwise, there is a significant risk that inventors will raise claims for additional remuneration in the future.
An acquisition of shares in a target company will generally not affect the terms of the individual employment contracts with the target company.
In the case of an asset deal, if the conditions of a transfer of an undertaking specified by the Labour Code16 are met, then all the rights and obligations under employment relationships will transfer to the transferee company by the operation of law. It has to be assessed on a case-by-case basis whether a transaction qualifies as a transfer of an undertaking. In the technology industry, where various assets, equipment, subcontractors, IP assets and human resources are crucial for the performance of an activity, a transaction will most probably not qualify as a transfer of an undertaking if only the employees are transferred, but not the assets. However, if only human resources are necessary for the operation of the transferred business, the pure transfer of the employees can qualify as a transfer of an undertaking assuming that the employees will perform the same activity at the new employer under the same or very similar work organisation or operating methods.
In the case of a transfer of an undertaking, the Labour Code prescribes a number of information obligations. Primarily, the transferor and the transferee employer must inform the works council or, if there is no works council, the affected employees, in writing at least 15 days prior to the date of transfer about the reason for the transfer, the date of the transfer, and the legal, economic and social consequences. If there is a works council, then the transferor and the transferee employer must initiate negotiations with the works council aimed at reaching an agreement concerning the proposed actions that affect the employees. The transferor employer must also inform the transferee employer before the date of transfer about the rights and obligations deriving from the employment, non-competition and study agreements. Furthermore, the transferee employer must inform the transferred employees in writing within 15 days following the date of transfer about the change in certain working conditions. In the event of failing to provide information, in general the transfer of employment relationships will not be invalid. However, employees may request the provision of the relevant information.
Importantly, employers are not entitled to terminate employment relationships for the reason of the transfer of employees. However, companies may dismiss transferred employees for reasons related to their operations (e.g., restructuring, reduction of workforce), or for performance or behaviour-related reasons if the reason for a dismissal is true and valid.
Under the Labour Code, the transferor employer and the transferee employer are jointly and severally liable for certain employment-related claims incurred prior to the asset transfer if such claims are enforced within one year from the date of the asset transfer.
Recently, the technology industry has been experiencing a labour shortage in Hungary; therefore, retention of key employees is crucial in most cases. Various benefit packages and flexible work schedules are among the typical means used for ensuring the engagement and retention of key employees. In addition, as mentioned in Section IV.iii, employers tend to bind their employees with post-termination non-competition agreements to themselves, which helps them retain key employees even after an acquisition of shares or asset deals.
Both the buyer and the seller in a technology M&A transaction should exercise extra care when managing data protection risks. In particular, they should assess whether the data can be transferred at all as part of the M&A transaction; and whether the seller has complied with the applicable data protection laws, and address any risks of non-compliance between themselves.
We must differentiate between a share deal and an asset deal: under a share deal, the data controller stays the same, as only the ownership will change; in an asset deal, the data controlling entity changes, as it is only the assets that are transferred. In the latter case, personal data is also transferred between two data controllers, which requires a legal basis. The General Data Protection Regulation17 specifically lists different legal grounds for processing data that are applicable in cases of the transfer of personal data as well. Generally, the consent of data subjects must be obtained to transfer their personal data from the seller to the buyer. However, consent is not always the appropriate legal basis. Therefore, if a contract can be legally transferred during an asset deal, this could justify carrying on with the data processing. As an example, this will often be the case regarding employment contracts, as these have to be transferred in accordance with the agreement on the asset deal.
Parties must take into consideration the special requirements in the case of data transfers outside the EU or EEA. If the buyer or the seller is outside the EU or EEA, then it must be based in a country that provides appropriate safeguards named by the European Commission (e.g., Argentina), or it must have appropriate safeguards in place (i.e., biding corporate rules, standard data protection clauses, approved codes of conduct). Most importantly, the use of the US–EU Privacy Shield is not an adequate option based on the latest case law of the Court of Justice of the European Union (CJEU).18
Violation of the data protection law may result in significant fines (up to 4 per cent of the data controller's total worldwide annual turnover of the preceding financial year or €20 million, whichever is greater: the Hungarian Data Protection Authority issued its highest data protection fine this year: an amount of 100 million forints19). Therefore, the buyer should attempt to require the seller to give warranties specifically confirming, inter alia, that the seller:
- did not have any data security breach incidents;
- is not engaged (and there is no risk that it will engage) in a dispute over a data protection issue;
- is equipped with adequate IT and cybersecurity mechanisms; and
- fully complies with the data protection law.
Incentives in the technology sector are common in Hungary, and they are partially implemented in the general tax system as well, at all times in line with the applicable EU state aid rules. When a company no longer complies with the requirements to be a beneficiary of an incentive, the amount of the incentive used should be usually paid back, regardless of the underlying reason of the non-compliance. Direct subsidies are not that common in the technology sector; however, in such cases the provisions of the respective agreement need to be considered.
When conducting a due diligence exercise, it is essential to understand the business of the target company or group. In technology deals, sector-specific focus must be given to IP and data protection issues. Buyers need a detailed assessment of an acquisition target's IP to value the target appropriately. For sellers, on the other side of a deal, valuing IP accurately can lead to a higher sale price.
Typical areas of IP due diligence undertaken in Hungary with respect to technology M&A transactions include:
- identifying all registrations, issuances and applications for IP assets owned by the target and confirming the status, lien status, chain-of-title, expiration date (if applicable), scope of protection and ownership thereof;
- identifying all other IP assets, including licences, owned or used by the target, and confirming the ownership thereof, any restrictions thereon and the target's scope of rights therein;
- reviewing and analysing the target's agreements with past and present employees, contractors and consultants with respect to the creation and ownership of IP assets, and the use and disclosure of trade secrets and other confidential information;
- reviewing and analysing all other IP-related agreements (or IP provisions in agreements), including research and development agreements, consulting agreements, manufacturing, supply and distribution agreements, settlement agreements, confidentiality agreements, and IP licensing and assignment agreements; and
- determining and analysing any past, present, or threatened IP-related claims or disputes involving the target company, such as infringement actions, cease-and-desist letters, requests for IP-related indemnification, disputes with past and present employees or contractors, and claims for remuneration for the creation of IP.
The buyer should also review material IP and IT contracts to determine whether they include change of control provisions or anti-assignment provisions triggered by the contemplated transaction. Counsel for the buyer typically also conducts:
- searches of publicly available databases;
- searches of websites owned by the target to analyse the privacy policies, terms of service and other publicly available information regarding the target; and
- searches to establish whether remuneration paid to authors or developers comply with the requirements of Hungarian law.
Considering the possible data protection risks as mentioned in Section VII, buyers should conduct not only conventional due diligence, but also an assessment as to whether data can be shared during the initial due diligence procedure, and afterwards, a review of operational, IT and cybersecurity measures and processes in place, and whether there is an appropriate legal basis for data processing.
Where a business to be divested is not organised in the form of separate legal entities, the assets, contracts, rights, liabilities, employees and other resources pertaining to the business will have to be carved out from the existing legal entities. As part of such transactions, an additional focus of due diligence is identifying and understanding:
- what is within the scope of the transaction and what is not;
- which resources have to be and can be transferred;
- whether there are any such resources that are in shared use;
- which activities are required to separate the business; and
- which interdependencies exist between the business to be divested and the business to be retained.
In transactions involving carveouts, substantial attention is given to the IP owned by the seller's group outside the transaction perimeter, but that is necessary for the conduct of business of the target; and IT services provided by the seller's group to the target, and vice versa, to identify the relevant separation issues that should be covered by the transitional services agreement and the brand licensing agreement.
Hungary is a civil law jurisdiction. The country has a four-tier court system, which includes the local courts, the county courts, the regional courts, and the Supreme Court. Depending on the amount of the claim or the subject matter of a dispute, litigation may be initiated before the local courts, or county courts as courts of first instance. Parties to litigation are entitled to appeal the judgments of the courts of first instance. Appeals against the judgments of the local courts as courts of first instance are adjudicated by the county courts, while appeals against the judgments of the county courts as courts of first instance are adjudicated by the regional courts. Second-instance judgments are final, binding and enforceable; however, under certain conditions the parties may file an extraordinary appeal that is adjudicated by the Supreme Court.
In general, parties to commercial contracts can freely enter into arbitration agreements and submit their claims to arbitration. Therefore, transaction documents in technology M&A deals usually provide that disputes are to be resolved through arbitration. One of the exceptions is that parties are not entitled to enter into an arbitration agreement if any of them is a consumer. Since 1 January 2018, the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry is the sole arbitral institution in Hungary that deals with commercial disputes. Nevertheless, the parties are also entitled to settle their disputes at a foreign arbitral institution (e.g., ICC, or Vienna International Arbitral Centre), or at an ad hoc arbitral tribunal.
Since the entry into force of the Brussels I Regulation,20 judgments rendered by any court of an EU Member State are enforceable in Hungary without exequatur procedure. Judgments rendered by a court of a non-EU Member State may be enforced in Hungary on the basis of an international treaty, reciprocity or the Private International Law Act.21 Arbitral awards rendered by arbitral institutions having their seat in Hungary, or by ad hoc arbitral tribunals conducting their proceedings in Hungary, have the same legal effect as the final and binding judgments of Hungarian courts, and as such are enforceable in Hungary. In addition, Hungary is a party to the New York Arbitration Convention; therefore, commercial arbitral awards of foreign arbitral tribunals and institutions are also enforceable in Hungary.
The substantial downturn of the market in terms of the number of deals due to the covid-19 pandemic in Q1 2020 will probably continue in Q2 and Q3 2020. Certain market dynamics suggest, however, that the detrimental effects of the global pandemic in Hungary may be mitigated by external and internal factors.
First, reports show growing state and corporate venture activities in technology investments that might not only be capable of providing funding to technology companies in times where other sources are not easily accessible, but could also create greater co-investment opportunities for private investors.
Second, some technology companies, such as AImotive or Gloster, were in fact able to secure funding at the peak of the pandemic in Hungary, which clearly shows not only their resistance to the crisis, but also investors' interest in Hungarian technology companies even in such extraordinary times.
Third, the anxiety and ambiguity around the interpretation of the new FDI Act has started to settle at last for the following reasons:
- the government has set up a taskforce solely dealing with notification matters under the new FDI Act;
- general guidance has been issued that helps interpret the FDI Act;
- market players may reach out directly to the competent authority with any given question of interpretation; and
- the applicability of the FDI Act is limited in time, as it will expire on 31 December 2020.
Fourth, 4iG, a dynamically growing Hungarian telecommunications conglomerate, declared its interest in expansion through acquisitions after failing to acquire T-Systems' Hungarian operations from Deutsche Telecom in 2019. Such development will arguably spur the upper end of the Hungarian technology M&A market too.
Finally, data suggests that the recovery of the Hungarian economy will rather be V-shaped than U-shaped, which, in addition to the above-described factors, may also create a competitive advantage for Hungary over other CEE countries.
1 Pál Szabó is a partner and Eszter Gál and Barnabás Simon are associates at Bird & Bird.
2 Invest Europe – Central and Eastern Europe 2019, 30 June 2020, pp. 15–17.
3 Invest Europe – Central and Eastern Europe 2019, 30 June 2020, p. 18.
4 EY – Venture Capital and Private Equity update Hungary 2019, p. 2.
5 For more detail, see Section IV.iv.
6 See Section IV.iv.
7 Act V of 2013 on the Civil Code.
8 Act CLXXVI of 2013 on the Transformation, Merger and Demerger of Certain Legal Persons.
9 Act CXL of 2007 on Cross-Border Mergers of Limited Liability Companies.
10 Act V of 2006 on Public Company Information, Company Registration and Winding-up Procedures.
11 See further in Section IV.iv.
12 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC Text with EEA relevance.
13 Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States.
14 As the new FDI Act was in fact enacted along with other laws under Act LVIII of 2020 in connection with the covid-19 global pandemic, our reference to the new FDI Act covers all recently adopted rules that are applicable to foreign investments into Hungary.
15 Act LXXVI of 1999 on Copyright.
16 Act I of 2012 on the Labour Code.
17 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC.
18 CJEU judgment C-311/18.
19 NAIH/2020/1160/10 (available at: https://www.naih.hu/files/NAIH-2020-1160-10-hatarozat.pdf).
20 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
21 Act XXVIII of 2017 on Private International Law.