Introduction
In common with many other continental European countries, Hungary is a Civil law jurisdiction and its laws are codified in Acts such as Act IV of 1959 on the Civil Code ("Civil Code"). The principal impact of a codified system of laws is that provisions of the Civil Code may apply to an agreement, even if they are not mentioned specifically in the agreement. This has traditionally meant that agreements in Hungary are shorter than those in common law countries, such as the UK and US, because many "boilerplate" concepts and provisions are dealt with in the Civil Code. However, Western investors often find that the provisions in the Civil Code are too vague or general and that they would rather have more specific wording in the agreement. In any event, under a codified system of law, the specific contents of the agreement may not be all the provisions affecting the business deal.
Setting up a bussiness presence in Hungary
Under Act CXLIV of 1997 on Business Associations (the "Companies Act") there are six different types of business entities through which investors may choose to operate. Of these, limited liability companies ("Kft.") and companies limited by shares ("Rt.") are the two most popular vehicles for investors. It is these types of entities, therefore, on which it is most useful to concentrate. Other forms of entities are a Union, a Joint Enterprise ("KV"), a Limited Partnership ("Bt.") and an Unlimited Partnership ("Kkt."). Alternatively, investors may choose to operate through a representative office or a branch.
Kfts and Rts – essential principles
A Kft. is a company limited by quotas or business shares (i.e. set sums of capital are invested by the members) and approximates most closely to a German GmbH. The nearest English equivalent is a private limited liability company. An Rt. is a company limited by shares and is more like an English PLC or a German AG. Both a Kft. and an Rt. can be owned by a single person/member. In such a case, no formal general meetings need be held and the single owner may simply decide on all matters falling within its capacity without having to comply with the various formalities. However there are further regulations imposing an increased level of liability upon single owners of companies. Even though the single owner of a company has limited liability in general, this rule may be set aside and unlimited liability imposed upon the single owner, for example, if it is shown that the single owner carries on a business which has an adverse effect in the long-term upon the company and this fact is upheld by a court upon the claim of a creditor.
Quotas
A Kft. may have one or more quotaholders (members), who may include both foreign natural persons and foreign legal entities. Membership of a Kft. is evidenced by entering the names of members into a list of members which the directors of the Kft. are obliged to maintain under the Companies Act. Unless the specific provisions of the Kft.'s deed of association provide otherwise, the quotaholder's liability for the obligations of the Kft. Is limited to the value of their quota. It is important to note that quota in a Kft. Are not the same as shares in an Rt.. Each quota is indivisible (except with the consent of the Kft. itself), must be denominated in Hungarian Forints, divisible by 10,000 and may not be less than HUF 100,000. Voting and dividend rights can be set out in the deed of association, subject to the proviso that at least one vote must be allocated per stake of HUF 100,000. Unlike shares, it is difficult to take security over the quotas. This is often relevant when financing the company.
Differences between a Kft. and an Rt.
Although both a Kft. and an Rt. Offer limited liability, for many investors a Kft. Is more attractive than an Rt. Some of the reasons include: a Kft. requires a lower minimum paid up initial capital. Only HUF three million need be paid to found a Kft., as opposed to a minimum capital of HUF twenty million for an Rt.; the procedures for calling a general meeting and taking corporate decisions are generally considered to be more flexible as regards a Kft. Thirty days' notice is required for calling a general meeting of the shareholders of a public Rt., including advertising in the press.In case of a closed Rt., however, only fifteen days' notice must be given by post and no public announcement is required. The same applies for the members' meeting of a Kft., which can be called on fifteen days' notice or, with the consent of all the members who have to be present, at even shorter notice. The members of a Kft. may also adopt certain resolutions, without convening a meeting, by using the written resolution procedure; and a Kft. Has managing directors but no decision-making Board of Directors, which an Rt. does. However, it may be more appropriate to found an Rt. for the following reasons: it is more suitable to take security over the shares of an Rt. (as shares may be evidenced by the issue of a share certificate). A quota (or business share) in a Kft. on the other hand is regarded as being a series of rights reflecting the proportion of the capital contributed by that member and is only evidenced in the books of the company and not in any physical form. As such, it is more difficult to pledge a quota interest as it is not represented by securities; the larger paid up capital of an Rt. Can sometimes give it an advantage in raising finance in the local or international financial markets; and unless otherwise provided in the deed of association, the directors of an Rt. can be removed by a simple majority, whereas the directors of a Kft. may only be removed by a resolution supported by at least 75% of the quotaholders.
Directors' Responsibilities
General information
The role of the managing director of a Kft. and member of the Board of Directors of an Rt. is regulated by the Companies Act. The managing director or Board member qualifies as an executive officer of a limited liability company. The managing director or Board member is entitled to represent the company before authorities and third persons and also to act and sign documents on behalf of the company. The signature rights can be individual or joint depending on the provisions of the articles of association of the company (or deed of foundation for an Rt.). The managing director or Board member may transfer his right of representation to employees in respect of particular issues. The managing director should be elected by the Members' Meeting (or shareholders' meeting for an Rt.) and his appointment can be withdrawn at any time by the same company body. The managing director can perform his obligations on the basis of an employment contract or a mandate agreement.
Company manager
The Companies Act also provides for the appointment of a "company manager". The main difference between the managing director or Board member and the company manager is that the company manager must be an employee and he should perform his tasks by following the instructions of the managing director(s). Otherwise the company manager also has the right to represent the company before authorities and third persons and to act and sign documents on behalf of the company. The signature rights – whether the company manager should sign individually or jointly - should be determined in the articles of association. The company manager cannot transfer his right of representation to employees. As far as the liability of the company manager is concerned, the rules of Labour Code Act XXII of 1992 ("Labour Code") with special respect to the provisions applicable for executive officers should be applied because the company manager can only be an employee. Please note that only one company manager can be appointed by the company unless the company has branches or business sites in which case the company can have one company manager at each branch or business site if permitted by the articles of association. A further restriction should be applied for a Hungary off-shore company ("HOC"). In accordance with Section 4.28 of the Act on Corporate Taxation, it is a requirement that over 50% of the executive officers, the members of the supervisory board and the employees taken as a whole, should be Hungarian tax residents.
Other Types of Investment Entities
Representative offices
A registered representative office can be established by a foreign company to perform the usual liaison functions, including assisting with contract negotiations, advertising and exhibiting products and other forms of marketing, although it should not "carry on business". Such an office can be opened by way of registration with the Court of Registration. There are no capitalisation requirements. The documents which need to be filed with the Court of Registration to register a representative office are similar to those required for companies.
Branches
Foreign enterprises may establish branches in Hungary, which may carry out normal business activities. These must be registered with the Court of Registration similarly to companies. There is no express minimum capital requirement for branches, but the foreign mother company must provide assets to the branch in an amount which is sufficient for its operation and the settlement of its debts. Act XLIX of 2003 on Modifications to Act CXLIV of 1997 on Business Associations ("Companies Act") and Act CXLV of 1997 on the Register of Companies, Public Company Information and Court Registration Proceedings was passed as an Act on 23 June 2003. The main aim of the modifications was to harmonise Hungarian corporate law with EU law. The new regulations came into force on 1 January 2004 except for some regulations which will come into force on the date of Hungary's accession to the European Union (1 May 2004). According to the modifications of the Companies Act, Hungarian companies must modify their Articles of Association ("Articles") by 30 June 2004 to comply with the new requirements. The new regulations will provide significant changes to the present regulations concerning mostly companies limited by shares. The main purpose of the modifications is to provide for increased transparency the operation of the company and to protect the registered capital of the company and the interests of creditors more efficiently. The changes to the modified Companies Act affect the following main areas of law from 1 January 2004: mergers and demergers; redeemable shares; convertible and subscription bonds; in kind contributions; related party contracts and payments to shareholders; treasury shares; take-over rules; financial assistance.
For further information please contact Gabriella Ormai.
