Legal guide for company directors and CEOs in Hungary

Hungary has complex and rapidly changing environmental regulation in place which is to be adhered to by companies operating in Hungary. As environmental considerations are an essential part of ESG obligations, in order to perform their ESG obligations, companies need to comply with a wide range of mandatory environmental regulations, and potentially with environmental management schemes (EMAS or ISO:14001, etc.) undertaken voluntarily by a company. The directors are the executive officers responsible for the management of the company, which includes the obligation to ensure that the company is in compliance with the applicable environmental and sustainability requirements. Such environmental regulation includes inter alia environmental obligations related to waste management, air, noise and vibration protection, soil and groundwater contamination and pollution matters, nature conservation, greenhouse gas emissions, environmental permitting, etc.

There are also certain employment-related issues that directors of Hungarian companies should take into consideration from an ESG perspective. For instance, the Hungarian Labour Code explicitly indicates the general principle of equitable assessment regarding employees’ interests. As directors are typically the persons exercising the employer’s rights over the employees of a company, and the directors are responsible for the management of the company, specific attention shall be paid to compliance with this general principle during all employment relations for the purpose of ensuring employees’ welfare in the company.

Furthermore, as the persons typically exercising the employer’s rights in the name of a company, directors have an obligation towards the works council of companies, where applicable, to provide information regarding the economic situation and employment conditions of employees. In this respect, it is also important to ensure that the works council can exercise its consultation right prior to decisions regarding matters relating to the interests of employees such as the determination of the order of work, principles relating to the calculation of wages, etc.

The provisions of the Hungarian Equal Treatment Act apply to both employment and agency relationships, therefore it is the directors’ responsibility to prevent the occurrence of any discrimination of employees on the grounds of any features or characteristics. The provisions of the Equal Treatment Act shall also be applied in relation to offers for the conclusion of contracts addressed to third persons not specified in advance, as well as to the provision of services/sale of goods in a place accessible to the public.

It is also important to note that under the Hungarian Labour Protection Act, it is the employer’s obligation to provide safe and healthy working conditions for employees, the performance of which pertains to the responsibility of the person exercising the employer’s rights, i.e. in most cases the executive officers (directors) of a company. In addition, the Labour Protection Act includes further obligations of directors that relate to ESG considerations, such as the performance of preliminary risk assessments, appointment of an employee who has appropriate professional knowledge regarding employee protection rules, information obligations, etc.

In April 2021 the European Commission proposed a new regulatory framework regarding corporate sustainability reporting, the Corporate Sustainability Reporting Directive (CSRD), which has not yet been adopted by the respective legislative bodies of the European Union. Should such new directive enter into force, the reporting obligation would have an extended scope (i.e. would cover additional companies), the disclosed reports would have to be audited, and reports would have to be made on the basis of mandatory EU reporting standards. Please also note that stricter (compared to NFRD, as defined below) reporting obligations are already in place for the financial sector under the Sustainable Finance Disclosure Regulation of the EU.

Companies listed on the Budapest Stock Exchange (“BSE”) are subject to a non-binding recommendation by the BSE to: (i) start issuing annual ESG reports from 2023; and (ii) issue a time schedule by 31 December 2021 with respect to the anticipated commencement date for compliance with the BSE recommendations, the anticipated ESG category they will be aiming for and any developments they plan to reach “advanced” ESG level. Directors of listed companies are advised to take into account the non-binding recommendation.

From June 2021 another non-binding recommendation of the National Bank of Hungary (“NBH”) covers Hungarian banks. The NBH will expect banks to start preparing for the new ESG reporting requirements under Section 449a of the EU Capital Requirements Regulation (“CRR”) which will apply from 28 June 2022. The NBH has further stated that it is good practice for banks not formally subject to the relevant CRR section to comply voluntarily with the ESG publication requirements from June 2022. Here, too, directors of banks will be advised to comply with the NBH recommendation.

Although most of the ESG-related legislation in Hungary is non-binding, there are some acts of legislation on the level of the European Union which are – indirectly – applicable and might be taken into consideration by directors of companies in Hungary as well. For instance, pursuant to the Non-Financial Reporting Directive of the EU (2014/95/EU) (“NFRD”), certain large companies (entities of public interest or public relevance) are obliged to disclose certain non-financial information including, but not limited to, environmental and social matters. The purpose of the NFRD is to encourage entities of public interest to introduce a responsible approach to ESG-related issues and to make such data of companies more easily accessible to decision-makers and the public. Therefore, the NFRD sets out a high-level, minimum standard legal framework regarding the disclosure obligation and each Member State of the European Union had to transpose such rules into their respective national law with the adoption of detailed legal regulation and processes.

Accordingly, the Hungarian Parliament amended the Hungarian Accounting Act, providing that entities of public interest exceeding thresholds of a balance sheet total, net income or number of employees in 2 consecutive years shall include in their business report a non-financial statement on their actions relating to environmental, social and employment issues, along with information on measures related to the protection of human rights and fighting corruption and bribery. Such statements shall include policies, the results achieved under the policies and ESG-related risks pertaining to the activity of the company. Needless to say, compliance with this obligation constitutes a significant burden on the directors of companies of public interest as the preparation of these policies, and the non-financial statement itself, falls within the directors’ responsibility.

Furthermore, the EU has also passed the Shareholders’ Rights Directive II (2017/828/EU) (“SRD II”) on the encouragement of long-term shareholder engagement, which provides for the preparation of an ESG-orientated investment strategy and policy of ESG-related commitments. The SRD II has also been implemented in Hungary by Act LXVII of 2019.

Under Hungarian law, the management of limited liability companies, the most common company form in Hungary, is performed by one or more managing directors. If more managing directors are appointed, they do not form a board and do not act as a decision-making body; all of them are entitled to manage the company individually. However, due to recent court practices, it is now possible to establish a board of directors as a management body of limited liability companies.

In the case of private companies limited by shares, the management is performed either by a chief executive officer as a sole director or a board of directors composed of at least three members. The board of directors operates as a decision-making body and passes its resolutions with the simple majority of the votes of its members. The board of directors and the supervisory board are two separate and independent organs in the company’s internal structure. 

In the case of public joint stock companies, the company may be directed either by a board of directors being responsible only for management duties, or by a unitary board which performs both management and supervisory board duties. A unitary board shall comprise at least five members and the majority of its members shall be independent persons.

Hungarian law does not distinguish between executive and non-executive directors. 

Any person being of legal age whose legal capacity is free of any restrictions that would hamper the performance of management duties may be appointed as a director of a Hungarian company. Residency in Hungary is not a requirement: a Hungarian or a foreign individual can be appointed as a director. 

However, a person who has been sentenced to imprisonment by a final judgment for committing a crime, until being released from the negative legal consequences relating to his/her criminal record, or who has been barred by a final judgment from being a senior officer, cannot be appointed as a director during the effective period of such ban. In addition, a person who has been banned by a final court verdict from any profession may not be appointed as a director during the effective period of such a ban in a company which pursues such a profession as its business activity.

In addition, the Court of Registration may ban such person from holding an executive office for a period of five years (i) who has been found liable by a final court decision for any claims that remained unsatisfied in the proceedings leading to the termination of a company without legal succession (by way of liquidation or forced dissolution) and if this person has failed to effect the payment obligations in compliance with the final court decision, (ii) who had unlimited liability for the debts of the company and failed to perform his payment obligation or (iii) against whom the Court of Registration imposed a fine and he/she failed to fulfil his/her payment obligation under the final court decision. In addition, if the company cannot be found at its registered seat or the tax authority deletes the company’s tax number, and therefore the company terminates without legal succession in a forced dissolution procedure, the Court of Registration bans such person from holding an executive office who was the executive officer, a member with unlimited liability, or a member having majority control at the time of the commencement of the forced dissolution procedure.

Both natural and legal persons may be appointed as a director. If the company appoints a legal person, the legal person must designate a natural person to discharge the functions of executive officer in their name and on their behalf. The rules pertaining to directors also apply to the designated person. Both members and non-members of the company may be appointed as a director. The person elected has to inform the company in writing if he/she already holds a similar position within fifteen days after his/her acceptance of the new position.

A director is required to disclose the following personal details: (i) his/her full name, (ii) full name of his/her mother, (iii) date of birth, (iv) home address, (v) tax number and (vi) in the case of a foreign tax number, the country where such tax number was issued. This information will also appear in the publicly available Companies’ Register.

A director is appointed by the members’ meeting or, in the case of a single-member company, by the sole member. The appointment may last for a definite period which cannot exceed five years or, if the constitutional document so permits, for an indefinite period. The appointment becomes effective when the director accepts the position. Companies may have one or more directors; the number of the directors appointed is not limited.

A director may resign at any time by giving notice to the company. If so required for the operation of the company, any resignation will only take effect when a new director has been appointed or alternatively, on the 60th day after the announcement of the resignation. 
The members’ meeting may remove the director at any time by means of a resolution passed by way of a simple majority vote (higher voting requirements may be stipulated in the constitutional document). Appointments and removals of directors must be registered with the Court of Registration. When a director who has an employment contract with the company is removed, the terms of the employment contract must also be observed in the course of the removal.

The mandate of a director terminates also in the case of (i) expiration of the mandate if the director is elected for a definite period, or if his/her mandate is subject to a condition for termination; (ii) restriction of his/her legal capacity which is necessary to carry out his/her duties, (iii) occurrence of a reason for exclusion or (iv) the director’s decease.

A director is authorised by law to represent the company vis à vis third parties and before the court and other authorities and to sign for and on its behalf. The method of representation is determined by the constitutional document of the company which can be either individual or joint. Representation capacity may be restricted (e.g. by internal company regulations); however, such limitation is not effective vis à vis third parties.

Directors may authorise any employees of the company with representation and signing right in a specific scope of matters (e.g. HR matters, finance issues). Such authorisation must also be registered with the Court of Registration.

By law, the managing directors of a limited liability company, the most common company form in Hungary, do not form a board. This means that a managing director’s right to represent the company may only be restricted by stipulating a requirement for joint signatures. Although it is possible for the constitutional document to provide for a division of responsibilities between different directors, this division would not be effective vis à vis third parties (i.e. if a managing director signed a document outside his/her authority, the signature would still bind the company). Similarly, the constitutional document may require the prior approval of the members’ meeting or the supervisory board to enter into certain agreements. However, any agreement entered into in breach of this requirement would nonetheless bind the company.

In the case of private companies limited by shares and public joint stock companies, the directors form a board which performs its management duties as a body. The board shall elect a chairman from among its members and shall pass its decisions with the simple majority of the votes. The board shall prepare a report on the management, financial situation and business policy of the company at least once a year for shareholders and at least once every three months for the supervisory board of the company. Hungarian law does not provide detailed rules concerning the competence, operation and meetings of the board; this is usually regulated by the constitutional document or by the by-laws adopted by the board of the company.

A director may perform his/her management duties on the basis of a service agreement or an employment agreement. If the director has a service agreement he/she may, but need not, be remunerated by the company. In the case of an employment agreement, remuneration needs to be provided on a statutory basis. It is also possible to engage the director under a service contract for his/her duties as a director and at the same time employ him/her under an employment agreement for tasks different to those carried out as a director. Further, a director may also have a contractual relationship with the company as a consultant providing services under a consultancy agreement.
The structure chosen is mainly a tax-driven decision. Termination of a directorship does not automatically terminate the employment/consultancy contractual relationship and vice versa. However, an agreement may provide that it terminates forthwith upon the individual concerned ceasing to be a director of the company.

To avoid possible conflicts of interest, directors may not acquire ownership (except for the acquisition of shares in a public joint stock limited liability company) and may not accept an executive office in any company whose main business activity is similar to that of the company where he/she already serves as a director, unless the constitutional document of the relevant company so permits. The constitutional document may specify that such a restriction applies to companies pursuing the same activity (i.e. not the same main activity).
Directors and their relatives (including spouse, children, parents, and relatives like the parents and children of his/her spouse etc.) may not conclude contracts on their own behalf (or for their own benefit) that fall into the main scope of activity of the company, unless the constitutional document permits this or unless they are considered to be everyday transactions. The director or his/her relatives may not be elected as a member of the supervisory board at the same company.

Generally, directors conduct the management of the company, represent the company vis à vis third parties and perform other obligations imposed upon them by law or by the constitutional document of the company. All matters relating to the management of a company that do not fall within the exclusive scope of the members’ meeting or other company organs on a statutory basis or pursuant to the constitutional document of the company are generally within the power of the directors.
The general management tasks of the directors include, for instance (i) the development and management of the working organisation and business of the company, (ii) preparation of the company’s annual financial report and proposal for the distribution of profits, and submission of the aforementioned for approval to the members’ meeting, (iii) the maintenance of the company’s financial records in accordance with applicable regulations and (iv) the determination of the company’s internal procedures.

In addition to directors being generally authorised to exercise the company’s rights as an employer over the employees of the company, they are responsible for reporting to the Court of Registration amendments to the constitutional document and the changing of any of the rights, facts and data entered in the Companies’ Register as well as any other data required by law. Directors are responsible for the keeping of the members’ list in the case of limited liability companies and the book of shares in the case of private companies limited by shares and public joint stock companies. In addition, if it comes to the attention of the directors that the company has financial problems (i.e. its equity has dropped below the registered capital or the statutory capital minimum, it is threatened with insolvency, it has stopped making payments and its assets do not cover its debts), he/she shall initiate the holding of a members’ meeting to provide for the necessary measures.

Directors shall perform their management duties individually by giving priority to the interests of the company subject to the legal provisions, the constitutional document and the resolutions of the members’ meeting of the company. 

Generally, directors may not be instructed by other organs of the company; however, as an exception, in the case of single-member companies, the sole member may instruct the directors and the directors must follow such instruction (i.e. execute or implement the decision of the sole member). 

Generally, directors must conduct the management of the company by giving priority to the interests of the company. However, if a situation occurs that threatens the company with insolvency, the directors must perform their management tasks by taking into consideration the interests of the company’s creditors and not the interests of the company itself. The occurrence of the threat of insolvency is the date and time from which the directors were or should have been able to foresee that the company would not be able to satisfy its liabilities when due. 

In the case that the directors do not comply with the above obligation and the company eventually becomes subject to a liquidation procedure, then the directors shall have joint and several liability vis à vis the creditors of the company. The directors are exempted from their above liabilities if they can prove that following the occurrence of the threat of insolvency, they have taken all measures that could be expected in such situation in order to reduce the losses of creditors and in order to initiate the decision-making of the members.

Liability towards the company: in general, directors must conduct the management of the company by giving priority to the interests of the company. Directors are liable towards the company for damages caused to the company by violation of the law or breach of the company’s constitutional document or resolutions of the members in the course of the management of the company in accordance with the general rules of liability for the breach of a contractual obligation. A director may be exempted from liability against the company if the director proves that the damage occurred in consequence of (i) unforeseen circumstances, (ii) beyond his/her control and (iii) he/she could not have been expected to take action to prevent or mitigate the damage. These circumstances can only be identified in a given situation; the expectable level of control naturally varies depending on the specific size of the company, its structure, organisation, number of executive officers, how the work is divided between them, etc.

If the director performs his/her duties without remuneration, then relatively less stringent liability rules are applicable, i.e. (i) in that case he/she will be responsible for the damage or loss that arose in association with the service if he/she caused the loss or damage through intentional misconduct or failed to provide information on any essential characteristic of the service, or (ii) the director may be exonerated from compensating any loss or damage caused by his/her service if he/she proves that his/her conduct was not actionable (he/she acted to a generally acceptable standard in the given situation).

In the case of single member companies, the sole member is entitled to instruct the directors and the directors must follow such instructions. However, if the director executes the instruction of the sole member, and as a result of such instruction a damage is caused to the company, the director is exempted from liability towards the company since he/she was required to follow the instructions of the sole member on a statutory basis. It may, however, be expected of directors to call attention to the fact if the execution of a certain resolution is likely to result in damage or loss to the company.

Liability towards third persons: as a general rule, if a director causes a damage to a third person in relation to his/her position as a director, the company shall be held liable for such damages. However, as an exception, the director and the company are liable for these damages on a joint and several basis if the damage was intentionally caused by the director.

Liability when the company is threatened with insolvency: if the company is threatened with insolvency, the directors must perform their management tasks by taking into consideration the interests of the creditors. In the case that the directors do not comply with this obligation and the company eventually becomes subject to a liquidation procedure and, in consequence, the company’s assets have diminished or the fulfilment of the creditors’ claims otherwise fails, then the directors shall have joint and several liability vis à vis the creditors of the company. This rule applies to the directors serving as such at the time of the initiation of the liquidation procedure and also during a period of three years preceding that date. It also applies to persons exercising de facto dominant powers in the decision-making process of the company (i.e. shadow management). 

The directors are exempted from their above liability if they are able to prove that following the occurrence of the threat of insolvency, they have not undertaken any unreasonable business risk when compared to the financial situation of the company, they have taken all measures that could be expected in such a situation in order to reduce the losses of creditors and in order to initiate the decision-making of the members.

Directors may request the members’ meeting to evaluate their performance in the previous financial year and to decide on granting a discharge of liability. Granting a discharge of liability constitutes the members’ verification that the directors have performed their tasks during the period under review by giving priority to the interests of the company. Such discharge can be granted upon the request of the managing director at certain times: (i) either when the members approve the company’s annual financial statements or (ii) when the director’s appointment is terminated. 

If the members’ meeting grants a discharge of liability to a director, then this exempts the director from liability against the company retroactively. If the discharge is granted, the company may only bring an action against the director if the facts and data based on which the exemption was granted were incomplete or untrue. The discharge of liability does not provide an exemption from the liability of directors towards third parties.

Within their internal relationship, the company and the director may agree on a limitation of the director’s liability. With respect to external relationships (i.e. the liability of the director towards third parties), it is possible for the company to grant an indemnity to the director by which the company undertakes to compensate the director for certain damages or losses. A company is also permitted to purchase directors’ and officers’ insurance on behalf of its directors.

The directors are the executive officers who are responsible for the day-to-day management of the company, including passing of essential business decisions, continuous monitoring of the company’s financial situation and exercise of the company’s rights as an employer.

As the long-time economic impacts of the COVID-19 crisis are still unforeseeable, directors should continuously monitor the financial status of the company and provide the necessary measures if the company’s solvency is somehow threatened. Also, directors should consider and investigate the potential risk of each business decision more carefully and should plan for a variety of different scenarios and develop alternative plans that can be implemented as necessary. Under Hungarian law, directors are obliged on a statutory basis to initiate the decision-making process of the company’s members if it comes to their attention that the company is facing financial difficulties.

Since in most Hungarian companies the directors exercise the company’s rights as an employer, they need to ensure safe working conditions for the company’s employees and develop a strategy by which the company complies with social distancing regulations and maintains the effectiveness of its operation. 

The Hungarian Government adopted Decree No. 502 of 2020, entered into force on 17 November 2020 (the “Government Decree”) re-introduced the temporary rules governing how Hungarian companies are able to hold general meetings and, the exceptional powers of the management of the companies in response to the second and third wave of Covid-19 in Hungary. The effectiveness of the Government Decree was prolonged by Government Decree No. 271 of 2021 and is still in force in Hungary for an indefinite period as long as the situation of emergency lasts.

As a general rule, Hungarian companies are able to hold their general meetings electronically or to pass their resolutions in writing only if it is permitted by their constitutional document. However, during the state of emergency, the Government Decree enables Hungarian companies to hold their general meetings via electronic means or to pass their decisions in writing even if these procedures are not contained in the company’s constitutional document. According to the Government Decree, management is entitled to set out the Government Decree’s detailed rules on holding an electronic general meeting or passing resolutions in writing and communicate these rules to the members of the company.

In addition, pursuant to the Government Decree, if the mandate of a director is due to expire during the COVID-19 crisis or a director would like to resign during the COVID-19 crisis, his/her mandate, in the absence of a members’ resolution, would be extended until the 90th day following the end of the current state of emergency and the director would be required to perform the management duties of the company. 

To facilitate the decision-making process of Hungarian companies, the Government Decree granted some exceptional powers to the management of Hungarian companies. Accordingly, if the general meeting of a company cannot be held electronically or resolutions cannot be passed in writing, the management is entitled to decide on the adoption of the annual report prepared for the financial year 2020 and on the appropriation of after-tax profit, as well as on other matters that otherwise fall within the competence of the general meeting, provided that these decisions are urgent and necessary for the maintenance of the lawful operation of the company and for the management of the current crisis situation caused by Coronavirus. Nevertheless, the Government Decree contains some exceptions in which the management is not entitled to make a decision, e.g. decision on the termination of the company without legal succession, reduction of registered capital in case of limited liability companies and private companies limited by shares.

Management can pass any of the above resolutions if the members holding at least 25% of the votes do not raise objections in their prior written opinions and if they are supported by at least 51% of the votes. If one of the company’s members has majority control or a qualifying majority, the management cannot pass any of the above resolutions if this member raises an objection.