Typical due diligence issues

In Hungary, it is customary to finalize the due diligence exercise before the execution of the acquisition agreement. There are no particular issues that a foreign investor should be aware of when undertaking a due diligence review of an entity incorporated, or a group of assets, in Hungary, other than those usually reviewed. The main areas of review in the due diligence process vary from transaction to transaction but generally include corporate, commercial, employment, real estate, environmental, regulatory and tax matters.

In a share sale transaction, reviewing material contracts (shareholder agreements, customer contracts, banking contracts) for change of control provisions is key to the due diligence exercise. In an asset sale, restrictions on the seller's ability to assign, or otherwise transfer, its rights or interests in the assets to the buyer are the most relevant issues to consider in the due diligence.

Based on the outcome of the due diligence exercise, the parties may negotiate tailored conditions precedent and/or specific indemnities and/or specific warranties.

Pricing and payment

The payment of deposits is not common practice in Hungary.

The most common form of consideration is cash, though sellers may prefer to receive loan notes or equity from a tax-planning perspective. It is common for the initial purchase price to be stated on a "cash-free, debt-free" basis either: (i) with the inclusion of a purchase price adjustment mechanism determined by reference to the working capital, or net assets, of the target company (or business) at closing by reference to completion accounts (the completion balance sheet is usually prepared by the buyer, or an audit firm on its behalf, but is not formally audited); or (ii) on the basis of a "locked box" mechanism.

While it is not common to provide for deposits or break fees, an escrow arrangement is relatively standard in respect of warranty claims.

Electronic transfers of funds, including through the SWIFT Code international system, are the most common way of paying cash consideration.

Signing/closing

Simultaneous signing and closing/conditions precedent

Subject to the detailed procedure for completion that is set out in the acquisition agreement, the shares or assets being sold are formally transferred to the buyer upon closing of the transaction. Usually, the purchase price is paid on or after closing.

In smaller deals, and otherwise, where possible, simultaneous signing and closing is common. Whether signing and closing is simultaneous or non-simultaneous will depend on whether there are conditions precedent that must be satisfied, including regulatory approvals (e.g., foreign investment restrictions or antitrust/merger control), the carve-out of certain parts of the target entity, third-party consents or waivers, or the resolution of problems discovered during the due diligence exercise.

Foreign investment restrictions

Hungary has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.

The foreign investment review (FIR) regime is targeted at certain sectors. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Hungary has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed. Certain transactions that meet the relevant criteria are subject to voluntary, non-suspensory notification, if it is not apparent that the transaction will not lead to a significant lessening of competition. If not notified, such transactions may be investigated by the competition authority within six months post-closing ex officio.

It is also necessary to consider EU merger control rules. Mergers involving companies active in several member states and reaching certain turnover thresholds are examined at European level by the European Commission. This allows companies trading in different EU member states to obtain clearance for their mergers in one go. For further information, see the more detailed section on "Antitrust/merger control" below.

EU Foreign Subsidies Regulation

As of 12 October 2023, the EU Foreign Subsidies Regulation (FSR) requires qualifying transactions, and bids in response to certain large public tenders in the EU, to be notified for upfront clearance by the European Commission where the companies involved have benefited from foreign financial contributions (a broad concept) that exceed certain (low) thresholds. Acquisitions of a target with annual revenues in the EU of at least EUR 500 million will trigger FSR deal notifications. Acquisitions of smaller targets will not, regardless of deal value. Outright mergers and large joint ventures will trigger a notification requirement if the EUR 500 million EU-wide revenue threshold is met by one of the merging parties or the joint venture.

Other regulatory or government approvals

Approval by the relevant authority may be required for the acquisition of a target that is subject to specific regulatory supervision, such as financial and credit institutions, energy providers, weapon manufacturers, telecoms providers, etc.

Acquisition of shares

An acquisition of shares is not considered a transfer of an undertaking for employment law purposes. It will, therefore, not involve the transfer of employees, but simply a change in the ownership of the employer (not a change in the employer per se). As such, all rights, duties and liabilities owed by, or to, the employees of the target company continue to be owed by, or to, the target company and the buyer therefore inherits all those rights, duties and liabilities by virtue of being the new owner of the target company.

However, if there is a post-acquisition integration of the target company's business with the buyer's business, this is likely to constitute an acquisition of assets (or a business transfer), and the considerations set out in the next section will be relevant.

Acquisition of assets

The automatic transfer of employees on an asset sale takes effect pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") and the provisions of the Act I of 2012 on the Labour Code, provided that the asset sale comprises the sale of an undertaking (for example, a sale of a business (or an identifiable part of a business)).

Where there is a relevant transfer, the employment contracts of those employees who are assigned to the business being transferred transfer automatically to the transferee on their existing terms and conditions of employment. The transferee effectively steps into the transferor's shoes with regard to the transferring employees such that all of the transferor's rights, powers, duties and liabilities under, or in connection with, the transferring employees' contracts pass to the transferee, and any acts or omissions of the transferor before the transfer are treated as having been done by the transferee.

Employees of the seller's business do not have the right to refuse to transfer to the buyer. However, if the transfer involves, or would involve, a substantial change in working conditions to the material detriment of the transferring employees, the employee may terminate their employment relationship within 30 days following the transfer effective date. In such cases, the employee may be entitled to a severance payment if the conditions of such payment are met.

As a result of the transfer, the buyer stands in the place of the seller with regards to the employees' contracts of employment.

Acquisition of shares

• No Value Added Tax (VAT) is due on a share deal.
• Real Estate Transfer Tax (RETT) may apply in the case of a domestic real estate holding company.
• Capital gains deriving from the sale are subject to 9% Corporate Income Tax (CIT).
• A reported participation scheme is available to achieve exemption from future capital gains for exit.

Acquisition of assets

• Gains deriving from an asset deal are part of the tax base, and, therefore, they are taxable for the seller.
• An asset deal is subject to VAT.
• Preferential schemes available: Gains realized on reported intangibles may be exempted from CIT if certain conditions are met.
• If the transferred asset is an immovable property located in Hungary or real estate-related rights, the transaction triggers RETT.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-Acquisition Integration Handbook.