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Brussels, 13 November 2007

Free movement of capital: Commission scrutinises amendments in Hungarian company law

The European Commission has decided to send Hungary a letter of formal notice concerning its Act CXVI of 2007 "amending certain acts relating to companies of particular importance for the security of public supply", which is considered incompatible with EC law. The Commission is concerned that the law may contain unjustified restrictions on the free movement of capital and right of establishment, by (i) introducing onerous requirements for public takeover bids and (ii) allowing public authorities to appoint a member on the boards of energy companies with the right to participate in the management and the control of the companies concerned.

The Act prescribes that, in the case of public takeover bids for a company of strategic importance for energy and water supply sectors, the operational plan that must accompany the public takeover bid has to be approved by the supreme body of the bidder before submission of the bid to the Hungarian authorities. This means that the bidder's intentions would become publicly known well in advance. In turn this would eliminate the surprise effect of the bid, may substantially increase the bid price and thereby obstruct the take over attempt. This provision appears neither suitable to attain legitimate aims to safeguard the security of energy and water supply, nor proportionate, since the competent Hungarian authorities will in any case have the right to investigate and, if necessary, mitigate the business plans for the target company, once the bid is placed.

According to the Act, the Hungarian Energy Office appoints one member of the board of directors, the executive board and the supervisory board of companies of strategic importance for energy supply. These representatives are entitled to participate in the management and the control of the operation of the business in question, as far as it concerns ensuring the energy supply of the country. However they have no representation right in the company and their statements at the meetings of the boards in question are not to be regarded as the standpoint of the Energy Office. The right to participate in the company's operations leads to a commensurate restriction in the owners' ability to exercise their right to influence the company's operations. These provisions appear neither suitable to attain legitimate aims to safeguard the security of energy, nor proportionate. The representatives appear to have a limited and unclear mandate. Furthermore, the Hungarian Energy Office, in line with EU law in the field of energy, has to grant licences in any case to relevant companies acting in the energy market with the aim of safeguarding the security of energy supply. Furthermore, the Office has the necessary powers to intervene, if it considers that licensed companies' actions infringe the security of supply, and can enforce the provision of any information it needs in that regard from the companies concerned.

Furthermore, the Act tends to restrict the free movement of capital and right of establishment also in combination with some types of special rights, which the Commission considers to be in non-compliance with the EC Treaty, but which are still maintained in some privatised companies. For instance, a provision in the Act prevents the application of the "breakthrough rule" (which nullifies voting limitations when a target company decides on a take-over bid) in companies where the State holds preference shares. The Commission considers the remaining preference shares in privatised companies to be a restriction, infringing on the above two fundamental freedoms, and that the named provision substantially aggravates their restrictiveness.
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