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Arbitration

A new law that restricts the right to refer certain matters to arbitration has entered into force. Among other things, it affects contracts concerning rights in rem and matters relating to 'national property' - a term that covers material objects, but may also extend to things as disparate as rights, company shareholdings, emission units and Hungarian airspace.

The Supreme Court has considered the effects of a verification proposal (ie, a motion of one party requesting the arbitrators to decide on a certain question) on the right of the parties to present their case. It ruled that the tribunal’s decision on whether to entertain the verification proposal does not affect the parties' procedural rights.

A recent Supreme Court judgment sets out key principles in respect of the validity and enforceability of an arbitration agreement. Among other things, the court ruled that where two parties are joined to a lawsuit but only one has agreed to arbitration, the dispute may only be resolved by the competent court.

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Banking

The Financial Supervisory Authority (FSA) shows little sympathy for financial institutions that place unfair burdens on consumers, acting as a diligent executor of the most recent consumer protection legislation. It firmly keeps an eye on how institutions observe these rules and penalises any deviation. Three recent cases in particular illustrate the FSA's approach to these consumer protection regulations.

Parliament recently adopted the Act on Financial Transaction Fees, which becomes effective from January 1 2013. The act designates the levied contribution as a fee, but the contribution does not represent a reimbursement of costs or consideration for a service rendered by the state. As such, it is really no different from a general tax and is commonly called the 'financial transaction tax'.

Recent statistics show that the new Financial Conciliation Body (FCB) is achieving a large number of successful settlements between consumers and financial service providers. However, concerns remain over the scope of its competence, and over the fact that a consumer who is dissatisfied with an FCB decision may apply to the courts, whereas a service provider may not.

For the first time, the Supreme Court has examined in detail whether a contractual term that gives a financial institution the right to amend a consumer loan contract unilaterally is consistent with Hungarian law. Financial institutions are already revising their practices and contractual terms as a result.

On the basis of the Fundamental Law, the Magyar Nemzeti Bank Act 2011 has replaced the Magyar Nemzeti Bank Act 2001. The Magyar Nemzeti Bank (MNB) – the central bank of Hungary – is obliged to adapt its governance and operation to accord with the new law by the end of March 2012. But the new act's changes raise concerns that the government may try to exercise undue political influence over the MNB.

A new law passed by Parliament introduces an interest rate cap on consumer mortgage loans and regulates the calculation of interest rates. It enables debtors to ask for the amendment of contracts that were concluded before the new law entered into force. In addition, it amends the Civil Code by introducing a mandatory base rate plus a 24 percentage-point cap for contracts where both parties are natural persons.

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Capital Markets

Overview
Including: Securities; Acquisition of Control; Investment Services; Nominees; Stock and Commodity Exchanges; Clearing Houses; Investor Protection Fund; Investment Funds; Supervisory Authority.

Under the first laws enacted after Hungary's conversion to a market economy, depositories which exercised shareholders rights on behalf of their clients were often treated as the de facto shareholder for all legal purposes. As this caused difficulties in structuring share acquisitions in certain industries, the regulatory regime has been revamped over time.

Under the new Capital Markets Act, investment fund managers are now allowed to deal with portfolio management, investment consultancy and security lease. In addition, they can now convert an investment fund into another type or brand, and alter its duration. Disclosure requirements have also been stepped up.

In order to meet the demands of institutional investors in the Hungarian securities market for long-term, low-risk investment instruments, a regulatory framework for long-term financing secured by real property and for the issuance of mortgage bills has been introduced. This update outlines some of the relevant requirements.

This update sets out the legal requirements that a foreign entity must meet if it wishes to offer foreign securities in Hungary, and the legal requirements that a Hungarian entity must meet in order to offer Hungarian securities abroad.

An increasing number of multinationals are extending employee stock option plans to the management and employees of their Hungarian subsidiaries. These plans involve the purchase or the option to purchase shares in the ultimate parent company.

A new phenomenon appeared recently on the Hungarian securities market: the takeover of listed companies through public tender offers. This update discusses the regulatory regime applicable to the transformation of companies taken over by one or more investors from public to private form, and the de-listing of these companies from the BSE.

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Commercial Property

The Act on Real Estate Registration includes provisions on independent properties other than parcels of land. Underground garages and other structures qualify as other independent properties if they are only partially owned by the owner of the land parcel. This also applies to underground storage areas which are entered from public areas, regardless of their purpose.

In a recent case a rental agreement was terminated by notice for non-payment of rent. The lessee argued that this termination was unlawful, as it had offset the costs of work it had carried out on the property against the rent. However, the Supreme Court ruled that the law does not recognize a unilateral right to offset and that termination was therefore valid.

Company & Commercial

Under Hungarian corporate law, public companies limited by shares may operate under either a one-tier or two-tier corporate governance system. By introducing a legal basis for the one-tier system in 2006, the Hungarian regime was brought into line with that of other western European countries and with EU regulations.

Based on the Companies Act, shareholders must make decisions regarding the operation of the company and executive officers must allow inspection of the company's books and documents. According to the legal opinion of the Supreme Court, this shareholder right is a fundamental right. Nevertheless, the right is limited.

The main provisions and restrictions on share sale and purchase are set out in the Company Act on Business Associations. The act contains general rules concerning the sale of shares in limited liability companies, private companies limited by shares and public companies limited by shares.

The rules for simplified company registration have been reviewed and amended. The changes were driven by the need to coordinate creditor protection and safety rules with the key interests of small and medium-sized businesses in order to register such companies more quickly. The simplified registration procedure calls for the use of templates and thus provides a speedier alternative to the normal registration procedure.

New business entities may be listed in the Company Register by using either an instrument of construction whose content is freely established by the parties or, in a simpler procedure, the template in the annex of the Act on Public Company Information, Company Registration and Winding-Up. However, the two types of registration are separate, and companies cannot switch between procedures at a later stage.

New legislation that modified the main acts in relation to company law and company registration has recently come into force. Among other things, it amends the involuntary dissolution regime, as well as changing the law in respect of seat services and the appointment of delivery agents.

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Competition

A proposed legislative amendment may have a major impact on ongoing investigations at the Competition Office. According to the proposal, the Competition Office will have no authority to investigate any agreement that is related to agricultural products and aimed at the restriction, distortion or exclusion of competition if the agreement attempts to guarantee fair and equitable income for the parties thereto.

In a recent decision the Competition Office concluded that three major rail cargo companies had participated in a price-fixing and market-sharing arrangement in the Hungarian rail cargo market between 2004 and 2009. As a result of the infringement, the Competition Office imposed substantial fines amounting to Ft1.25 billion (approximately €4.5 million). All three infringers were state-owned undertakings.

The Competition Office recently approved the creation of a joint venture between Hungarian Post, the Hungarian Electricity Works and MFB Invest, a subsidiary of the Hungarian Development Bank. All of the new entity's shareholders are state-owned companies, and the regulator has provided useful guidance on how to calculate the turnover of state-owned undertakings in a merger control context.

Following a public consultation, the Competition Office has published its new merger clearance application form. It incorporates many elements recommended by market participants and practitioners, but the rationale for some of its requirements is hard to fathom. The Competition Office has also issued guidelines on the rules for pre-notification consultations.

After many years of debate between the Competition Office and various courts, new guidelines have been issued on determining fines in cartel and abuse of dominance cases, detailing the calculation of base amounts and adjustments. The Competition Office's right to include a corporate group's foreign turnover in calculating the base amount could lead to a sharp rise in fines.

A new decree on block exemptions for vertical agreements and concerted practices mainly follows the principles of its predecessor, but introduces one significant change: both parties - the buyer and the supplier - must have a market share of below 30% in their relevant markets.

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Corporate Finance/M&A

Under Hungarian law, financial assistance is not generally prohibited, but is subject to certain restrictions under the Companies Act. Since limited liability companies and companies limited by shares are liable to their creditors alone, and as shareholders cannot be held liable for the company's obligations, the law provides for the protection of the company's assets and equity.

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Corporate Immigration

Although the principle of free movement of workers covers most European countries, the employment of foreign citizens remains a hot topic in Hungary. Employers should ensure that they are familiar with the processes and requirements for work and residence permits and the EU blue card, as well as the circumstances in which employees are exempt from work permit requirements.

Corporate Tax

A tax amnesty has been offered for the tax years 2008 and 2009 providing a significantly discounted corporate tax exposure for dividends and certain capital gains received from controlled foreign corporations. The amnesty is primarily intended to attract funds that are trapped in tax havens into Hungary and ultimately foster investment in Hungarian state bonds.

Although the planned abolition of the 4% solidarity surtax has yet to be enacted, a number of elements in Hungarian tax legislation already favour various types of tax structure. This update shows how a well-planned combination of various income and cost elements derived from different activities can reduce the effective Hungarian tax burden to close to zero.

Hungary has traditionally been a popular jurisdiction for international licensing and financing holdings. The planned abolition of the 4% solidarity surtax, expected to take effect in January 2009, will make Hungary's effective corporate income tax burden the lowest in Central Europe, further raising its profile among investors.

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Derivatives

The Hungarian Financial Supervisory Authority has fined Deutsche Bank London Ft90 million (approximately €325,500) for manipulating the exchange rate of the Hungarian forint in a series of transactions undertaken in October 2008. The regulator concluded that Deutsche Bank London had sold huge quantities of Hungarian forints on the
over-the-counter market, causing a significant weakening in the forint rate.

E-commerce

Overview
Including: Background; Definition and Status of Service Providers; Trading Restrictions; Online Contracts; Liability of Internet Service Providers; Self-Regulation; Dispute Resolution

A new act was recently introduced to bring the Hungarian e-commerce legislation further into line with EU requirements. The act also covers data protection issues in connection with information society services, and the penalties applicable to infringements of national provisions adopted pursuant to the E-commerce Directive.

Recent legislative amendments introduce a framework for the electronic registration of limited liability companies and companies limited by shares. All such companies are also required to convert their company documentation into electronic form before December 31 2006, in order to facilitate electronic disclosure of company documents.

Hungary's E-commerce Act took effect on January 24 2002. While the act is largely in line with the E-commerce Directive, Section 18 acknowledges that compliance with certain issues was not achieved. Recent feedback from the European Commission and studies conducted by the Ministry of Information Technology and Telecommunications have also revealed gaps in harmonization.

Hungary's domain name registration rules afford priority to domain names based on registered trademarks. As the rules exclude from the scope of priority requests for domain names which are based on pending trademark applications, any party may challenge such a registration successfully.

The absence of regulations on the retention of electronic documents has hindered the development of e-commerce, with companies worried that future legislation may require the use of different systems to those they employ in the meantime. However, clarification is expected in the form of a new law which will specify the requirements for proper electronic record management.

In recent months the Hungarian Parliament has amended the legislative framework to allow for the efficient use of electronic signatures and the operation of certification service providers. However, as no state financial support is available for certification service providers, few have commenced operations to date.

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Employment & Labour

The new Labour Code has introduced changes to the collective redundancy process. The most significant amendment affects the employer's consultation obligation. According to the new rules, in case of collective redundancies the employer will consult only the works council, if one exists; no provision is made for how the employer should proceed if there is no works council.

The new Hungarian Labour Code, which recently came into effect, introduces certain amendments and rules to the previous code that affect the forms of flexible employment. Among other things, the new code allows employers to terminate fixed-term employment contracts without incurring significant pay-outs, establish shared positions and make agreements with school cooperatives for student employment.

A major reform of Hungary's Labour Code will come into force in July 2012, affecting not only employers and employees, but also trade unions and works councils. The change will alter many aspects of the employment relationship, including termination, leave and unfair or adverse statements by employees through online media.

The protection of employees returning from maternity leave has always been a significant issue, where social considerations and employment law questions inevitably overlap. As in so many areas, effective legislation must balance the different interests of the parties involved. However, problematic aspects of the legal regime tend to be ignored or concealed when they should be addressed and resolved.

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Energy & Natural Resources

Last year saw public utility costs fall in Hungary, with Parliament adopting several acts to reduce household gas, electricity and district heating prices by significant margins. Although the fee reductions are intended to improve the financial situation of average households, the economic implications of these measures may cause grave problems in the medium term.

Hungary has implemented an EU directive on the energy performance of buildings. The implementing decree establishes a scheme in which the energy performance of buildings can be calculated and certified by authorised experts. The law will enable owners and lessees to obtain up-to-date information on the energy performance of their buildings, thus encouraging investment and awareness in improving energy efficiency.

Legislation establishing the Hungarian Energy and Public Utilities Office (HEPO) recently entered into force. HEPO has replaced the former regulatory body for the energy sector, the Hungarian Energy Office. The government has stated that the new authority will work to protect efficient energy consumption, security of supply and consumers' interests.

When considering Hungary's energy policy, the security of natural gas supplies is the most important unresolved issue. Hungary's own fossil resources are relatively low quality and comprise limited reserves, while natural gas dominates the heating industry. These two circumstances make Hungary significantly dependent on imported natural gas, mainly from Russia.

The government has recently established a commission to consider strategic issues related to the construction of new power blocks in the Paks nuclear plant, and has ranked the expansion as a "high-priority project for the national economy" in recognition of nuclear power's strategic role in Hungary's electricity supply and energy security. The tendering process is expected to start later in 2012.

The Ministry of National Development has proposed a new mandatory takeover system for heat and electricity produced from renewable and alternative resources. Strategic priorities of the proposed system include promoting small and medium-sized power plants, enhancing efficiency in energy production, ensuring long-term sustainability and diversifying energy supply channels.

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Information Technology

Recent amendments the Data Protection Act contain further details on data processing and on the persons who perform data processing tasks. Among other things, they regulate the evaluation of personal information through computerized data processing, stating that the data subject must consent to such processing and is entitled to request information on the methods used.

Insolvency & Restructuring

Although Hungary's bankruptcy procedure is well established in legislation, it largely failed when the country was badly hit by the global economic downturn. Recent reforms aim to make bankruptcy proceedings attractive to both debtors and creditors and to provide an alternative to liquidation proceedings. The changes are particularly relevant to banks and credit institutions.

Insurance & Reinsurance

Overview
Including: Regulatory Framework; Substantive Insurance Law

In a recently published interim judgment the Metropolitan Court of Appeal explained the term 'car theft' based on a grammatical interpretation of the insurance company's general business terms. The incident at the centre of the case involved a sham accident: the perpetrators had crashed into the plaintiff's car and when the plaintiff got out to inspect the damage, his car was promptly stolen.

A Hungarian business association recently initiated court proceedings to determine the amount of compensation due to it when a company car was stolen. The Supreme Court ordered the insurer to pay the market value of the vehicle plus value added tax, ruling that any tax benefits available to the plaintiff had no bearing on the performance of the insurance contract.

Hungary's Parliament recently passed a new Insurance Act in order to continue the harmonization of Hungarian legislation with EU law. The act also aims to address the new challenges facing the insurance sector and to coordinate the supervision of financial services.

The new Insurance Act which will soon be adopted was developed in tandem with the industry, resulting in an accomplished piece of legislation which is acceptable to insurance professionals. The act takes account of the practical experiences of the last decade and fully complies with EU law, which will facilitate the entry of Hungarian insurance companies into the single market.

A warehouse owner recently contested a final settlement agreement which it reached with its insurer following fire damage to its property. It argued that the insurer had exploited its financial position and that the agreement was therefore usurious. However, the courts ruled that financial necessity in itself cannot be regarded as sufficient grounds to invalidate a contract.

Under a legal expenses insurance contract, the insurer undertakes to cover the cost of judicial procedures initiated in order to protect the legal interests of the insured. The insurer is entitled to refuse to pay out if the case has little chance of success. Certain legislative measures serve to minimize conflicts of interest in this area.

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Intellectual Property

The Budapest Metropolitan Tribunal recently overturned the negative decision of the Hungarian Intellectual Property Office issued in a revocation proceeding against Pfizer, thus maintaining its second medical use patent for sildenafil in the oral treatment of erectile dysfunction. The main issue in question was the lack of inventive step, which the court analysed in light of both Hungarian and European approaches.

The owner of the mark BUDAPEST KRÓNIKÁJA ("chronicle of Budapest") filed suit against the author of the book Budapest Krónikája a kezdetektől napjainkig ("Chronicle of Budapest from the beginning to the present") for trademark infringement. The ensuing case was notable in highlighting the limits of the protection afforded to mark owners, especially where the dominant element of the mark is insufficiently distinctive.

The word MEDVE ('bear' in Hungarian) with the image of a bear is an old and popular trademark in Hungary for cheese packed in a box. A competitor developed and introduced a similar mark into the market featuring the word MACI ('little bear') and the image of a small, smiling bear. The Metropolitan Tribunal has upheld the cancellation of the MACI mark, noting that it was used with the aim of exploiting the reputation of the MEDVE mark.

A dispute concerning the RABA trademark – one of the oldest and best-known Hungarian marks for vehicles – provides useful guidance on how the courts will consider composite evidence of genuine use, in which multiple documents are submitted. The courts' decisions in the case were in line with the European Court of Justice's ruling that "all relevant facts and circumstances" must be taken into account.

The Metropolitan Court of Budapest recently issued several decisions upholding preliminary injunctions against a group of generic pharmaceutical manufacturers and wholesalers that wished to make commercial use of generic sildenafil-based drug products corresponding to Pfizer's Viagra and Sildenafil Pfizer products. The court issued the decisions in a rehearing ordered by the Metropolitan Appeal Court.

The basic rules on remuneration for the inventions of employees where their inventions are used by the employer are set out in the Patent Act. For inventions made in the course of an employee's duties, the employer is required to remunerate the inventor accordingly. However, both parties must meet certain obligations.

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Litigation

There are few legal grounds in Hungary on which a shareholder may be held liable for the debts of its company. One such ground is for a so-called 'long-term detrimental business policy'. The Supreme Court recently considered the statutory provision that provides for the piercing of the corporate veil in such an event. The decision marks a turning point in Hungarian company law.

Hungary's new Constitution has resulted in significant changes to the competence of the Constitutional Court, the most important of which introduced the concept of the 'real' or 'individual' constitutional complaint. This measure is expected to enhance the protection afforded to fundamental rights and to change the role that the Constitution plays - not only in the operation of the court system, but also in everyday life.

Award holders that seek to enforce a foreign award in Hungary must be aware of certain procedural pitfalls in the court process. They should also be prepared for some of the surprising effects of a re-awakened piece of legislation that, having lain virtually dormant for 40 years, is causing problems for foreign parties.

A recent, unpublished study, which was prepared by a Supreme Court judge in order to facilitate the amendment of Hungary's arbitration law, has summarised Hungarian court practice in connection with arbitration. It is particularly valuable because it considers a number of court rulings that are unavailable to the public.

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Securitisation & Structured Finance

The Supreme Court has rejected a claim against the exclusive Hungarian distributor of structured notes issued by Lehman Brothers Treasury Co BV and guaranteed by Lehman Brothers Holding Inc. After the issuers and the guarantor became insolvent, their client initiated a lawsuit against the defendant on various grounds, seeking repayment of the notes' face value and the fee paid to the defendant, plus interest.

While the European securitization market continues to thrive, the experience in Hungary is somewhat different. The necessary legal framework appears to be in place, but for various reasons the domestic market is still in its infancy. However, 2005 is widely anticipated as the year in which the first securitization transaction is likely to take place in Hungary.

Telecommunications

Overview
Including: Telecommunications; Television and Radio Broadcasting

Less than a year after the new Communications Act took effect, industry players have begun complaining that there are problems with the new regulatory scheme and institutions, and that competition has been slow to develop. Calls are thus being made for the act's revision.

A recent decree obliges telephone service providers to share internet access revenues with internet service providers (ISPs). However, disputes arose when the former state monopoly telephone service provider required the ISPs to collect the percentage of internet access fees allocated to them by the decree.

Telephone service providers with significant market power are now required to grant access to their local loops to other service providers upon request. They are also required to submit a reference interconnection offer to the Communications Arbitration Committee for approval once their exclusive rights to provide telephone services expire.

The new Communications Act will take effect on December 23 2001. Its aim is to open up the telecommunications market by the end of this year. The act, in accordance with current EU directives and regulations, provides the framework for the liberalized telecommunications market in Hungary for the next decade.

Under a new decree any equipment that complies with the relevant harmonized and/or localized harmonized standards will be deemed to be in conformity with its basic requirements, and may thus be imported into, distributed and used in Hungary.

A new ministerial decree regulates the conditions for use of the 3.5 gigahertz (GHz) frequency band. The status of the band has been changed in the National Frequency Allocation Table to reflect that it is now free for designation for the purposes of public telecommunications services.

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White Collar Crime

Hungary has largely caught up with most of its fellow EU member states in terms of anti-money laundering legislation. However, a recent law introducing a new type of bank account in Hungary – the stability savings account – calls into question the government's commitment to fighting money laundering. Many have argued that the account may serve as a means of legitimising illegal funds.

In 2012 Parliament passed a law that limits the sale of tobacco products by creating a state monopoly and selling retail concessions. The alleged primary aim was to prevent minors from smoking. However, it is now widely believed that the government's ruling party passed the law in order to provide lucrative business opportunities to its own loyal supporters.