The rules relating to squeeze-out, which were first introduced in Hungary in 1998 by the Securities Act, are now set out in the Hungarian Capital Markets Act (Act CXX of 2001 – the CMA). The squeeze-out rules apply to all public companies, not just listed companies. An amendment to the CMA, implementing Directive 2004/25/EC on takeover bids (the Takeover Directive) and entering into effect on May 20 2006, has altered the squeeze-out regulations, which will be largely influenced by the practice of the new financial supervisory body established under the new provisions.

Under the CMA, squeeze-out may be effected through a statutory call option right, as provided by Section 76/D. This section of the CMA sets out the preconditions for a squeeze-out call option and the procedural rules regulating the exercise of these rights.

Background

Before the amendment entered into force, the statutory provisions relating to squeeze-out were contained in Section 76(2) of the CMA. The provisions set out that the offerer, having acquired as a result of its offer more than 90% of the voting rights in the target and having performed all payment obligations and related reporting and publication obligations, has a statutory (call) option right, within 30 days of performing its reporting obligations, for the remaining shares upon completion of the public takeover offer.

The new provisions were introduced by the amendment as Section 76/D of the CMA.

Pursuant to Section 76/D of the CMA, the offerer may exercise a call option right if: (x) the offeror has stated its intention to exercise its call option right in its request submitted to the Financial Supervision for approval of the offer; and (y) the offerer has acquired an influence of at least 90% in the target within three months after the completion of a successful mandatory or voluntary offer; and (z) the offerer certifies that it has enough funds to cover the consideration payable for the shares that are the subject of the squeeze-out.

Under the current provisions, the 90% influence may be acquired and the squeeze-out call option right may be exercised within three months after the mandatory or voluntary offer is successfully completed. The purchase price of the remaining shares must be deposited in a deposit account once the exercise of the squeeze-out call option right has been reported to the Financial Supervision. The price for the remaining shares of the target that are the subject of the squeeze-out must be the higher of the offer price included in the takeover offer or the equity per share value indicated in the target's last audited annual report. If the target's shareholders fail to hand over their shares to the acquiring party, the target can invalidate their shares and issue new shares. These new shares must be made available to the offerer.

The definition given by Section 76/D gives rise to some issues:

• The meaning of the term "acquisition of an influence of 90% or more in the target".
• The offerer's obligation to certify the availability of the funds, and to include a declaration of its intent to exercise the call option right.
• Whether squeeze-out is subject to the approval procedure of the takeover offer.

Acquisition of influence

Under the CMA, a public takeover offer has to be made for all voting shares of the public target for all shareholders holding voting shares. But under the Companies Act, employees' shares may only be acquired by full-time or part-time employees or pensioners of a company. This restriction prohibits any third parties from acquiring employees' shares. So employees' shares, although representing voting rights in the company, are not subject to a takeover offer, meaning that the holders of voting employees' shares cannot benefit from a takeover offer.

The language of the CMA makes no distinction between the different classes of shares to be acquired in an offer, so it remains unclear whether the voting rights represented by employees' shares have to be taken into consideration when calculating the statutory threshold – that is, whether the overall number of votes or just the number that may be acquired by way of a public offer should be applied as the basis for calculating the threshold. This has been an issue under the previous squeeze-out regimes, and remains unsolved by the new legislation.

Regarding the offerer's right to trigger the squeeze-out mechanism, the proportion of the registered capital acquired by the offerer by way of its public takeover offer is of no relevance.

Squeeze-outs and takeover approval

Another aspect of the squeeze-out mechanism is whether the squeeze-out call option right is subject to the administrative procedure carried out by the Financial Supervision when considering a public takeover offer. Under the CMA, an offerer is only entitled to a squeeze-out if it complies with the public takeover offer procedure and the related reporting and announcement requirements. But without any further requirement on the approval of the exercise of the call option right, it could be argued that the squeeze-out stands separate from the Financial Supervision's approval procedure.

This conclusion is also a valid one under the new legislation, regardless of the fact that the offerer must include a declaration of its intent to exercise the call option in its application for approval. On the basis of the provisions of Section 76/D, and Section 76/D(1)(b) in particular, it seems apparent that the declaration is not assessed in the course of the approval procedure and that the approval of a takeover offer does not include assessment or approval of the declaration or its contents. Also, the fact that influence acquired after the completion of the offer may serve as grounds for the squeeze-out supports the argument that the squeeze-out is not subject to the approval procedure. Rather, the inclusion of the declaration in the application for approval could be considered a statutory condition precedent required to exercise the squeeze-out call option right, the lack of which means that the respective share purchase agreements cannot exist.

The Financial Supervision may initiate investigations to review a squeeze-out and apply measures, separately from the initial public takeover offer approval procedure under the CMA.

Squeeze-out declaration

Section 69(6)(e) of the CMA (as introduced by the amendment) requires that, if the offerer aims to acquire an influence of at least 90% and if it intends to exercise its squeeze-out call option right, it must include a declaration of its intent in its application for approval of the takeover offer. In accordance with the provisions of Section 76/D (1)(a), this declaration is a precondition for the squeeze-out.

On the other hand, under the requirements of Section 71(1), a takeover offer must be made for all voting shares of the target for all shareholders holding voting shares (that is, shares that represent voting rights). This requirement means that a takeover offer may not be directed at the acquisition of less than 100% of the voting rights of the target. It seems that these two provisions contradict each other, and the requirement prescribed by Section 69(6)(e) only means that the declaration must be included in relation to any offers if the offerer intends to exercise a squeeze-out.

This provision also contradicts the new principle of squeeze-out, which allows squeeze-out on the basis of influence acquired after and outside of a takeover offer. According to this new principle, the extent of influence acquired by a takeover offer is almost irrelevant from the perspective of squeeze-out regulations. The fact that has the most relevance in this respect is that a squeeze-out must be preceded by a takeover offer and that, within three months of the completion of a successful offer, the offerer must have an influence of at least 90%. It is of no relevance what portion of the influence is acquired outside of the offer. In theory it would be possible for an offerer to acquire most of the respective threshold after the completion of the offer for the valid exercise of a squeeze-out. Also, considering the requirements of Section 71(1), it appears that the subjective element contained in the provisions of Section 69(6)(e) does not fit into the new structure of squeeze-out regulations.

Availability of funds

Under the new provisions regulating squeeze-out, the funds necessary to purchase the shares that are the subject of the squeeze-out must be deposited with a bank. The general rules relating to takeover offers and the form of the consideration payable by the offerer allow the consideration to be in the form of cash, bank guarantee or securities, so it seems that the squeeze-out regulations set out stricter rules in terms of the form of the consideration and the requirements relating to availability of consideration.

Welcome clarification

The amendment brings clarification to certain issues and provides a broader basis for the exercise of the squeeze-out call option right.

Under the old legislation, the wording "acquisition of the voting rights in excess of 90% as a result of the takeover offer" caused confusion in relation to the Hungarian squeeze-out regime. There were two ways to interpret the offerer's obligation to have acquired more than 90% of the voting rights in the target "as a result of the public takeover offer".

Under a strictly formalistic approach, only an offerer that acquires shares representing more than 90% of the voting rights in the target by way of and upon completion of the public takeover offer would be entitled to the squeeze-out call option right. This interpretation would mean that no shareholder already holding more than 90% of the voting rights in a public company would be entitled to a squeeze-out, even if the holding had been followed either by a mandatory or a voluntary takeover offer.

A less formalistic interpretation could be based on the squeeze-out regulations' legal aim to provide a uniform shareholder structure after a shareholder acquires the majority of the voting rights of a company.

The differences between the two possible interpretations, neither of which had been tested by a competent court, might have led to the absurd conclusion that an offerer holding more than 90% of the voting rights of a company in spite of a public takeover offer (even in case of a mandatory offer) would never be entitled to a squeeze-out. The issue under the former regime appeared to be whether an offerer held more or less than 90% of the voting rights when the public takeover offer was submitted for approval by the Financial Supervision. This issue had never been settled in practice, or by the Supervision or a competent court.

The amendment introduced a more objective basis for the exercise of squeeze-out by requiring an influence of at least 90% to be acquired within three months after the completion of a successful takeover offer. The new wording of the CMA relating to the applicable squeeze-out threshold resolves uncertainties and makes it possible for the offerers to use the institution of squeeze-out in an easier and less controversial way.

The requirement of acquiring an influence of at least 90% instead of more than 90% of the voting rights is more favourable for the offerer, as the definition of influence given by Section 5(1)136 of the CMA includes items other than voting rights.

Pursuant to this definition, the following will be considered an acquisition of influence: (i) the acquisition of voting rights in the decision-making process of the general meeting of a public company, including a purchase option, repurchase option or futures option for voting shares, and the exercise of voting rights through the right of use or usufruct; (ii) where control is acquired by any means other than an outright bid submitted by the acquiring party (for example, inheritance or succession) or by way of a resolution of the public company that affects shareholders' voting rights or changes the rates of voting powers; (iii) where an interest was acquired through the recovery of voting rights; and (iv) the conduct of persons acting in concert.

The amendment introduced the term "persons acting in concert" as a statutory definition, including the conduct of legal or natural persons or organizations without legal capacity that act in concert with the offerer or the target company on the basis of an agreement to acquire control in the target company or to hinder the success of a takeover offer. The members of a group of companies are deemed to act in concert.

The new regulations mean that the conclusion of an option agreement by the offerer for the target shares or its concerted actions with other persons (typically shareholders of the target) after the completion of its takeover offer resulting in the acquisition of an influence of at least 90%, or affecting shares representing the threshold, will be considered enough grounds for the exercise of a squeeze-out.

The amendment also extended the term during which the call option right may be exercised from 30 days to three months. This term is also open for the acquisition of influence serving as a basis for the exercise of the squeeze-out, so the amendment clarifies an important aspect of the applicable regulations and creates a framework in which squeeze-out can be exercised more easily.

Author biographies

László Nanyista CHSH Cerha Hempel Spiegelfeld Hlawati László Nanyista is a member of the M&A practice group of CHSH Budapest, and has been with the firm since July 2003. His main areas of practise are mergers and acquisitions, takeovers, company law and commercial/corporate litigation. László Nanyista has accompanied several national and international clients in takeover proceedings and matters generally relating to M&A and takeover issues. László Nanyista graduated from the Law Faculty of Eötvös Loránd University in Budapest in 1998 (Dr iur) and has been admitted to the Budapest Bar since April 2003. He has authored publications on different aspects of Hungarian takeover and antitrust regulations. Kinga Hetényi CHSH Cerha Hempel Spiegelfeld Hlawati Kinga Hetényi is the head of the corporate and M&A department of CHSH Budapest, which comprises another three senior and three junior lawyers. Her main areas are corporate law, M&A transactions and restructurings. Kinga Hetényi graduated from Eötvös Loránd University in Budapest in January 1995 and was admitted to the Budapest Bar in January 1998. Before joining CHSH Budapest one year ago, she worked for the Budapest office of a large US law firm for nine years and was head of the legal department of the Hungarian subsidiary of a multinational FMCG company for one and a half years.