Although it made some changes to the Capital Markets Act (Act CXX of 2001; the CMA), the implementation of EU Directive 2004/25/EC of April 21 2004 on Takeover Offers did not bring big changes to the sanctions system, nor did it resolve the existing ambiguities in Hungary.
If a squeeze out is carried out in breach of the statutory requirements, the Financial Supervision may initiate investigations to review the exercise of the squeeze-out call option right and the observance of related statutory preconditions.
Given the lack of court or authority practice in this respect, it is difficult to determine how broadly the lack of statutory preconditions of squeeze out could be interpreted: for example, if a provision of the takeover offer is in breach of the CMA, and is approved by the Supervision by mistake, could it result in an unlawful squeeze-out? Past experience shows that the price calculation rules can easily lead to hard-to-detect mistakes in the offer in relation to the offer price.
If the exercise of a call option right took place in breach of the CMA, the Financial Supervision can:
- impose a fine on the offeror (Section 405 (1) and 406 (2) m) CMA);
- establish that the shareholders' rights of the offeror affected by the breach may not be exercised or, if necessary, prohibit the exercise of such shareholders' rights (Section 77 and 400 (1) o) CMA); or
- order that the shares acquired as a result of an unlawful squeeze-out be disposed of within 60 days (Section 77 CMA).
When initiating an investigation, the Financial Supervision can act on an ex officio basis or upon the notification of a third party. The latter possibility, in specific cases, can become a tool for shareholders of the target, allowing them to require a higher squeeze-out price than that offered by the offeror or in any other way to frustrate a successful squeeze-out. Remedies of civil law nature and the sanctions set out in this paragraph can apply simultaneously.
The actions of shareholders seeking remedies against a public takeover offer might involve certain technical aspects, which could also have adverse effects on the offer (or the position of the offeror).
In the course of a squeeze-out, the shareholders of the target, or certain shareholder groups, may attempt to frustrate the procedure by not submitting their shares to the offer.
In this case the target company, through the board of directors, may resolve to cancel the shares in question and to issue new shares to be transferred to the offeror. The shareholders of the target can challenge the resolution of the board of directors in court, claiming that it was passed in breach of the statutory regulations.
In the case of dematerialized shares, on the basis of the resolution of the board of the target, the respective shares are cancelled and the new shares are technically issued by the central clearing house.
Given the lack of statutory provisions regulating how the clearing house should act in case of a debate over a squeeze-out, it is difficult to predict how the clearing house would react in this situation. In the past clearing houses have refused to cancel the respective shares at the request of the target, claiming that there is a debate pending with respect to the squeeze-out's legality. This action practically blocks the squeeze-out procedure.
These sanctions, which may be applied by the Financial Supervision, or the ambiguous legal environment of certain technical aspects of a takeover offer, pose risks to the offeror's position.