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Changes in corporate law

A new Act Concerning Corporations took effect in Hungary in June 1998. The new law provides for, among other things, a complete restructuring of the law concerning groups of companies. In contrast to the previous statute, the new law expressly provides that not only domestic corporations and private persons but also foreign corporations and private persons may be controlling shareholders (who hold more than 25, 50 or 75% of the votes in the controlled company, which may be an Hungarian limited liability company or joint stock corporation). This clarifies that Hungarian law on groups of companies is also applicable in a case of foreign influence.

However, even under the new law, it remained unclear whether Hungarian law on groups of companies should also be applicable to the corporate bodies of a foreign shareholder. According to sec. 294 para. 2 of the new law, one person could not simultaneously be a managing director (member of the board of directors) or member of the supervisory board of both the controlled company and the controlling shareholder which holds more than 50 per cent of the votes in the controlled company. It was discussed whether this new provision should also be applied to the case where the controlling shareholder is a foreign corporation. This question was particularly interesting because, concerning the one-man limited liability company and the one-man joint stock corporation, the law contains a similar prohibition with regard to the relationship between the bodies of the sole shareholder and the one-man company. For this situation legal commentators were of the opinion that, due to the wording of the law, the prohibition applied only to domestic shareholders of a one-man corporation, but prevailing opinion was that the prohibition in the law on corporate groups (section 294 paragraph 2) also applied to the corporate bodies of foreign controlling shareholders. However, despite this interpretation, the court maintaining the Commercial Register, occasionally paid no attention and entered these bodies with foreign controlling shareholders in the commercial register.

Before the Hungarian Supreme Court could settle this question, parliament repealed section 294 paragraph 2 in early April of this year. Thus, in the future managing directors and/or members of the supervisory board may serve on an executive body with both the controlling shareholder and the controlled corporation, regardless of whether the controlling shareholder is of domestic or foreign origin.

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