Hungarian state subsidies: an impediment to M&A?

The answers depend on the terms and conditions of the subsidy in the subsidy agreement and in the relevant laws. Typically, the investment is defined and the Hungarian target must commit to realising it. This usually consists of the construction of a factory, its enlargement for capacity expansion or the launch of any other type of business, like a new shared service centre. This is usually further specified in terms of how much money will be spent on the real property, construction or renovation works, how many employees will be hired, what kind of equipment, machines, or other assets will be purchased, etc. A deadline is also always agreed for completing all the above. The government in turn commits to provide a fixed subsidy or a certain portion of the investment up to a maximum amount.

After the completion of the investment, the target must file a report on the realisation of the investment and provide documentary evidence, e.g., invoices proving that it has actually spent the agreed amount on the agreed purpose and the investment has become operational. If everything is in order, the government will disburse the subsidy. In the case of more significant investments which are completed in several stages, the disbursement can occur in several stages, in accordance with the progress of the investment.

Once the above is completed, the subsidy then advances to the monitoring period, which is usually three to six years and begins when the investment is completed. During the monitoring period, the company must usually undertake to maintain and operate the investment, i.e. to run the factory or operate the shared service centre, to keep a defined number of employees employed, disburse a defined amount of salary cost, and often also to achieve a certain, gradually increasing annual turnover. The failure to achieve any of the above goals may trigger the obligation to repay the subsidy along with interest and penalties, for which usually securities must also be given before the subsidy is disbursed.

Hence, the potential purchaser must evaluate whether the above commitments fit into its plans for the target company and whether the transaction will affect the fulfilment of the target's obligations. For example, any potential redundancy scheme, the sale of the company's assets acquired as part of the subsidised investment, or the dissolution of the consortium that has originally set up the target company, may result in repayment obligations.

There are also subsidies only for small and medium size enterprises (SMEs). If the target company qualifies as an SME when it receives the subsidy, it must be reviewed whether the target company's status as an SME was a condition for receiving the subsidy. The acquisition of such a target company a multinational company could potentially result in losing the SME status and thus, losing the entitlement to the subsidy, which may then trigger a potential withdrawal or termination option for the donor and repayment obligation. This is very relevant as the target has an obligation to notify the donor of the subsidy of any change in its ownership structure and any other relevant features. Failure to make such notification may also result in the withdrawal of the subsidy.

Likewise, the terms of the subsidy usually include that, the target must qualify as a 'transparent organisation' during the entire period of the subsidy. 'Transparent organisation' is a specific term defined in Hungarian law and is linked to questions such as whether the ultimate shareholder(s) of the target company are known and the tax status of the target company. If the change in the ownership structure results in the target company losing its qualification as a 'transparent organisation', the target will also lose its eligibility for the state subsidy, and repayment obligations may arise.

So while state subsidies are a financial boon for companies, their strict terms and conditions may limit the subsidised company's options when defining its future strategy. Potential investors and future shareholders are advised to review and evaluate the terms and conditions of the subsidies carefully.

authors: Zsófia Rideg, Adrián Menczelesz