Relationship between merger control and FDI
Under EU merger control law, the Commission has exclusive competence to assess concentrations with an EU dimension. This competence is determined on the basis of the turnover figures of the undertakings concerned: the combined aggregate worldwide turnover of the undertakings concerned must exceed €2.5bn and the aggregate EU-wide turnover of at least two of the undertakings concerned must exceed €100m (see Art. 1(2) and (3) EUMR).
At the same time, EU Member States can take measures to protect legitimate interests of public security, media plurality and prudential rules (see Art. 21(4) EUMR). This includes FDI screening rules that allow national regulators to examine, restrict or – as a last resort – prohibit acquisitions that threaten national security interests. Measures that serve another public interest must be notified to the Commission in advance. In this case, the Commission not only reviews the proportionality of the measure, but also makes sure that it actually serves the protection of a legitimate interest.
While these principles seem clear, their application in practice is less straightforward. The EU and national regulators (currently 18 member states have adopted FDI screening rules) will have different views on what constitutes a legitimate interest. Even the EU interprets the term in different ways: public order reasons, such as securing the supply of energy, raw materials and food, are legitimate under the recently adopted EU FDI Screening Regulation (see our previous blog and update), but not under the EUMR. For international investors, this can create significant risk of uncertainty and delays in transactions. Most recently, this was illustrated by Vienna Insurance Group's ("VIG") planned acquisition of the Hungarian subsidiaries of AEGON, which we will outline below after a brief summary of the Hungarian FDI rules.
Hungary's double FDI screening mechanism
Currently, there are two FDI screening mechanisms in Hungary. The scope of the two regimes is slightly different, and it should be carefully assessed whether a transaction falls under one or the other:
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The "permanent" FDI screening regime was introduced in 2019 and contains the applicable Hungarian rules on the basis of the EU FDI Screening Regulation. It applies if a "foreign investor" intends to acquire a Hungarian company whose business activities are deemed to be sensitive to national security (e.g. production of arms and certain secret service devices, productions of dual-use products, supply of water, electricity, natural gas and telecommunication services). It was designed not to cover transactions by EU investors.
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The "temporary" FDI screening regime was introduced by the Hungarian Government in April 2020 with the aim of protecting Hungarian companies active in the relevant strategic industries in the context of the Covid-19 pandemic. Strategic industries include among others, building, tourism and waste management sectors, and also ‘traditional’ strategic sectors (e.g. energy, transport, communications) affecting investment and exit opportunities in relation to Hungarian companies, resulting in an approx. 80% coverage of Hungarian industry sectors. The "temporary" FDI control regime was enacted through emergency legislation and will remain in force until the end of the state of emergency situation in Hungary (which was recently extended due to the war situation in Ukraine). Transactions resulting in the indirect acquisition of a Hungarian subsidiary of a foreign legal entity qualifying as a strategic company fall outside of the scope of the "temporary" FDI screening regime. Thus, transactions that do not involve a direct change in ownership of Hungarian entities are not caught under the "temporary" regime, so that many cross-border transactions (e.g. any sale where there is a holding structure outside Hungary) are exempt from the notification obligation.
"Lex AEGON"
In September 2020, AEGON decided to sell its various subsidiaries in the CEE region (Hungary, Poland, Romania and Turkey) to one buyer in a single transaction, the Hungarian operations being the most important. The best offer was submitted by VIG and the transactional documents were quickly negotiated with an agreed signing date on 29 November 2020.
The Hungarian Government introduced an amendment to the "permanent" FDI screening regime which was published in the Official Journal Saturday evening, just the day before the signing of the transaction (scheduled for a Sunday morning). In the form of a Government Decree and as a special measure permitted under the state of emergency situation, the "foreign investor" definition was extended to cover EU and EFTA investors. Additionally, insurance activities were included in the catalogue of activities deemed sensitive to national security. Without this "last minute" legislative measure, the AEGON deal would have neither been caught by the "permanent" nor the "temporary" FDI screening regime: (1) For the “permanent” regime, VIG, listed on the Vienna Stock Exchange, was not a foreign (i.e. non-EU/EFTA country) investor, and (2) for the “temporary” regime, only non-Hungarian holding companies were to be sold based on the structure of the transaction. As a result, the planned transaction was suddenly subject to the "permanent" FDI regime which added an additional regulatory approval to obtain in order to close the deal.
The Commission unconditionally cleared the transaction under the EUMR on 12 August 2021. However, the Hungarian Government had already issued its veto on 6 April 2021 to prohibit the transaction for reasons related to national security.
The parties decided to submit an application for judicial review against the veto decision before the Hungarian courts and also filed a complaint to the Commission for infringement of EU law. As the Metropolitan Court of Budapest, however, rejected the parties' claims by its judgment of 20 September 2021, VIG announced that they would lodge an appeal against the court decision. At the same time, they were "continuing the constructive dialogue with the Ministry of Finance to clarify possibilities for a positive conclusion of the acquisition".
The Commission opened an investigation to assess whether the veto decision violated the Commission's exclusive competence to assess concentrations with an EU dimension and such measure was taken to protect legitimate interests of public security.
While the infringement procedure was ongoing, VIG announced on 22 December 2021 that they had reached an agreement on the principles of a cooperation and the further course of action, which would provide for a participation of 45% by the Hungarian State in (1) the Hungarian AEGON subsidiaries, and (2) UNION Vienna Insurance Group Biztosító Zrt. (VIG's already existing Hungarian subsidiary).
The Commission closed its investigation on 21 February 2022 and found that Hungary infringed EU law (1) by failing to communicate their intended veto to the Commission prior to its implementation, and (2) by failing to demonstrate that the measure was justified, suitable and proportionate, so that the veto was incompatible with EU rules on the freedom of establishment. The Commission therefore concluded that the veto infringed Art. 21 EUMR and ordered the Hungarian Government to withdraw its veto by 18 March 2022 (press release from 21 February 2022 available here).
On the same day, a couple of hours before the Commission's press release was published, the Facebook page of the Hungarian Minister of Finance reported that an agreement was signed between VIG and Corvinus Nemzetközi Befektetési Zrt., a 100% Hungarian state-owned investment fund on the acquisition of a 45% shareholding in all Hungarian AEGON subsidiaries.
Happy end?
Ultimately, the Commission’s decision was already obsolete when issued: As the deal was already done and dusted between VIG and the Hungarian Government, the veto decision would have been withdrawn by the Hungarian authorities in any case – even without the Commission's decision – in order to let the initial transaction go through. This was a condition precedent to the subsequent deal between the Hungarian Government and VIG.
Both the initial transaction with AEGON and the subsequent one with Corvinus have been successfully closed since, i.e. by the end of March 2022, making VIG the leading insurance company in Hungary and securing the Hungarian State a (minority) interest in the insurance business. So, it seems that everyone involved in this deal is happy – except maybe the Commission.
However, the VIG/AEGON deal raises several serious questions:
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Can Member States successfully use FDI screening rules to block transactions without sufficient justification to enforce their own interests?
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What options does the Commission have to act against such unjustified behavior from Member States before it becomes a dangerous precedent?
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How can investors protect themselves against such unforeseen events potentially causing delay and uncertainty in their transactions?
In M&A deals where these questions could potentially become relevant, investors should seek support from their FDI experts from the start. Also, the upcoming decision of the Court of Justice in the case Xella Magyarország (C-106/22) could bring further guidance, which – again – deals with a Hungarian FDI veto.
In the bigger picture, the case once more underlines that the regulatory environment regarding M&A transactions in Europe is becoming more and more complex: not only has the Commission changed its policy to now accept deals for merger review which do not meet the thresholds of the EUMR if referred to it by Member States (see our previous blog), but in a somewhat reverse development the majority of Member States now have far reaching FDI rules in place, while the Commission does not have central competence under FDI rules. This may lead to additional clearances for national security and public order to be required on the top of merger control. The VIG/AEGON case shows very practically that FDI rules have to be considered on their own account – even for intra-EU/EFTA deals. It is vital for deal teams to manage these developments and address individual transaction challenges upfront.
Authored by Ákos Kovách, Stefan Kirwitzke, Philipp Reckers. Lena Westphal, a trainee in our Dusseldorf office, contributed to this article.
