Corporate Governance and Directors' Duties: Hungary

A Q&A guide to corporate governance law in Hungary.

The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.
 
To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.
 
The Q&A is part of the multi-jurisdictional guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg
Barcza Mihály and József Bulcsú Fenyvesi, Oppenheim
Contents

Corporate entities

As a matter of Hungarian law the main corporate entities (companies) comprise the following:

  • Unlimited partnership (közkereseti társaság) (Kkt). A company with at least two members, where the liability of the members for the debts of the company is unlimited. A Kkt has no minimum registered capital requirement.

  • Limited partnership (betéti társaság) (Bt). A company with at least two members, where the liability of at least one member for the debts of the company is unlimited, and the liability of the other members is limited to the amount of their capital contributions. A Bt has no minimum registered capital requirement.

  • Limited liability company (korlátolt felelősségű társaság) (Kft). A company with one or more members, whose interests in the Kft take the form of quotas which correspond to their capital contribution to the company and are expressed as a percentage of the registered capital. The liability of the members is limited to their capital contributions. The minimum registered capital required in respect of a Kft is HUF500,000 (as at 1 April 2011, US$1 was about HUF188).

  • Private company limited by shares (zártkörűen működő részvénytársaság) (Zrt). A company established by the subscription of shares in a pre-determined number and nominal value by one or more persons. The interest of the members takes the form of shares, which also determines the limit of the liability of the shareholders for the debts of the company. The shares of a Zrt cannot be offered to the public. The minimum registered capital requirement of a Zrt is HUF5,000,000.

  • Public company limited by shares (nyilvánosan működő részvénytársaság) (Nyrt). A company with liability limited to the amount of its capital. The shares of a Nyrt are traded publicly. The minimum registered capital requirement of a Nyrt is HUF20,000,000.

 

Legal framework

1. What is the regulatory framework for corporate governance and directors' duties?

All companies operating under Hungarian law are subject to the following regulations:

  • Act IV of 2006 on Business Associations (Corporate Act) which contains the principal provisions relating to the establishment, operation and termination of a company, as well as its organisational structure.

  • Act V of 2006 on Public Company Information, Company Registration and Unwinding Procedure (Company Registration Act) prescribing the procedure of the statutory registration (foundation, alteration) for companies.

  • Act IV of 1959 on Civil Code (Civil Code).

  • Act IV of 1978 on Criminal Code with its Chapter XVII on economic crimes.

  • Act CXX of 2001 on Capital Market containing regulations in relation to Nyrt.

  • Act LVII of 1996 on the Prohibition of Unfair Trading Practices and Unfair Competition enforcing the freedom and fairness of business activities.

  • Act C of 2000 on Accounting (Accounting Act).

  • Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings (Bankruptcy Act).

  • Act CXII of 1996 on Credit Institutions and Financial Enterprises which governs the operation of companies pursuing financial and related services.

  • The constitutional documents of the company (for example, articles of association and/or bye-laws).

 
2. Has your jurisdiction adopted a corporate governance code? If yes:
  • What is the name of the code? What areas are covered by it (for example, board composition and committees, remuneration, audit and risk)?

  • How is the code structured (for example, a set of rules or principles and provisions)? What type of companies must comply with the code?

  • Is the code based on the comply or explain principle? How are companies required to report their application and compliance with the code (for example, in their annual report)?

  • What are the consequences of non-compliance with the code?

  • What has been the general response of companies, regulators and shareholder groups to the comply or explain approach? Has it been popular or controversial? Are there plans to reform it?

The Budapest Stock Exchange (BSE) adopted a code on corporate governance under the title of Corporate Governance Recommendations of the BSE (Code). The Code covers four main areas:

  • Shareholders' rights and treatment of shareholders.

  • Responsibility of the managing body and the supervisory board.

  • Committees.

  • Transparency and disclosure.

The Code makes suggestions relating to recommended, applicable practices. The principles and rules set out in the Code are considered to be an addition to the relevant Hungarian legislation (predominantly the Corporate Act). On no account shall recommendations included in the Code be regarded as recommendations contrary to the provisions of law. The Code contains recommendations, suggestions and related explanations. The Appendices of the Code include those provisions of the Corporate Act which regulate the issues of corporate governance (such as, for example, management board/board of directors, supervisory board, members' independence). Issues regulated by the Corporate Act are not covered by the Code. However, the relevant legal provisions must also be considered when evaluating the corporate governance policy of listed companies registered in Hungary. The Code is aimed primarily at public companies registered in Hungary and listed on the BSE.

Alignment and compliance with the Code are recommended but not mandatory for companies listed on the BSE. The Code is based on the comply or explain principle. However, as to the application of the comply or explain principle a distinction must be drawn between recommendations and suggestions. Companies are expected to apply the recommendations under the Code, and they must state to what extent they follow the recommendations. If a company does not apply the recommendation or applies it in a different manner, an explanation of what the discrepancies are and the reasons for the said discrepancies should be provided. In relation to suggestions under the Code, companies must only indicate whether they apply the given suggestion or not; a specific explanation is not required. The board of a public company listed on the BSE must submit a corporate governance report to the general meeting of the company together with the annual report (Corporate Act). The general meeting must then make a declaration on the company's application of the Code using the comply or explain method.

The Code has been generally well received. Companies listed on the BSE do apply the Code and submit their annual evaluation on compliance with the Code to the BSE.

 

Board composition and remuneration of directors

3. What is the management/board structure of a company? In particular:
  • Is there a unitary or two-tiered board structure?

  • Who manages a company and what name is given to these managers?

  • Who sits on the board(s)?

  • Do employees have a right to board representation?

  • Is there a minimum or maximum number of directors or members of the managerial and supervisory bodies?

Structure

Hungarian corporate law has traditionally favoured a two-tiered board structure, separating the executive and supervisory functions of the board. However, since 2006 and in respect of Nyrts only, the Corporate Act allows a unitary (single-tiered) board structure.

Management

The executive (management) functions of companies are conducted by elected executive officers, called managing directors in the case of Kfts, and boards of directors in the case of Zrts and Nyrts. A Zrt can confer the powers of the board of directors on a chief executive officer (CEO), while a Nyrt may implement a single-tiered system by conferring both the management and supervisory functions on the board of directors, in which case no supervisory board operates alongside the board of directors.

The management of a company (directors) must consist of one or more natural persons. Bts and Kkts are an exception to this rule. Legal persons are permitted to be directors of Bts and Kkts.

The directors of a company have full authority and power over the company unless powers have been expressly reserved to another organ of the company, such as the members of the company in a general meeting.

As a general rule, in conducting their activities directors must give priority to the interests of the company and must exercise their tasks with due care and diligence. However, if there is imminent risk of insolvency this general rule is overridden by the obligation to give priority to the interest of the creditors. A director may be held liable if he breaches this obligation and the breach results in a loss of assets of the company (wrongful trading).

Board members

The directors of Zrts and Nyrts must be natural persons and in the case of Nyrts can comprise both executive and non-executive members.

Employees' representation

The Hungarian regulations do not provide for the participation of employees in the management of a company. However, it is possible for a company to grant its employees a right of representation in respect of certain issues.

Number of directors or members

In the case of a Bt or a Kkt, the members of the company can appoint an executive officer or delegate the management of the company to any of the members. In the case of a Kft one or more managing directors can undertake the management of the company. Alternatively, the articles of association of a Kft may allow all the quota holders to undertake the management of the company. In relation to a Zrt, a board of directors with at least three but no more than 11 members must be appointed. The board of directors must elect its chairman. Alternatively, the members of the Zrt may elect a single person acting as CEO. The board of directors may also control a Nyrt under the single-tier system. In this case, the board of directors consists of at least five and no more than 11 members and the majority of the directors must be independent (see Question 5, Independence).

 
4. Are there any age or nationality restrictions on the identity of directors?

Age restrictions

There is no upper or lower age limit applicable to directors of a company. However, according to the general civil law principles, directors must be over 18 years to have full contractual capacity.

Nationality restrictions

There are no restrictions regarding the nationality or residence of directors (except for two members on a board of directors operating at credit institutions, where the law requires that they be Hungarian citizens).

 
5. In relation to non-executive, supervisory or independent directors:
  • Are they recognised?

  • Does a part of the board have to consist of them? If so, what proportion?

  • Do non-executive or supervisory directors have to be independent of the company? If so, what is the test for independence or what makes a director not independent?

  • What is the scope of their duties and potential liability to the company, shareholders and third parties?

  • Recognition. Non-executive or independent directors may be appointed to the unitary management board of a Nyrt if proposed by any shareholder of a Nyrt and duly elected in a general meeting.

    Under Hungarian law, the supervisory directors constitute an independent body, called a supervisory board. A person may not be a member of the board of directors of a company and its supervisory board at the same time.

  • Board composition. The composition of the board is not regulated, save for the requirement of independence of non-executive directors sitting on the unitary management boards applicable to Nyrts (see below, Independence).

  • Independence. No special requirements apply to non-executive directors, except for certain disqualification and conflict of interest rules. A director of a company cannot simultaneously occupy a position on the supervisory board of the company and/or provide auditing services to the company.

    The majority of the board of directors of Nyrts must comprise independent persons where a unitary management board is appointed (Corporate Act). An independent director of a Nyrt cannot occupy any other office in the company apart from his membership of the management board. However, these regulations do not apply to companies belonging to a recognised group of companies.

    The Corporate Act provides a non-conclusive list of circumstances that exclude independence, such as:

    • being an employee or a former employee (this applies for five years following the termination of employment) of the Nyrt;

    • providing services to the Nyrt or its executive officers for consideration as an expert or other similar services;

    • being a shareholder of the Nyrt controlling, whether directly or indirectly, at least 30% of the votes or a close relative or a domestic spouse of such person;

    • being a close relative of any non-independent executive officer or executive employee of the Nyrt;

    • being entitled to receive financial benefits based on the board membership if the Nyrt operates profitably, or receiving any other form of remuneration apart from the salary for the board membership from the company, or from a company that is affiliated to the Nyrt;

    • being engaged in a relationship with a non-independent member of the Nyrt in another business association on the strength of which the non-independent member attains control;

    • being an independent auditor of the Nyrt, or an employee or partner of such auditor (this continues to apply for three years following the termination of such relationship);

    • being an executive officer or executive employee of a business association, whose independent board member also holds an executive office in the Nyrt.

  • Duties and liabilities. All non-executive or independent directors, if any are elected, are subject to the same duties and liabilities, which apply to directors generally. They must discharge their duty to manage the business affairs of the company with the degree of due care and diligence, which could generally be expected from a person occupying such a position.

 
6. Are the roles of individual board members restricted? For example, can one person be the chairman and chief executive?

A person cannot hold a position on the supervisory board or as an auditor, while also being a director of the company (Corporate Act).

 
7. How are directors appointed and removed? Is shareholder approval required?

Appointment of directors

A managing director of a Kft is elected by the members of the company in a members' meeting (supreme body). The managing directors may also be members of the company but the members can elect any person to be a managing director.

The boards of directors for both Zrts and Nyrts are elected at a general meeting of the company. The members of the board elect one of their members as the chairman of the board, or if the articles of association allow it, the chairman may be elected at the general meeting.

If a CEO is appointed (which is only possible in a Zrt) he is also elected by the supreme body of the company.

The articles of association of a Kft or a Zrt may contain provisions conferring the right to appoint and remove managing directors on the supervisory board.

The directors of a company can be re-elected without limitation.

Removal of directors

The directors can be removed at any time by a resolution of the supreme body of the company passed by a majority of the members. The members do not need to specify any reasons.

 
8. Are there any restrictions on a director's term of appointment?

Directors can be elected either for a definite term, of up to five years, or for an indefinite term (if permitted by the articles of association of the company).

 
9. Do directors have to be employees of the company? Can shareholders inspect directors' service contracts?

Directors employed by the company

A director of a company can perform his duties either within the framework of an employment contract or a personal service contract. This is entirely for the company to decide. However, the member of a sole member company as well as the member of a Bt or Kkt solely entitled to manage the company cannot serve as an executive officer under an employment contract.

Shareholders' inspection

By adopting the resolution appointing a director, the members present at the meeting of the supreme body will be aware of the details of his management contract. A company must maintain a book of resolutions, in which resolutions passed by members, must be kept. Any member, including those not present at the relevant meeting of the supreme body when the director in question was appointed, can review the resolutions in the book of resolutions, and thereby obtain information regarding management contracts.

 
10. Are directors allowed or required to own shares in the company?

Directors are allowed but are not required to own shares in the company. However, in the case of a Nyrt, a shareholder who is directly or indirectly entitled to 30% of the votes in a general meeting is not considered to be independent, and cannot be appointed to the board as a non-executive director.

 
11. How is directors' remuneration determined? Is its disclosure necessary? Is shareholder approval required?

Determination of directors' remuneration

Generally, the remuneration of directors is determined at the time of their appointment at the general meeting of the supreme body. As an exception, the appointment and removal of directors and the determination of directors' remuneration may fall within the competence of the supervisory board as set out in the articles of incorporation of a Kft or a Zrt. If this is the case, the supervisory board can determine the level of directors' remuneration.

Disclosure

Although the Corporate Act does not expressly require disclosure of the remuneration package of directors, any member of the company can refer to the members' resolution adopted for the election of the director, which sets out this information. In addition, members have the right to require information from directors (this right is granted to any member with respect to any aspect of the company's affairs).

Shareholder approval

Generally, the level of directors' remuneration is subject to the approval of the majority of the members of the company, which is required for the adoption of the resolution electing the directors. The only exception is if the supervisory board of a Kft or a Zrt has the right to appoint and/or remove the directors of the company. If this is the case, the supervisory board can determine the level of remuneration of the directors without the approval of the members.

 

Management rules and authority

12. How is a company's internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them?

If the management of the company is undertaken by more than one person (that is, there is a board of directors or managing directors), the board of directors must exercise its rights and perform its duties as an independent body. The division of tasks and competence between the members of the board of directors, and the procedural rules according to which they must operate, is set out either in the company's articles of association or bye-laws.

Usually a 15-day notice period is required in relation to formal meetings of the directors. A majority of the directors must attend a board meeting for it to be quorate. Generally, a resolution will be passed by a simple majority of votes. However, resolutions of high importance may require a qualified majority of votes or unanimous approval.

 
13. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties?

Directors' powers

The extent of the powers of directors is determined implicitly by the Corporate Act, which authorises the directors to make all decisions in relation to the operation of the company, unless specific powers are reserved for the exclusive competence of the supreme body or any other organ of the company.

Restrictions

The members have the discretion to decide whether to grant directors an individual or joint right of representation. In the case of a joint right of representation, the signature of two directors is required for any action carried out by the board of directors to be valid.

Any other restriction of the right of representation of the directors is null and void in relation to third parties. Therefore, a third party dealing with a company needs to establish only whether the members have granted a joint or individual right of representation to the directors of that company.

There are several decisions that cannot be made by the directors but only by the general meeting. For example, in case of a Kft, the following decisions can only be made by the general meeting:

  • The approval of the annual report.

  • The decision to pay an interim dividend.

  • Election and removal of supervisory board members and the auditor, and setting their remuneration.

  • The termination without succession, or the transformation, of the company.

  • Any modification of the articles of association.

  • The increase or reduction of the registered capital.

 
14. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration?

The board of directors can delegate responsibility for specific issues between themselves, by setting out any such delegation of tasks in the bye-laws.

However, any delegation of responsibility between the directors themselves, although binding on the directors, has no effect on the liability of the company towards third parties.

 

Duties and liabilities of directors

15. What is the scope of a director's duties and personal liability to the company, shareholders and third parties? Please distinguish between civil and criminal liability under each of the following (if relevant):
  • General duties.

  • Theft and fraud.

  • Securities law.

  • Insolvency law.

  • Health and safety.

  • Environment.

  • Anti-trust.

  • Other.

  • General duties. The main function of a director is the administration of the company's affairs and the representation of the company. A director is the legal representative of the company in relation to third parties and before the courts and other authorities. In addition, a director is the person who is required to exercise employer's rights (for example, he signs employment contracts on behalf of the company).

    The directors of a company are entitled to decide on all matters not reserved for the exclusive competence of the supreme body or other company organ.

  • Theft and fraud. Besides penalising theft and fraud generally, the Criminal Code establishes a specific crime, called impairment of equity capital, which involves concealing any part of the company's equity by any illegal means. This crime can only be committed by a company director.

  • Securities law. The directors of companies, by virtue of their position in the company, are often privy to confidential information and business secrets. The Act on Capital Market and the Criminal Code makes it an offence for a director to be engaged in insider trading and to undertake market manipulation.

  • Insolvency law. The obligations of directors of an insolvent company differ in a number of important respects from their obligations when the company is solvent.

    If there is an imminent threat that a company may become insolvent, the directors must give priority to the interests of the company's creditors when conducting the affairs of the company (Bankruptcy Act and Corporate Act). A director who fails to comply with this obligation may be held personally liable to the company's creditors.

    The creditors may also claim security from the directors in their statement of claim submitted to the court, requesting the court to state that the directors did not manage the company with a priority given to the creditors' interests, following which a threat of insolvency has occurred.

    Furthermore, a director may be liable to pay a fine if he breaches the obligations which apply to companies which are insolvent (for example, preparing the final inventory and/or annual business report) or provides false information in the course of the company's liquidation.

    The Criminal Code establishes a criminal offence called criminal bankruptcy. It is a criminal offence for a director to:

    • conceal, damage or destroy any assets of the company;

    • conclude a fictitious transaction;

    • recognise a doubtful claim;

    • commence or continue the business of the company at a loss; or

    • otherwise act contrary to the requirements of prudent management.

  • Health and safety. The company is liable to third parties for any damage they may suffer as a result of any acts of a director. A company may recover its losses from the director responsible.

  • Environment. The general rule is that a company, not its directors, is responsible for any breach of any environmental regulation applicable to the company. However, if a director supports a resolution with knowledge of its detrimental environmental effect, he may be subject to unlimited liability in damages if the company is terminated and the assets of the company are insufficient to pay any losses it may incur as a result.

  • Anti-trust. The establishment or participation of a company in a cartel is prohibited under the Competition Act and also in certain circumstances (that is, concession or public procurement) under the Criminal Code. Generally, the Competition Act prohibits a company from entering into any agreement which prevents, restricts or distorts economic competition, or which may have such an effect.

  • Other. The Criminal Code contains several offences, which are only capable of being committed by a director of a company. For example:

    • illegal conduct by executive employees of economic operators, which is committed by disclosing or spreading false information, or concealing information or concluding fictitious transactions, in relation to financial instruments;

    • failure to comply with the obligation to supply economic data, which is committed if a company cannot be found at its registered address or by a director failing to report certain specified facts, information, or rights to a relevant public body.

 
16. Can a director's liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities?

The civil law provides that directors of a company may be subject to unlimited personal liability to the company for their actions.

Directors may be exempted from their personal liability as follows:

  • If it can be shown that they acted in a manner that can be generally expected in the given situation, which led to the occurrence of the loss or damage.

  • If any loss or damage is a result of a decision of the board of directors as a whole, a director who did not take part in the decision-making process or voted against the decision may be exempted from personal liability.

  • If the articles of association of the company contain a provision to this effect, the supreme body can annually release directors from their personal liability by passing a resolution confirming that the directors discharged their duties in the previous year by giving priority to the interests of the company.

  • If the company is terminated without succession, there is a time limit within which the members can bring claims for damages against the directors.

 
17. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium?

Hungarian corporate law is silent on this point. However, it is possible to take out an insurance policy that covers the potential liability of a managing director. The insured person is the managing director but the beneficiary and the contracting party of these insurance policies is usually the company in question, which in most cases also pays the insurance premium.

 
18. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally appointed as a director)?

Under Hungarian law, any member of a company who voted in favour of a resolution and was aware (or with due care should have been aware) that the resolution was contrary to the best interests of the company may be held liable to the company (on an unlimited basis) for any resulting damage. In addition, since Hungarian law allows for a group of companies to be registered, it is possible that a third party (the dominant company which holds only an indirect membership interest in the controlled company) may be held liable (on an unlimited basis) in respect of an act of the controlled company.

Although the Hungarian corporate law does not officially recognise the concept of a shadow or de facto director, the Bankruptcy Act provides that if the directors of a company carry out wrongful trading when there is an imminent risk of insolvency (that is, they do not act in accordance with the interests of the creditors and this results in a loss for the company), then not only the directors but also shadow directors can be held liable for the losses that have had a determining influence on the directors' activities. Such shadow directors can be, for example, the directors of the parent company or an influential member of the company, who have actively influenced the acts of the directors.

 

Transactions with directors and conflicts

19. Are there general rules relating to conflicts of interest between a director and the company?

There are detailed rules governing conflicts of interests between the interests of directors and the interests of a company. Unless the articles of association or the supreme body provide otherwise a director is subject to the following restrictions:

  • He cannot acquire an interest, other than the acquisition of shares in Nyrt, in companies whose business activity is identical to that of the company.

  • He cannot occupy the position of a director in another company whose business activity is identical to the business of the company.

Neither the director nor his close relative or spouse may be elected to the supervisory board of, or appointed as an auditor to, any such companies.

 
20. Are there restrictions on particular transactions between a company and its directors?

Unless the articles of association provide otherwise, a director and his close relative or spouse are prohibited from concluding, either in their own name or for their own benefit, transactions falling within the scope of the activity of the company. Even if the articles of association prohibit these transactions, in the case of a Kft, the supreme body may approve them on a case-by-case basis.

 
21. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of?

The ability of directors to be party to transactions relating to shares and other securities of a company is strictly restricted. In relation to Nyrts, the Act on Capital Market sets out a number of transactions which are prohibited, and also makes provision for other transactions, which are permitted but are subject to reporting requirements or are otherwise regulated.

According to the rules against insider trading, a director of a Nyrt cannot enter into transactions concerning securities issued by his company during certain periods, for example, during a certain period preceding the date of publication of the annual report (Act on Capital Market).

 

Disclosure of information

22. Do directors have to disclose information about the company to shareholders, the public or regulatory bodies?

The directors of a company are responsible for ensuring that the company complies in full with its obligations to file certain information with the relevant public bodies. A fundamental obligation of disclosure is to file annual reports with the court having jurisdiction over the company providing specified financial information on the efficiency of the company's operation in the given year.

In addition, any member of a company has the right to require directors to provide him with certain information and to inspect the books and documents of the company, unless to do so would be contrary to the business interests of the company or would result in the breach of a business secret.

 

Company meetings

23. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved?

Under Hungarian law, the supreme body of the company is the meeting of its members. This is called a member's meeting for a Kft and a general meeting for a Zrt and a Nyrt. The scope of the authority of the supreme body is set out separately in the Corporate Act for each type of company. Essentially, however, the supreme body is responsible for making decisions relating to strategic and fundamental issues of the company. The main issues falling within the exclusive competence of the supreme body are the following:

  • Approving the annual report.

  • Electing and removing directors, the supervisory board and the auditor, and the determination of their remuneration.

  • Amending the articles of association of the company.

Meetings of the supreme body must be held at least annually. Each member of a company is entitled to participate in any meeting of its supreme body.

 
24. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this?

The general rule is that the directors are responsible for calling general meetings or members' meetings, and do so by sending notices of invitation to the members.

As an exception to this general rule, members of a company holding a membership interest equal to at least 5% of the total voting rights of the company (1% in case of Nyrts), or such lower figure as may be set out in the articles of association of the company, are entitled to request calling of a meeting of the supreme body of the company, indicating the reason thereof. The directors of a company must call and hold a general meeting within 30 days of receiving such a request.

 

Minority shareholder action

25. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this?

Members holding at least 5% of the voting rights (or a member who can obtain support from others who with him hold 5% of the voting rights) who believe the company is being mismanaged can:

  • Request the directors to call a meeting of the supreme body of the company, indicating the reason for and the aim of the meeting. If the directors fail to comply with this request, the members in question can apply to the court to call the meeting of the supreme body or to authorise the members in question to call the meeting themselves.

  • Request the directors to add an item to the agenda of the meeting of the supreme body to require an auditor to examine the last annual report of the company, or any act of the directors of the company which has taken place within the previous two years. If the supreme body fails to approve this agenda item or to adopt a resolution approving such an examination, the court of registry can, at the request of the proposing member (holding a 5% voting interest) order the proposed examination to be undertaken.

  • Request the directors to add an item to the agenda of the meeting of the supreme body to assert a claim against the executive officers, the supervisory board members or the auditor of the company. If the supreme body fails to approve that agenda item or to adopt a resolution approving the assertion of such a claim, the requesting members can assert the claim themselves in the name of the company.

 

Internal controls, accounts and audit

26. Are there any formal requirements or guidelines relating to the internal control of business risks?

The principal guidelines governing directors' activities are the decisions made by the supreme body, the constitutional documents of the company and the provisions of Hungarian corporate law.

In addition, the articles of association usually contain a threshold (expressed either in value or by reference to a type of agreement) above which directors are prohibited from taking action without the approval of the supreme body.

The Corporate Act imposes mandatory restrictions on the actions of directors when the equity of the company has fallen below a certain limit or when the company becomes insolvent. In such cases, directors must convene a meeting of the supreme body for the purpose of deciding how to proceed.

Members of a company may decide to appoint a supervisory board, or, in certain circumstances, the Corporate Act may require a supervisory board to be appointed.

When supervising the activities of a company, the supervisory board is entitled to request information from the directors and any executive employees of the company. The supervisory board also has the power to inspect the books and documents of the company, involving experts if necessary. If the supervisory board finds any action of the management to be contrary to any corporate regulation or the interests of the company or its members, it may convene a meeting of the supreme body of the company.

 
27. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?

The Corporate Act requires directors to discharge their duties with due care, including in relation to the company's accounts. In rare circumstances a breach of this duty of due care may result in criminal liability.

 
28. Do a company's accounts have to be audited?

As a general rule, all business associations falling under the scope of the Accounting Act must appoint an auditor unless the yearly turnover of the company is less than HUF100 million and the number of employees is less than 50 (both criteria are determined on the basis of the average of the two previous financial years). Notwithstanding the extent of the yearly turnover and the number of employees, an auditor is also mandatory for companies whose accounts are consolidated. This applies to Hungarian branches of foreign companies and in some other circumstances.

The principal task of the auditor is the examination and auditing of documents as specified in the Accounting Act. In particular, the auditor is required to undertake a review of the annual report of the company to ensure that it conforms to applicable legal requirements, and provides a true and fair picture of the company's assets and liabilities, financial position and profit or loss.

 
29. How are the company's auditors appointed? Is there a limit on the length of their appointment?

The appointment of the auditor, whether optional or compulsory, falls within the competence of the supreme body of the company, which must determine the terms on which the auditor will be appointed by the company.

An auditor can be appointed for a definite term of up to five years. The minimum term for which an auditor can be appointed is the period from the appointment until the date of the meeting of the supreme body adopting the annual report. This meeting formally closes the period of the audit.

 
30. Are there restrictions on who can be the company's auditors?

An auditor can be a legal or natural person, but must be registered with the Hungarian Chamber of Auditors. If the appointed auditor is a legal person, it must designate a natural person to be personally responsible for performing the audit.

It is not possible for a member of the company or its directors, supervisory board members, their close relatives or any employee of the company to be appointed as auditor during the term of their relationship with the company and for a period of three years thereafter.

 
31. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for?

An auditor is not allowed to engage in any activity with the company, which may jeopardise his independency and objectivity in the course of providing his auditing services.

 
32. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded?

An auditor of a company is subject to unlimited civil law liability for any pecuniary and/or non-pecuniary loss suffered by the company as a result of the performance of his auditing services. An auditor will be exempt from any such liability if he can prove that he performed his duties in accordance with a standard that could reasonably be expected of him in the circumstances.

Since membership of the professional chamber is necessary to be appointed as an auditor, all auditors must hold professional liability insurance against which the company is entitled to claim indemnification.

Hungarian legal regulations do not provide for any specific guidance in respect of claims by third parties, including members of the company. Theoretically, the rules concerning tort liability apply in relation to a damage claim based on the wrongful activities of the auditor.

 

Corporate social responsibility

33. Is it common for companies to report on social, environmental and ethical issues? Please highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility.

The reporting obligation of companies on environmental issues depends on the type of activities they pursue. There are certain activities which may only be conducted with the permission of the competent authorities, and this permission usually requires periodic reporting by the company.

Hungarian companies are subject to some obligations in relation to reporting on social issues, for example, Hungarian corporate law requires employee representation on the supervisory board of companies where the annual average number of the permanent employees of the company exceeds 200.

 

Company secretary

34. What is the role of the company secretary in corporate governance?

The company's supreme body may appoint one or more company secretaries from among the employees of the company. Generally, a company secretary is responsible for the day-to-day operation of the company. A company secretary is the only representative of the company who may be granted a general right of representation apart from the directors of the company.

 

Institutional investors and shareholder groups

35. How influential are institutional investors and other shareholder groups in monitoring and enforcing good corporate governance? Please list any such groups with significant influence in this area.

Hungarian law does not specifically grant institutional investors or shareholder groups a right to monitor or supervise a company.

 

Whistleblowing

36. Is there statutory protection for whistleblowers (persons who disclose criminal activity or other serious malpractice within a company)?

The Hungarian legal regime is silent in relation to whistleblowing.

 

Reform

37. Please summarise any proposals for reform and state whether they are likely to come into force and, if so, when.

Not applicable.

 

Contributor details

Barcza Mihály

Oppenheim Ügyvédi Iroda

T +36 1 486 22 00
F +36 1 486 22 01
E mihaly.barcza@oppenheim.hu
W www.oppenheim.hu

Qualified. Hungary, 1999

Areas of practice. Company law; securities; M&A; capital markets; restructuring and insolvency.

Recent transactions

  • Representing Allianz Hungária Insurance Co as seller of Allianz Bank Zrt to FHB Mortgage Bank.
  • Advising the Bavarian federal state regarding the consolidation and partial nationalisation of Bayerische Landesbank and the related acquisition of indirect ownership in MKB Bank Hungary and its Hungarian subsidiaries.
  • Advising the venture capital fund Benson Oak in connection with the acquisition of EVM Zrt, a Hungarian chemicals company.
  • Advising the private equity firm CVC Capital Partners in connection with the takeover of the European brewery operation of Interbrew Central European Holding BV (InBev), including the sale of the Borsodi Sörgyár Zrt, a Hungarian brewery.
  • Advising Credit Suisse Zurich in connection with the sale of the Hungarian asset management business of the Credit Suisse Group to Aberdeen Asset Management.
  • Advising Hewlett-Packard in connection with the consolidation of its Hungarian subsidiaries into one company.

For more details of recent transactions, publications, and so on, see full PLC Which lawyer? profile here.

József Bulcsú Fenyvesi

Oppenheim Ügyvédi Iroda

T +36 1 486 22 00
F +36 1 486 22 01
E jozsef.fenyvesi@oppenheim.hu
W www.oppenheim.hu

Qualified. Hungary, 2002

Areas of practice. Company law; securities; M&A; capital markets; restructuring and insolvency.

Recent transactions

  • Representing Allianz Hungária Insurance Co as seller of Allianz Bank Zrt to FHB Mortgage Bank.
  • Advising the Bavarian federal state regarding the consolidation and partial nationalisation of Bayerische Landesbank and the related acquisition of indirect ownership in MKB Bank Hungary and its Hungarian subsidiaries.
  • Advising the venture capital fund Benson Oak in connection with the acquisition of EVM Zrt, a Hungarian chemicals company.
  • Advising the private equity firm CVC Capital Partners in connection with the takeover of the European brewery operation of Interbrew Central European Holding BV (InBev), including the sale of the Borsodi Sörgyár Zrt, a Hungarian brewery.
  • Advising Credit Suisse Zurich in connection with the sale of the Hungarian asset management business of the Credit Suisse Group to Aberdeen Asset Management.
  • Advising Hewlett-Packard in connection with the consolidation of its Hungarian subsidiaries into one company.

For more details of recent transactions, publications, etc. see full PLC Which lawyer? profile here.

 
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