September 27 2000 Demergers and Spin-Offs in the Telecommunications Sector Dentons | Tech, Data, Telecoms & Media - Hungary Tech, Data, Telecoms & Media Legislative Framework Splitting a Service Licence Practical Application of the Law The Hungarian telecommunications market is changing more rapidly than ever before. Telecommunications companies merge, demerge and spin off businesses in order to gain competitive advantages. These corporate restructurings are mainly motivated by the evolution of info-communications technologies, and the convergence of telecommunications, internet and multimedia content. A demerger often enables a company to offer certain services under different service names and therefore improve brand awareness among consumers. A company that spins off a lucrative business may attract investors and thus encourage further capital investment, for example, by means of an initial public offering. In some instances a company will separate one of its businesses in order to enter a joint venture with other parties. This can bring more capital, new technologies or a larger customer base to the services. However, many activities within the telecommunications sector are subject to government authorization. The demerger or spin-off of a telecommunications business thus raises complex issues. Companies must consider the conditions under which the surviving entities will be entitled to continue to provide the services, and whether an existing authorization to provide telecommunications services may be split between the surviving companies. Legislative FrameworkUnder Hungarian law, the provision of public telecommunications services is subject to a concession or a service licence. The terms and conditions of splitting a concession, and accordingly of a demerger or spin-off of a telecommunications business from a concession company, are regulated by the Telecommunications Act (Act 72 of 1992) and the relevant concession contract between the Hungarian state and the concession company. Generally, these actions are prohibited or else require the consent of the minister of communications. The splitting of a service licence is governed by Government Decree 48/1997 (III 14) on the Licensing of Certain Telecommunications Services and by practices recently developed by the Communications Authority of Hungary in accordance with the decree. Splitting a Service LicenceThe successor companies created in a de-merger are considered to be the original company's general legal successors and, pursuant to the Companies Act (Act 144 of 1997), the licence-holders of the original company. This includes its telecommunications service licences, subject to compliance with their conditions. In accordance with the Companies Act, the decree stipulates that in the event of a legal succession, the service licence will be transferred to the legal successor. However, a service licence may not be transferred in any other circumstances. The transfer must be announced to the Communications Authority. Pursuant to the decree, the authority may revoke the service licence of a particular successor if it does not comply with the licensing requirements. Each successor must comply with the following conditions in order to qualify as a service provider: Its foundation document must specify the particular telecommunications services as an activity within the scope of its businesses; It must not have tax or other public indebtedness, or have had any bankruptcy or insolvency procedure instigated against it; It must have all necessary permits which satisfy the technical conditions for the provision of services; and It must employ at least one employee with specialized qualifications and at least two years of experience in the industry.Each successor that wishes to continue to utilize the service licence must submit documentation to the authority which proves that these criteria are met. Since the services that the successors provide will differ in some respects from those initially provided by the original company, the transferred service licences may need to be amended to reflect the changes. These amendments typically affect the general terms and conditions of service, which the company applies to its customer contracts. The terms and conditions must be filed with the authority along with the application for a service licence, and provide the following information: the scope of services offered; the target customers; the applicable service charges; the network infrastructure that is utilized; and any other relevant information related to the services. Practical Application of the Law Although the law does not appear to require that new licences must be issued to successors, the Communications Authority takes the view that a legal succession will result in the issuance of a new licence. This may be because the authority is obliged to follow certain procedures in order to ensure that the successors fulfil the licensing requirements and amend the existing service licence, if necessary. The authority has stated that it will issue the new licences, which are based on existing the licences, through a simplified procedure which is less time-consuming than the issuance of a new service licence for a new licensee. For further information on this topic please contact Balázs Fazekas at Réczicza Law Firm White & Case LLP by telephone (+36 1 488 5200) or by fax (+36 1 488 5299) or by e-mail ([email protected]). The materials contained on this web site are for general information purposes only and are subject to the disclaimer.