The complicated Hungarian legislation on domestic company mergers can cause headaches, including in cross-border mergers. These headaches result mostly from the fundamental differences between Hungarian law and the national laws of other EU member states, which remain applicable alongside the harmonised rules for cross-border mergers.

Hungary adopted the EU Directive on cross-border mergers just in time, in December 2007. Since then a little more than a dozen cross-border mergers have taken place with the involvement of Hungarian companies. Most of them were registered by the Metropolitan Court and around 95% of them were “export mergers” from a Hungarian perspective, meaning the Hungarian company was merged into a company domiciled in another EU member state. Furthermore, these mergers were mostly group-internal and involved large multinational companies present in several member states, including for example banks that continued to operate in Hungary through a newly established branch.

No unified practice has developed regarding the details of how these mergers must be implemented and documented; we have seen as many different approaches as there have been mergers. The most difficult task is to harmonise the effective date of the merger and to overcome the differences in the accounting and tax laws of the member states.

Feasibility study phase

Under Hungarian law, the companies that wish to merge must commence the merger procedure by preparing draft balance sheets and draft inventories with a cut-off date that may be defined by the shareholders’ meetings of the merging companies, and having them audited by an independent auditor. These balance sheets simulate the merger as if it took place on the defined cut-off date. In reality, however, these draft balance sheets (which must be prepared for the merging companies and for the surviving company or the company coming into being as a result of the merger) represent only a theoretical feasibility study to establish whether the merger makes sense, and whether the legal successor company will be financially capable of doing (continuing) the business. Such a phase is not known in several other member states, such as Austria. As this feasibility study phase is the basis of a merger in Hungary, the preparation of a draft balance sheet and a draft inventory of assets of the Hungarian company to be merged into another company domiciled in another member state cannot be left out in a cross-border merger. This is despite the fact that the EU directive on cross-border merger allows – in the case of a unanimous decision of all shareholders of the merging companies – for a waiver of an audit of the merger documents (and exempts the companies from such audit in case of a merger into the mother company).

No retroactive effect in Hungary

The most significant problem in connection with the effective date of the merger is that Hungarian law does not recognise a retroactive merger, and the actual merger has nothing to do with the cut-off date of the draft balance sheets. The real cut off date of the merger is either the day when the court registers the merger or a subsequent day requested by the merging companies.

In Hungary, the merger will become effective from this date from all aspects, ie, legally and also from an accounting/ tax point of view. Thus, the merging company must continue to keep its books and records, and is subject to Hungarian taxation until the legal effective date. This means that if a Hungarian company is merged into, eg, an Austrian company, from an Austrian law point of view it can be said that the merger has a tax and accounting effect from 1 January 2011 but is registered by the court only with effect from 1 September 2011. From a Hungarian law point of view, however, both the legal and the tax and accounting effective date will be 1 September 2011, and the Hungarian merging company must prepare closing a balance sheet as of 31 August 2011, which is not required in Austria.

The divergence in the regulation of the various (signing) formalities (which the EU Directive has not attempted to regulate) can be overcome by simply following the stricter requirements. Thus, in the case of some mergers, the merger plan is incorporated in a notarial deed; in others, it is only in the form of a simple written document.

Although the differences under national laws require close cooperation between the merging companies and the lawyers assisting them during a cross-border merger, the first few cross-border mergers seem to have taken the various hurdles well and may serve as an example for future cross-border mergers.

No unified practice has developed regarding the details of how these mergers must be implemented and documented; we have seen as many different approaches as there have been mergers. The most difficult task is to harmonise the effective date of the merger and to overcome the differences in the accounting and tax laws of the member states.