In its recent decisions, the Hungarian Competition Office (“HCO”) shed light on the assessment of interim period covenants – the contractual terms that regulate parties’ conduct between the signing and closing of a transaction which ensure that the value of the investment does not decrease during such period. Typically, interim period covenants consist of obligations undertaken by the seller or specific monitoring or consent rights granted to the purchaser.
From a competition law perspective, interim period covenants may trigger two issues: violation of the standstill obligation and excessive ancillary restraints. Under Hungarian law, the purchaser is banned from exercising control until the HCO approves the transaction – an obligation referred to as standstill. Interim period covenants that grant too strong of powers to the purchaser could lead to a control-situation in violation of the standstill obligation and may be subject to a fine. As to ancillary restraints, although proportionate restrictions that are directly linked to the transaction and necessary for its completion are allowed under certain circumstances, if these are too broad, the HCO may investigate the parties’ agreement in a separate procedure.
The following highlights the most important general guidance from the HCO:
- obligations undertaken by the seller to safeguard the purchasers’ interests are more likely to be acceptable than rights directly granted to the purchaser;
- a general obligation to conduct business as usual is considered fairly standard and acceptable;
- the following undertakings on the seller’s side – subject to the purchaser’s prior approval – aimed at preserving the value of the target are generally acceptable:
- acquiring shares in other undertakings or new assets, creating new subsidiaries, limitation on the sales of shares (quotas) and major assets;
- implementing management decisions that may jeopardize the value of the target, including salary increases and the amendment of corporate documents, however, the purchaser’s veto against a certain management decision shall be assessed on a case-by-case basis;
- undertaking loans and other major encumbrances – however, working capital facilities may be necessary to the target’s day-to-day operations;
- limitation of signing new agreements – subject to a case-by-case assessment, instead of a general prohibition the HCO suggests including a materiality threshold according to the size of the target;
- terminating existing agreements, amending or terminating the agreements between the seller (or other members of the seller’s group) and the target;
- ambiguous obligations undertaken by the seller may be subject to review by the HCO in a separate investigation.
The quick overview above covers standard interim period covenants, however, other transaction and sector-specific contractual safeguard clauses may also come into play. We advise that all interim period covenants be assessed on a case-by-case basis in order to minimise the risk of fines and separate investigations and to accelerate the merger clearance process.