On March 15, 2014, the new Civil Code will enter into force as the most important law governing the basic financial and personal relations of companies and persons. The new code, with an increased commercial emphasis, incorporates the results of legal developments of the past decades and adapts to the economic needs of our times. The new code takes into account the rules that have crystallized in trading in Hungary and it has European legislation in its sights as well. The new act comes with several new, and completely or substantially reformed legal structures. The changes will broadly concern the activities of enterprises, thus familiarization with the new rules and appropriate preparation by market players for such rules will be fundamental. With our newsletters, we aim to provide support for such preparation.

In this newsletter we seek to draw your attention to certain changes introduced by the new Civil Code (Act V of 2013) that relate to private and public companies limited by shares (in Hungarian: zártkörűen működő részvénytársaság (zrt) and nyilvánosan működő részvénytársaság (nyrt)).

  1. Setting up a company limited by shares only in private form

Once the new Civil Code takes effect, companies limited by shares can only be established in a private form. Pursuant to the new rules, the shareholders and share capital may not be solicited publicly in the course of setting up a company limited by shares. However, this does not mean that the new Civil Code will not recognize the concept of public of the company limited by shares or the public offering of the shares of a company limited by shares. The new Civil Code makes a distinction between the definition of private and public companies limited by shares based on whether the shares of the company are listed on a stock exchange or not. Similarly to the current legislation, the definitions of private and public offering of shares will be contained in the Capital Markets Act (and not in the new Civil Code).

  1. Changes regarding the scope of information contained on share certificates

The new Civil Code clarifies the tasks in case the data displayed on the share certificate will change and it makes clear that such changes need to be indicated also on share certificates already issued. In case of printed share certificates the certificates will need to be replaced or over-stamped in accordance with the rues applicable to share capital increase, while in case of dematerialized shares the content of the share will need to be modified pursuant to the rules applicable to dematerialized securities.

  1. Restrictions on the transfer of shares

The New Civil Code applies a framework of rules that is in accordance with the general provisions of securities law by stating that any provision restricting the transfer of the share will only be effective towards third parties if such restriction and its content is indicated on the share certificate or by the data of the securities account.

The new Civil Code empowers the board of directors to indicate the acquisition of ownership on the share certificate upon request, based on the document certifying such ownership. In case of dematerialized share, the financial services provider holding the securities account will need to register the change of ownership upon the new shareholder’s request, based on the documents certifying the acquisition of the share.

According to the rules of the new Civil Code, if the articles of association of the company limited by shares require the company’s consent for the transfer of shares, the grounds of refusal must be set forth in the articles of association. The power to decide on the granting of such consent will remain with the board of directors.

The new Civil Code states that in case of printed share certificates the record of the board of directors marked on the share certificate will be treated as part of the chain of endorsements.

  1. Share types

The new Civil Code preserves the types of share existing under the current legislation and it sets forth the same share types (ordinary share, preferential share, employee share, interest bearing share and redeemable share). The rules on share types in the new Civil Code will be substantially similar to the current rules. However, the enumeration of share types set forth in the new Civil Code is not exhaustive; pursuant to the new rules, the articles of association may implement provisions concerning shares conveying rights other than those listed in the new Civil Code. The precondition to that is the explicit definition in the articles of association of the special shareholder rights relating to such shares.

  1. Share register (book of shares)

The new Civil Code preserves the legal effect of the registration in the share register, i.e. it is the precondition for exercising shareholder rights towards the company. Accordingly, the lack of the shareholder’s registration in the share register will not affect the shareholder’s ownership rights concerning the share but it will prevent the shareholder from exercising rights in respect of the company.

The new Civil Code implements only minor changes with respect to the provisions concerning the entry to and cancellation from the share register: it eliminates the requirement that the holder of the securities account or deposit holder is to initiate the change in the share register.

  1. Rights and obligations of shareholders

The new Civil Code does not implement substantial changes to the currently applicable rules of exercising shareholders’ rights either from a textual or conceptual perspective. For exercising shareholder rights it is henceforward required to be the owner of the share verified by the text shown on the share certificate and to be registered in the share register.

It will remain the sole obligation of the shareholder towards the company based on such legal relationship to provide the capital contribution, which obligation may not be waived. Concerning the obligation to provide the capital contribution, the new Civil Code set forth that in case of in-kind contribution a report must be attached to the articles of association, which report contains the valuation of the in-kind contribution. Any auditor (including the company’s appointed auditor) or another expert having the expertise necessary to valuate such asset may be engaged to prepare such valuation report.

As opposed to the current 5-year term, the new Civil Code sets forth a deadline for providing contributions in kind: within 3 years from the date on which the company was registered. A provision of the articles of association extending the aforesaid time period shall be null and void.

Following the entry into force of the new Civil Code, no special authorization in the articles of association will be needed to grant the general meeting the right to resolve on the payment of interim dividends. Such decision may be made upon the board of director’s recommendation presented with the consent of the supervisory board (if the company operates with a supervisory board).

As the new Civil Code’s provisions on distributions to shareholders contain safeguards for the company’s creditors, one may not deviate from such rules by prescribing more lenient provisions compared to the statutory rules; such deviations would be null and void.

  1. Organization of companies limited by shares – the shareholders’ meeting

As opposed to the current law, the new Civil Code does not set forth a comprehensive list of matters being in the exclusive competence of the shareholders’ meeting, although it does prescribe certain matters for the exclusive competence of the shareholders meeting of public limited companies (e.g. the determination of the principles of the remuneration and incentive scheme of executive officers, supervisory board members and executive employers of the company).

In case of private companies limited by shares, the shareholders’ meeting shall be convened via invitation sent to the shareholders at least 15 days in advance of the date of the meeting, while in case of public companies limited by shares, the invitation to the shareholders’ meeting shall be published on the company’s website at least 30 days in advance of the date of the meeting.

The general meeting may be suspended on one occasion and shall be resumed within 30 days as per the new Civil Code; however, such act will not require any more the authorization granted in the articles of association.

The following decisions shall be adopted with a 75% majority of the votes: amendment to the articles of association, changing the corporate form (private/public), transformation, merger, de-merger, termination without succession and the decision to reduce share capital. The new Civil Code, however, will not include the decision on the alteration of the rights attached to the various series of shares and the conversion of categories or classes of shares amongst the matters requiring a 75% majority vote.

The board of directors shall convene the shareholders’ meeting or initiate voting in writing within 8 days if either director learns that the company's equity capital has dropped to 2/3rd of the share capital due to losses, the equity of the company has dropped below the statutory minimum amount, the company is threatened with insolvency or it has stopped making payments and its assets do not cover its debts. However, according to the new rules, it is also possible to pass a decision in writing in such case without holding a shareholders’ meeting and there will be no need for an interim balance sheet to confirm that the aforesaid facts exist. The new Civil Code implies that in order to remedy the loss of capital such a resolution must be adopted that is capable of curing the said situation. Such resolution must be executed   disclaim the consequences of capital losses, a resolution shall be adopted, which is susceptible to resolve the above reasons and orders to execute such shareholders’ resolution within three months pursuant to the new Civil Code.

The new Civil Code makes it clear that, if the articles of association allows the shareholders’ meeting to be held via teleconference, the shareholders are free to decide about their way of participation. The meeting may not be held via teleconference if shareholders holding at least 5% of the votes object to that and request that the meeting be held in person, within 5 days of receipt of the invitation or the date when the invitation was published.

  1. Board of directors

Pursuant to the new Civil Code the board of directors shall consist of 3 natural persons and any provision of the articles of association prescribing a board of directors consisting of less than 3 directors shall be null and void. However, the law sets forth no limitation on the maximum number of directors. The new Civil Code will not require that the allocation of competences amongst board members be set forth in the board’s rules of procedure. It will also not prescribe that the rules of procedure of the board of directors may contain facilities to allow its members to participate by way of teleconference instead of attending in person.

If the articles of association so provides, also in the future public companies limited by shares may be controlled by a single management board instead of a separate board of directors and supervisory board. In such case the management board shall discharge the duties of the board of directors and the supervisory board as conferred upon them by law.

  1. Supervisory board and auditor

The provisions concerning the establishment of the supervisory board will not change substantially under the new Civil Code. in addition to the mandatory requirements set forth amongst the common provisions on business associations, the establishment of a supervisory board in case of public limited companies shall be mandatory (unless a single management board is operated) and in case of private limited companies a supervisory board must be set up if shareholders with at least 5% of the votes so request.

Public companies limited by shares shall henceforward operate an audit committee to support the supervisory board and the board of directors in the supervision of the company’s financial reporting system, in the selection of the auditor and in the cooperation between the company and the auditor.

The new Civil Code prescribes for all companies limited by shares to appoint a permanent auditor. However, the articles of association of a private company limited by shares may deviate from this rule, i.e. to decide not to appoint an auditor (unless that is explicitly required by the Accounting Act). In case of public limited companies, due to their often larger size and their public nature, may not deviate from the said requirement and they shall appoint a permanent auditor in each case.