A Vews from Budapest

The rise and apparent fall of the Budapest Stock Exchange has taken place at high speed. At the same time as the exchange was celebrating its 10th anniversary earlier this year, most thoughts were focused on the depressed state of the market, not all of which can be attributed to wider factors affecting other equity markets: the index is at the same level as at the end of 1997; turnover has fallen significantly; the flow of new listings, which turned to a trickle in the late 1990s, has effectively dried up; and several takeovers have resulted in a net decrease in the number of listed companies.

There have been interesting legal developments in the takeover field, beginning with the introduction in 1998 of new provisions in the Securities Act on the obligation to make, and the conduct of, mandatory offers. Several offers have been conducted following those rules, most notably the two offers, the latter successful, for Cofinec, a Dutch company listed in Budapest and Luxembourg, which was acquired in early 2000 by the Austrian packaging group Frantschach, and the Kékkúti mineral water company, which was acquired by Perrier Vittel following competitive bids by Hellenic Bottling and Perrier Vittel.

Those and several other takeovers were generally perceived to show the new legislation operating with a reasonable degree of efficiency, notwithstanding certain obvious weaknesses and loopholes in the law. The second half of 2000 saw a dramatic change in sentiment, with the loopholes being exploited and the market reacting negatively to a trend which left minority investors exposed. The highest-profile example of this was in the case of chemicals company BorsodChem. Having earlier in the year acquired a 30 per cent shareholding in one of the other leading chemicals companies TVK, it found itself facing a significant group of shareholders which together appeared to be controlling substantially more than 33 per cent of BorsodChem's voting shares, the statutory "mandatory offer" threshold. Now, more than six months after the emergence of that investor block, allegedly linked to the Russian natural resources giant Gazprom and its subsidiary Sibur, no offer has been made by those shareholders. This is notwithstanding increasing evidence that they in effect control the company, not least by having changed the board at a shareholders' meeting in January.

The Financial Services Supervision went much further than it had ever done before under the existing law to identify links between the investors and to attempt to force these investors to disclose their full interest, and if that interest exceeded the 33 per cent threshold, to make a public offer. Those efforts have so far not been able to elicit an offer.

The effect of these moves both on the share price of BorsodChem and the market more generally, and the concerns about the apparent impotence of the regulator and the ability of an unclear investor group to obtain control of a company without making a formal public offer, have given rise to significant concern, both in the financial and political communities. As a result, attention has focused on revision to the takeover provisions of the Securities Act. Among key provisions of the current draft (which is still under discussion as The Lawyer goes to press) are enhanced powers for the regulator, attempts to clarify the shares, which should be aggregated when trying to identify a shareholder block, and the point at which the obligation to make a mandatory offer arises. The coming months will show whether that new legislation is successful in establishing a more even balance between aggressive investors, minority shareholders and existing management, and is able to restore confidence and life to the currently depressed market.

Richard Lock is a corporate partner in the Budapest office of Clifford Chance and István Lánchidi is an associate in the corporate practice