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7 July 2014 | By Jonathan Ames
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The government’s appetite for legislation is proving a headache for lawyers but a new civil code and an accelerating automotive industry are a great pick-me-up
Hungary’s prime minister Viktor Orbán has plenty of critics ready to slam his approach to freedom of speech and the rule of law generally, but he and his right-of-centre government must be the darlings of parliamentary draftsmen.
In just three years Orbán’s government has generated more than 600 laws. But while such fertility is impressive, it is by no means welcome among the country’s corporate lawyers.
“Part of the problem is the superficial nature of the way the laws are drafted, without taking into consideration how they will fit into the existing legal framework – whether there will be a contradiction or conflict,” explains Szecskay senior partner András Szecskay. “An MP can stand up in parliament on a Friday to submit a proposal that is discussed on the Monday and passed by the government’s qualified majority on the Tuesday.”
Local lawyers claim that even officials at government ministries are frustrated by the glee with which their politician masters legislate. And the approach, complain lawyers, creates a nightmarish whirlwind for international investors.
High on the list of irritants is Budapest’s approach to tax law. János Tamás Varga, managing partner at VJT & Partners , diplomatically describes the Hungarian government as being “famous” for employing “unorthodox economic tools”. Chief among these is an almost schizophrenic attitude to tax legislation.
“They have been known to change the tax regime dozens of times a year,” says Varga. “There have been periods when they’ve introduced a new tax every month. It was completely unpredictable.”
A revised civil code
But one legislative innovation getting a more positive reception is the revised civil code, implemented last March. The reforms were 20 years in the pipeline, with commentators suggesting 80 per cent of the new code bears a striking resemblance to its predecessor. But the remaining 20 per cent is anticipated to have significant implications for lawyers and their clients.
One of the reforms likely to have the most impact is what Varga describes as a “change in the philosophy in the establishment of companies”. There were reams of rules in the previous code, restricting the activities of shareholders and executives. The new code reduces these dramatically.
“There’s now much more room for applying bespoke solutions,” comments Varga.
Lawyers credit the new code with providing more flexibility. For example, unless there is a provision stating that the code cannot be deviated from in relation to a specific activity, a business can operate how it likes.
Forgó Damjanovic & Partners partner Gábor Damjanovic provides an example.
“The old Companies Act said that if you had a business with more than 200 employees you had to have a supervisory board,” says Damjanovic. “But now, unless there is a clause saying you can’t deviate from that provision, you don’t have to have one. It gives businesses more freedom when drafting deeds of foundation.”
That said, the civil code horizon is not clear of clouds. Lawyers point out that, while the law is codified, Hungary shares with common law jurisdictions an enthusiasm for judge-made precedents. The lack of case law under the new code means, says Damjanovic, lawyers are “reluctant to try things we might think can be done under the new code – we don’t know how the courts will interpret”.
Varga agrees. “The big question is whether the courts will adapt to this paradigm shift and really let companies take the opportunities provided in theory by the new code.”
Nevertheless, lawyers report that advising clients on the potential impact of the code has translated into a handy earner.
Return to growth
Local lawyers and the global practices that remain in Budapest will be grateful for any stream of new work. The Hungarian economy has been stagnant at best for much of the past five years, and the legal market has an element of cut-throat competition about it.
But there are some positive indicators poking through what has been fairly arid soil. A return to GDP growth seems likely for 2014. This would be the first positive figure for several years in Hungary, with forecasts hovering around the 3 per cent mark.
Several factors are driving a general improvement. First, Hungary is profoundly linked to the economic fortunes of eurozone engine Germany. When Germany perks up – as it has done since the depths of Europe’s sovereign debt crisis – Hungary benefits.
Helping drive recovery is Hungary’s move to significantly boost its role in the automotive and machinery manufacturing industries of Central and Eastern Europe, capitalising on its location at the crossroads of major transport lines. It is seen as a logistics centre from where the Middle East, East Asia and Western Europe are accessible. The country also promotes its multilingual, well-qualified workforce that just happens to be prepared to work for wages as much as 50 per cent lower than those in Western Europe.
As a result, major international motor companies have planted flags in the country, such as big German names Opel, Audi and Mercedes-Benz, along with Japan’s Suzuki. Major tyre manufacturing outfits such as South Korea’s Hankook and Hanover-based Continental have also built substantial production sites in Hungary.
Then there are the state-sponsored infrastructure projects. The Orbán government is particularly interested in high-profile sport events, having already bagged the World Aquatics Championships in 2021. It is mulling bids for the 2028 summer Olympics and football’s European Championship in 2020.
“You can feel the improvement,” comments Damjanovic on the healing Hungarian economy, which, claim lawyers, has fostered a rise in M&A activity. “Client expectations are better. There was a strong drop in corporate-commercial work and especially in transactional work, but already this year we’ve seen more transactions that are close to closing or that have closed. While there were the beginnings of several transactions in the years before, they failed before closure.”
Varga claims that as the European and global economies improve, foreign investors are more disposed to live with the mercurial legislative tendencies of the Budapest government.
“There is a general interest on the part of foreign investors to buy Hungarian companies after years of silence,” he says.
But not every voice has a positive lilt. Gárdos Füredi Mosonyi Tomori partner Péter Gárdos accepts that some see signs of an M&A revival, but remains profoundly concerned about the wider picture.
“The economic situation is unchanged,” he says. “Instead of investment we see companies leaving or thinking of leaving the country.”
A number of international law firms have been among the businesses leaving Hungary in the past five years or so, led by magic circle players Clifford Chance , Freshfields Bruckhaus Deringer and Linklaters . Of the UK top five, only Allen & Overy still has a local office, although one local lawyer speculates that “it’s difficult to understand why that firm remains when the others have left”.
Other international players present in the country are Baker & McKenzie , CMS , Dentons , Weil Gotshal & Manges and Bird & Bird , with the latter focusing narrowly on a technology and IP practice. Hogan Lovells operates in Budapest through an association with local firm Partos & Noblet , while DLA Piper works with local player Horváth & Partners .
A long-standing issue between the Budapest offices of the global firms and their domestic counterparts has been fee rate low-balling. And despite a gradually improving economic landscape, the locals maintain the globals are still at it.
“Their policy of competing so aggressively on price to retain market share is not sustainable,” moans one local lawyer. “We often compete with the largest international firms and they offer fees that even we can’t compete with. It’s unbelievable.”
Another describes the competitive atmosphere with one word: fierce. That lawyer points out that, as so much cross-border investment originates from Germany and Austria, Austrian powerhouse firms Wolf Theiss and Schoenherr are serious players in the country, although the former has a bigger presence on the ground.
Last April Orbán’s party won a general election and is likely to be in government for four more years. Domestic and international lawyers will be hoping he and his political colleagues have exhausted their passion for legislating and will give Hungary a chance to concentrate on economic recovery.
Key figures: Hungary
Life expectancy at birth: 75
Source: World Bank and Hungarian Central Statistical Office