Vol 1 (2005) - Issue 5

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The Basic Rules of Hungarian Corporate Legislation

The general rules in respect of the establishment and operation of Hungarian business associations are provided by Act CXLIV of 1997 on Economic Associations (hereinafter the ‘Companies Act’), which legal vehicle is fully harmonized with the EU regulation.

Companies under the Companies Act

The Companies Act distinguishes between legal entities and business associations not having legal personality. The legal entities are (i) the joint enterprise, (ii) the limited liability company, and (iii) the company limited by shares. The latter may operate as a public company (the shares of which have been issued in part or in full through a public offering) or as a closed company (the shares of which have not been issued by way of a public offering). As opposed to the above, the limited partnership and the unlimited partnership are companies not having legal personality.
Generally the most appropriate and popular forms for conducting business in Hungary by foreign investors are the limited liability company (‘Kft’) and the company limited by shares (‘Rt’), due to the limited liability afforded to the equity owners of such companies. Considering the above, this article mainly focuses on the rules concerning these companies (to be collectively referred to as ‘Company’) under Hungarian corporate legislation.

Establishment of a Kft and an Rt

Pursuant to the Companies Act, a Kft or an Rt shall be established by its Foundation Document, which is called the Articles of Association in the case of a Kft and a public Rt, and the Deed of Foundation in the case of a closed Rt and a wholly owned Kft.
The initial capital in the case of a Kft must be a minimum of HUF 3 million (Hungarian forints) (approximately EUR 12106 at the current exchange rate), and a minimum of HUF 20 million (approximately EUR 80 711 at the current exchange rate) in the case of an Rt. The capital may be contributed in cash or partly in cash and partly in-kind. The minimum cash contribution shall be 30% of the total initial registered capital, and (i) a minimum of HUF 1 million in the case of a Kft and (ii) a minimum of HUF 10 million in the case of an Rt. In the case of a wholly owned Kft or Rt, however, the total cash contribution to the Kft’s or Rt’s initial capital must be paid in upon foundation. The in-kind contribution must be put at the Company’s disposal by the time of filing of the application for registration with the Court. The in-kind contribution may consist of any asset (e.g., office equipment) or right representing pecuniary value, including intellectual property rights.

The Kft’s governance is conducted by the Manager(s); in contrast, the Rt is governed by its Board of Directors, which acts as a collective body. The executive officers of the Company (the managing director in the case of a Kft and the Members of the Board of Directors in the case of an Rt) are appointed by the supreme body of the Company for a definite period of time (up to a maximum of five years). The executive officers may be re-appointed to their position. Only natural persons may act as executive officers. The Companies Act contains general prohibition and restriction rules in respect of the executive officers, which must be taken into consideration when electing or appointing them. In addition, detailed liability rules are included in the Companies Act concerning the liability of the executive officers and the owners of the company.
The supreme body of the Kft is the quota-holders’ meeting, while the General Meeting, which comprises all shareholders of the Rt, is deemed to be the supreme body of the Rt.

The establishment of a Supervisory Board controlling the activities of the Company is compulsory in the case of an Rt, while the Supervisory Board must be established only for those Kfts whose initial capital exceeds HUF 50 million or which employs more than 200 employees as an annual average (and only in the latter case in respect of a wholly-owned Kft).

The scope of activities of the Company must be specified and must be described in the Foundation Document by reference to the list of activities, known as ‘TEÁOR’, published from time to time by the Hungarian Statistical Office.