LEX MOL REFLECTS EUROPEAN RETHINKING ON ENERGY INVESTMENT REGIME

Overwhelmingly approved by the Hungarian parliament, the legislation known as “Lex MOL” [MOL law] is set to take effect after the presidential signature as a final formality. The law reacts to Austrian state-controlled energy champion OMV’s hostile takeover bid against MOL, Hungary’s largest economic entity, which is fully private-owned. The newly adopted legislation can stop that bid. OMV is 31.5% owned by the Austrian government’s industrial holding and 17.5% by the Abu Dhabi state investment fund. OMV controls 20% of MOL’s shares.

OMV’s hostile bid has occurred amid rapidly rising concerns in Europe about state-controlled entities, particularly from outside the European Union, seeking to take over privately owned energy companies. Such takeovers impact more heavily on formerly communist-ruled countries that have struggled to complete privatization and the transition to the market economy, only to see their privatized energy assets in some cases targeted for takeovers by foreign state-controlled entities.

Hungary’s just-adopted law is one of several manifestations of such concerns. The German government (particularly its Christian-Democrat component under Chancellor Angela Merkel) has recently expressed similar concerns. Last month, the European Commission issued a package of legislative proposals — some of them known informally as “Gazprom clauses” — to bar or at least restrict takeovers by non-EU state-controlled companies or investment funds in the gas and electricity sectors.

While OMV’s bid against MOL is a matter for two companies on EU territory, it would have inserted a Middle Eastern state investment fund in Hungary and, moreover, would have opened the way for a Russian takeover of MOL’s oil business. Indeed, a hypothetical OMV-MOL merger would create a quasi-monopoly situation in oil refining and fuel-marketing in a large part of Central Europe; EU law and the competition authorities would then require the merged entity to sell part of those assets. Russian state-connected companies would be the most likely buyers.

The law, dubbed “Lex MOL,” does not actually mention the MOL company. This law reflects wider preoccupations about the energy sector in tune with that European trend. The law applies to energy companies generally and also to water-supply firms. The Hungarian government and parliamentary drafters define “strategic” companies in an innovative way as “companies that have a strategic role in the supply of the population.” The law is designed to fend off takeover bids by foreign state-owned entities that may be guided by non-transparent political influence.

Although triggered by OMV’s actions, this law can fend off Russian takeovers in the future — an essential point, often missed by European commentators. The new law creates potentially insurmountable hurdles to any takeover bid by a foreign company or investment fund that are wholly or partially state-controlled.

Thus, any sale of core assets requires approval by a general meeting of shareholders in the Hungarian company that becomes a target for such takeover. Moreover, it is up for the shareholders’ meeting to authorize management to buy treasury shares and/or launch share-buybacks as defensive measures, even after a public takeover bid was made. The law eliminates the 10% limitation on a company’s holding its own shares as treasury stock. (In MOL’s case, management now controls directly or indirectly some 40% of the company’s shares through such measures, under the company’s articles of association).

Furthermore, the law empowers the general meeting of shareholders to limit the voting rights of individual or group shareholders. (Under MOL’s articles of association, those voting rights are limited to 10%, regardless of the size of the stake owned).

Under this law, the foreign bidder must submit a business plan to Hungary’s financial market regulatory agency, PSZAF, for approval.

Prior to that submission, the bidder’s business plan must be approved by the bidder company’s general meeting of shareholders. If the bid is unsuccessful, no company could make a new public bid within six months after the unsuccessful closure. (These provisions would allow the targeted company a breathing space to take defensive measures and avoid surprise attacks of the type that OMV unleashed in June, partly through Russian intermediaries.)

The law also makes it very difficult for a bidder to change the target company’s articles of association in the bidder’s own interest, for example by acquiring 75% of the shares. Also, a majority of at least 75% is now required for changing the targeted company’s board. The Hungarian government’s single remaining “preference share” (a last-resort tool, after the government gave up its golden share) can be used for approving or blocking such changes, in the event of the foreign bidder’s concentrating 75% in its hands. (These measures seek to defend against foreign state-controlled entities that can afford buying up shares well above the market price and use the resulting voting power to advance a hostile takeover.)

The law reflects overall the interests of shareholders by maximizing the decision-making powers of the general meeting. It also reflects public interests in the redefinition of what constitutes “strategic” companies. And it does nothing to prevent private foreign entities from EU or other Western countries from buying into Hungarian energy companies.

(MTI [Budapest], Dow Jones, Financial Times, October 9-10, 25-26; Heti Vilaggazdasag [Budapest], October 12, 26)