Excellence by default

Joint Ventures and the new Civil Code

the devil is in the details...
Typically, a Joint Venture (JV) is based on the belief by two partners that they
can reach a win-win situation: One of the parties brings its capital and business
connections to the marriage; the other provides its labour force, professionaltechnical know-how, etc. The key to successful cooperation within a Joint Venture is the use of appropriate contracts and agreements that are balanced, legally reliable, and reflect the economic situation of the parties. Such pillars include the Joint Venture Agreement, the Articles of Association of the Hungarian
JV company, and various vertical agreements including, for example, supply
agreements, know-how transfer or licence agreements. The new Civil Code, effective as of 15 March 2014, sent significant waves through this system of checks
and balances, thereby necessitating the re-adjustment of existing legal and
business arrangements. Consider these three examples:

Silent collateral Beware invalidity!

Acquiring a call option regarding shares in the JV company has been a popular way
of protecting business interests. In extreme situations, such an option can be used
as a last resort, if the partners fail to reach an agreement regarding any dispute
between them. However, such aces in the hole are now regarded by the new Civil
Code as null and void. The same rules apply to all similar collateral agreements,
such as the silent assignment of all revenues from the JV vehicle to one of the
partners. Such collateral arrangements have given way to the more traditional
lien. Nota bene: The lien is invalid unless registered in the register of credit collateral. However complicated, taking care of the registration is highly advisable.
As for call options: An advantageous innovation for both partners is that the period of a real purchase option i.e. one that serves a real business strategy instead of being used as mere collateral is no longer limited to 5 years. This
change may necessitate a reconsideration of Joint Venture contracts. Thankfully,
the legal tricks employed by lawyers to bypass the 5 year limitation have now become history...

Challenging a contract: Why not stay on the safe side?

Various uncertainties arise from the uniquely Hungarian statutory provision that
a contracting party may challenge an agreement after contracting on the grounds
of apparent disproportionality in value. On this basis a JV partner, once willing
to admit that he/she made a poor business decision, may challenge the entire
agreement and leave scorched earth. While these grounds for challenging a contract are still noted in the new Civil Code, they can now easily be excluded in the
contract. Professional corporate lawyers now routinely include various clauses in
the contracts to exclude this possibility and to inform the partners explicitly.
Furthermore, a new (and rather dangerous) provision of the Civil Code states that

incomprehensible or inconsistent provisions of a contract become null and

void by virtue of the law. Critics of the new legislation say that this provision allows a Joint Venture partner to gain (otherwise unjustified) bargaining power by
making threats regarding the invalidity of the entire agreement just because of a
minor ambiguity or inconsistency in the contract package. It is strongly advisable
to seal this loophole in the contract as tightly as possible.

Freedom of contract: blessing or a curse?

A fundamental principle of the new Civil Code is that
JV partners are free to determine the provisions of
their Articles of Association. It follows from this principle that the Articles of a Hungarian JV vehicle no
longer represent a mere imitation of the Companies
Act, but can provide real added value and serve as a
quasi-regulatory platform. This novel form of the
freedom of contract has three general limitations:

http://www.theaiatrust.com/joint-ventures-anticipate-claims/

The adopted rules may not limit the lawful interests of

stakeholders, i.e. creditors and employees;
The rights of minority shareholders may not be limited; and
The adopted rules may not limit the official supervision of
the company by the competent authorities.

As Hungarian law used to prohibit any deviation from the former Companies Act,
similar material provisions going beyond the Companies Act used to be included
in another contract i.e. a syndicate agreement before the new Civil Code entered into force. This is not necessarily the case any longer, provided that the
Joint Venture partners are willing to accept that their agreement is made publicly
available by the company registry. In return, the contracting parties are afforded
a higher degree of legal certainty, as their agreement is no longer confined to a
drawer.

According to the new Civil Code, Joint Venture partners are allowed to determine the
rights and obligations of the JV partners, the requirements concerning voting in the
shareholders meeting, sales scenarios etc. However, it is important to note that a JV
partner, in tight situations, will gladly invoke any of the three above-mentioned limitations to invalidate the entire contract, primarily with a view to strengthening its bargaining position. It is advisable to have all agreements thoroughly reviewed for overall legal
compliance and to specifically and jointly reaffirm the legal suitability of the agreed provisions.
Leaving an existing Joint Venture Agreement unaltered under the scope of the new Civil
Code would be most ill-advised. The partners need to avoid certain most unpleasant surprises lurking among the provisions of the new Civil Code for example voluntary liquidation ordered unilaterally by the JV partner. In this context, the Joint Venture partners are
not simply allowed, but are obliged to deviate from the default settings provided by
the Civil Code...

Dr. Buzdy Csongor, LLM (Berlin)

The author is an attorney-at-law, specialising in corporate finance and

bud legal Buzdy & Udvari Attorneys at law has over 10 years of experience in serving
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dr. Csongor Buzdy, LLM, Partner

csongor.buzady@bud-legal.hu

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HUNGARY

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