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Golden Shares To Face Strict Limits

The government is expected to make a decision within three weeks on how to replace the state’s preferential, “golden” shares in companies including oil and gas company MOL Rt and telco Matáv Rt. Last week the economic cabinet approved a proposal, prepared jointly by the justice, finance and economy ministries, and sent it back to the ministries to make a detailed version of the concept.

EU rules severely limit the range of companies in which the state can maintain such shares, narrowing it down to strategic companies such as energy suppliers, public service companies and defense firms. The regulations also impose strict rules on the procedure in which such shares can be used.

The system of golden shares was introduced in 1995, when Hungary started its mass wave of privatizations, during which it sold its majority stakes in strategic companies. The scheme was designed to maximize state revenues and maintain a government say in strategic decisions at those companies. The golden share grants the government a veto right in deals involving significant assets of the company. Significant in this case means both significantly large and significant in terms of operation.

The changes will require amending the relevant part of the 1995 Privatization Act, according to Gadó. Hungary has to reform its system of golden shares before it joins the EU, as shares granting preferential rights to the state in many cases violate the Treaty of Rome, which put forward the principle of free movement of capital.

Golden share systems exist in a number of current EU countries. However, while governments of EU member states can retain veto rights, they can only enforce them when public order is in danger. The use of the veto falls under a public administration procedure, meaning that the government has to justify its move, and the move can be appealed at court. The European Commission brought actions in May against Spain and the U.K. for the infringement of the principle of free movement of capital. The European Court of Justice found that the rules regulating special shares had been violated in both countries.

Although the principle of free movement of capital has existed for more than 20 years in the EU, the European Commission only recently started taking action against the misuse of golden shares, said a lawyer at Köves and Partners Clifford Chance Law Firm who requested anonymity. He added that in the EU, legal avenues are open to people and companies who feel that the exercising of a golden share violates their interests.

(BBJ 08.ix.03)

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