The Revival Of The Employee Stock Ownership Plan In Hungary

Author:Ms Eszter Kamocsay-Berta
Profession:KCG Partners Law Firm

Background - The History of the Principle of Self-Regulation in Hungary

Hungary's Act XLIV of 1992 on the Employee Stock Ownership Plan (the "ESOP Act") allows employees to acquire an ownership stake in their employing company on their own initiative within the framework of an Employee Stock Ownership Plan by means of an organization established by themselves on the basis of the principle of self-regulation. The purpose of this legal instrument was to boost the company's economic performance by bringing together the owners' and workers' collective interests. However, the ESOPs established in the nineties ceased to exist after a dynamic initial period, which might be explained by the fact that several benefits related to the ESOP were abolished. In contrast, the ESOPs in the United States of America based on the same principles became stable and reliable operators of the capital market.

Seismic Shift in Hungary - The New ESOPs

The amendment of the ESOP Act by Act CLXXXVII of 2015 established a new form of ESOP, operating with centralized management. As a result of the amendment, financial institutions, insurance companies, and investment firms may also launch an ESOP with the aim of managing financial instruments acquired by the employees within the framework of the remuneration policy. This opportunity may well lead to the widespread use of ESOPs. Depending on which employees are covered by the ESOP, the personal scope might be extended from the managers to all employees of the company and its subsidiaries within the company group.

The ESOP might be used as an incentive instrument in an exclusive or complementary manner or as an instrument used for "privatization purposes." If, however, the ESOP is based on securities representing shareholders' rights, the employees do not necessarily become owners of the founding company who established the ESOP, but acquire membership in the ESOP organization, which itself becomes owner of the founding company.

Upon meeting the conditions set in the remuneration policy, the employees may exchange their membership in the ESOP organization for cash or securities or for a combination of these two.

High Hopes - ESOPs from an International Perspective

From an international perspective, ESOPs could be a major economic growth factor in Hungary. In the United States, for instance, roughly 7,000 ESOPs were launched before 2015, in which approximately 13.5 million employees were involved, owning more than 8% of...

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