European Court of Justice: a foreign company cannot be prohibited from buying up a Hungarian gravel quarry

A strict Hungarian legislation was overruled in an important economic case. The European Court of Justice has ruled that restricting the freedom of establishment on the grounds of ensuring the security of supply in the construction industry is not a fundamental social interest, hvg.hu reports.

Xella Magyarország Építőanyagipari Kft., a manufacturer of construction products made of concrete, filed a lawsuit against the then Ministry of Innovation and Technology for prohibiting it from buying Janes and Partners Ltd., which operates a gravel, sand and clay mine.

The reason given was that Xella Ltd was foreign-owned: it was owned by a German company, which was owned by a Luxembourg company, and the latter was indirectly owned by a parent company based in Bermuda which, at the end of the ownership chain belongs to an Irish national.

It was back in 2020, during the Covid-19 epidemic, that the Hungarian government issued a government decree stating that the permission of the minister responsible for domestic economy is required before foreigners can acquire ownership in companies of strategic importance. Based on the legislation, the ministry deemed Janes and Partners to be of strategic importance under the Hungarian law establishing the mechanism for screening foreign investments.

The case ended up before the Metropolitan Court of Justice, where – in a preliminary ruling procedure – the judge referred the case to the European Court of Justice for guidance. According to the guidelines just issued, the screening mechanism applied by the Hungarian Ministry constitutes a clear and particularly serious restriction on the freedom of establishment. This is not justified by the objective of ensuring security of supply in the construction sector, in particular at the local level, of certain essential raw materials, namely gravel, sand and clay.

According to the Court, that objective does not fall within the scope of the 'essential interests of society'. Furthermore, the Court also states that it cannot be established that the acquisition is of such a nature as to constitute a 'real and sufficiently serious threat'.

This judgment is all the more important because the European Commission's May report on Hungary also pointed out that the Hungarian state is actively influencing the structure of the market in certain sectors. The authors of the report found that the Hungarian government often uses its power to grant exemptions from merger control for certain transactions, classifying them as being "of strategic national importance", the newspaper said.