Corporate M&A 2019 Comparisons

Last Updated June 10, 2019

Law and Practice

Authors



CHSH Kališ & Partners s.r.o. forms part of the CHSH international network of law offices, which has its main seat in Austria and other offices in Belarus, Bulgaria, Hungary, Moldova, Romania and the Slovak Republic, and a total of around 180 lawyers. The close and ongoing collaboration between CHSH offices and co-operating law offices in other jurisdictions, as well as its Lex Mundi membership, enables the firm to assist clients even beyond the CEE region. CHSH Kališ is based in Prague and focuses on M&A and restructuring and insolvency, banking and finance, litigation and arbitration and competition. The Corporate team is particularly experienced in distressed transactions, whether at the pre-insolvency stage or during ongoing insolvency proceedings. It is also active in significant national and international transactions taking place on the Czech market, including asset deals, share deals and mergers (carried out mainly by way of the transformation of companies).

Among the Central and Eastern European (CEE) M&A markets, the Czech market remains one of the most attractive, especially due to its stable economic growth, friendly environment for foreign investments and relatively low-cost skilled employees. For these reasons, the volume of transactions in the past few years has been growing. Moreover, according to available data, the Czech Republic experienced the most M&A transactions in terms of both quantity and volume in the CEE region in 2018.

Many important, high-volume transactions involving both Czech and foreign investors took place in 2018. The biggest transaction in the CEE region was a one between Czech investment group PPF and Norwegian telecommunication provider Telenor. Valued at EUR2.8 billion, this transaction saw PFF acquire Telenor's CEE assets and thus acquire mobile operators in Hungary, Bulgaria, Montenegro and Serbia.

There were also important acquisitions within the Czech market, eg, the acquisition of a significant Czech insurance company, Pojišťovna České Spořitelny, by Kooperativa pojišťovna, in which both companies were part of the Vienna Insurance Group. This acquisition took effect on 1 January 2019.

Undoubtedly, 2018 may be noted as a very successful year in terms of transactions taking place in the Czech Republic or in which Czech investors were involved.

Apart from high-volume deals such as the Telenor acquisition by PPF described in 1.1 M&A Market, above, there is a growing trend in transactions with respect to small or medium-sized companies, as they are reaching a stage at which external investments are needed to provide funding for them to expand. Many shareholders or family companies are also tending to sell their shares and retire. However, this trend is noticeable not only in the Czech Republic but also in all post-Soviet countries, as many entrepreneurs started their businesses in the 1990s.

In the first half of 2018, the majority of transactions (52%) were completed between Czech entities. Foreign investments represented 26% of the total amount of transactions, with the majority of these investments coming from the UK and Austria; 22% of the total amount of transactions were represented by Czech investments abroad.

There are signs suggesting that 2019 will also be very interesting in terms of M&A transactions.

In 2018, the most attractive industry was that of industrial products and services, closely followed by property. According to data provided by the Czech investment and business development agency CzechInvest, 90 acquisitions in the area of industrial products and services and 82 acquisitions in the area of property were announced during the first three quarters of 2018. Based on the same source of data, there were 64 acquisitions in retail, consumer goods and entertainment, 29 in healthcare, 24 in financial institutions, 16 in agriculture and raw materials and finally 15 acquisitions in energy. Key industries in the Czech M&A market do not differ from the European M&A market, as the real estate and manufacturing industries are areas in which the majority of transactions were carried out in the EU as well.

Under Czech law, an acquisition may be structured as an acquisition of shares, particular assets or an enterprise. An acquisition of shares is considered to be the easiest method to acquire a target company or control over one, particularly because there is no transfer of the target's assets, since both the assets and liabilities pertaining to the target business remain with the target business. On the contrary, the acquisition of assets or an enterprise requires a transfer of the target's assets and liabilities from the target to the acquirer. Nevertheless, regarding a listed joint-stock company, the acquisition of its shares may become highly complicated as strict rules under the Takeover Act (Act No 104/2008 Coll.) apply.

For a majority shareholder in a joint-stock company it is also possible to obtain control over a target through the so-called squeeze-out mechanism (see 6.10 Squeeze-out Mechanisms, below) or by being asked by minority shareholders to take over the company through the sell-out mechanism (see 6.2 Mandatory Offer Threshold, below).

Other methods of acquisition are mergers in the form of both amalgamation (companies are merged together) and absorption (companies are merged together, all cease to exist and a new company as an acquiring company is created), or de-mergers and spin-offs.

Cross-border mergers or mergers of companies of different legal form, such as merger of limited liability companies and joint stock companies, are also allowed under Czech law while governed by the Transformation Act (Act No 125/2005).

In the Czech Republic, the relevant authority for authorising M&A activities is the Office for the Protection of Competition. According to the Act on Protection of Economic Competition (Act No 143/2001 Coll.), the Office for the Protection of Competition must approve every acquisition if certain requirements set by the Act are met (see 2.4 Antitrust Regulations, below). It is also very common that acquisitions must be approved by relevant authorities in other countries, eg, the merger of two bakery companies had to be approved by both the Czech and the Slovak anti-monopoly office (see the United Bakeries case).

However, where an acquisition may have a direct or indirect effect on the EU market, the respective acquisition is subject to the approval of the European Commission. Other approvals may be required with respect to an acquisition of a company carrying out its business in a certain industry. For example, in the area of an acquisition of financial institutions (eg, banks), or listed joint-stock companies, acquisitions are subject to prior approval of the Czech National Bank. By the same token, under the Radio and Television Broadcasting Act (Act No 231/2001 Coll.), each acquisition of a company operating in the broadcasting industry meeting certain requirements must be approved by the Council for Radio and Television Broadcasting.

From a legal standpoint, both domestic and foreign investments are treated equally, as the same rules apply to both groups of investors. However, there are certain sectors, eg, insurance, banking, energy, lottery and defence, where stricter rules apply and therefore foreign investments may be excluded from participating in a particular industry.

The Office for the Protection of Competition protects economic competition. Under the Act on Protection of Economic Competition, acquisitions are subject to the approval of the Czech Antimonopoly Office when the total net turnover of all merging competitors, ie, those participating in an acquisition, is greater than CZK1.5 billion (approximately EUR58 million) in the latest accounting period. In addition, at least two of the merging competitors must have each achieved net sales of more than CZK250 million (approximately EUR9.6 million) for the same period. If these requirements are met, a notification must be filed. There are no exceptions to this rule.

Moreover, if an acquisition might affect the EU market, ie, have an EU dimension, EU jurisdiction will apply. In such cases, the European Commission must be notified of the acquisitions and approval must be obtained from the European Commission instead of the Office for the Protection of Competition.

According to the Labour Code, Sections 338 et seq (Act No 262/2006 Coll.), an acquisition through a transfer of enterprise triggers an automatic transfer of all employees of a transferring company to an acquiring company. Although the employees' consent is not needed, the seller and the buyer must inform and consult with employees’ representatives (eg, a trade union or works council) on the automatic transfer and terms of the acquisition (ie, the date of the acquisition, or the legal, economical and social effects on the affected employees) 30 days prior to the transfer. If there are no employee representatives, the employees must be informed individually. If the seller, ie, employer, and/or the buyer, ie, new employer, fail to fulfil the information and consultation obligation, the transfer remains valid, however the respective employer may be fined up to CZK200,000 (approximately EUR8,000) or the affected employees may claim damages.

If the affected employee gives a notice of termination to the seller due to the envisaged transfer of rights and obligations arising from employment relationships before the effective date of the transfer, then the employment relationship terminates as of the day previous to the effective date of the transfer, at the latest. This means that standard two-month notice period may be shortened in such a case.

In the case of a transfer of enterprise, the employment relationships are transferred from the seller to the buyer, including all rights and obligations. Furthermore, all rights and obligations arising from a collective bargaining agreement (if such an agreement exists) will be transferred to the buyer for a period of time until the collective bargaining agreement takes effect, but no longer than until the end of the following calendar year.

The legal framework of the Czech Republic prohibits or restricts certain areas such as defence or banking (see 2.3 Restrictions on Foreign Investments, above) from foreign investments; however, there is no mechanism securing these sensitive industries.

In connection with the growing volume of foreign investments, there have recently been incentives to establish such mechanisms. According to the incentives, these mechanisms should aim for the verification and transparency of investments into sensitive industries (eg, energy, in particular the nuclear sector, transport, data rooms, artificial intelligence and cybersecurity) rather than prohibiting foreign investors from participating. There is also an on-going debate over whether to adopt such mechanisms at EU level.

Of late, there have not been many significant legal decisions regarding M&A transactions in the Czech Republic. However, the courts have ruled that the protection of the weaker party may arise in M&A transactions when certain requirements are met (typically, when one of the parties involved is a natural person). Therefore, where one of the parties to the transaction is considered the weaker party, the other party/parties must not abuse its stronger position. If the stronger party fails to fulfil this obligation, it will be obliged to pay damages to the weaker party.

There may well be more judicial decisions in the area of antitrust and competition, but they do not usually provide a general rule applicable to every case concerning M&A transactions.

There have not been any significant changes takeover law recently. However, we may see initiatives on adaptation mechanisms to protect sensitive industries at both the national and EU level.

In the Czech Republic, we do not have any particular mechanisms to protect sensitive industries from dangerous foreign investments (see 2.6 National Security Review, above). The protection of sensitive industries is also crucial to the EU, which intends to monitor and analyse foreign investments coming from third countries to the EU. The EU aims to review all the investments in the sensitive industries, such as infrastructure, eg, harbours and energy networks. Nonetheless, the EU only intends to review these investments; the final decision on whether to authorise a particular investment or not must be made by the particular member state, and the EU overview should be regarded as the basis for that decision.

The negotiations between the European Commission, the European Parliament and the European Council have reached a stage of compromise, and the members of the European Parliament were due vote on the proposal in 2019.

In order to increase success in acquiring control over a company, a bidder may acquire a stake in the company prior to launching an offer. Regarding a non-listed company, this is a very common practice as there are no requirements to publish a list of shareholders or to notify a controlling authority, such as the Czech National Bank.

However, according to the amendment of Directive 2004/109/EC of the European Parliament and the Council on the harmonisation of transparency, a similar practice regarding listed joint-stock companies has become obsolete. The Act on Capital Market Business imposes an obligation to notify on every shareholder of a listed company if certain thresholds are exceeded (these thresholds are described at 4.2 Material Shareholding Disclose Threshold, below). Where any of these thresholds are met, the mandatory notification makes any attempt to sneak into the company almost impossible. Moreover, after a shareholder of a listed joint-stock company exceeds 30% of all voting rights, a public offer towards other shareholders must be launched (6.2 Mandatory Offer Threshold, below).

Disclosure Threshold for Listed Companies

Under the Czech Act on Capital Market Business, Section 122 (Act No 256/2004 Coll.), a shareholder who reaches or exceeds 1% of all voting rights of the target business with registered capital exceeding CZK500 million or 3% of all voting rights of the target business with registered capital exceeding CZK100 million, must notify the target company and the Czech National Bank. A shareholder must also notify the same entities if at least 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50% or 75% of the registered capital has been achieved, regardless of the total amount of registered capital of the target company. Notifications may be made in Czech or in English.

However, the above thresholds only apply to listed companies whose registered offices are in the Czech Republic or whose reference country is the Czech Republic.

Disclosure Threshold for Non-listed Companies

Focusing exclusively on a Czech private limited liability company (společnost s ručením omezeným) and a non-listed joint-stock company (akciová společnost), notification obligations are set in respect of the commercial register, which is publicly accessible online. Every shareholder of a private limited liability company must be registered in the register, provided that the shareholder is identified (by name, address and date of birth if a natural person, or by a business name, ID number and registered office if a legal person), together with the extent of the share of the total registered capital. Conversely, the shareholder structure of a non-listed joint-stock company may be unclear to the general public, as there is no obligation to publish its shareholder structure unless there is only one shareholder.

Since 2018, every legal entity registered in the Czech commercial register is obliged to provide the respective register with information on the beneficial owner of that entity. This information is not publicly available, but it is registered in the companies´ files by the courts maintaining the respective commercial register.

The thresholds described above (see 4.1 Principal Stakebuilding Strategies, above) are mandatory and cannot be altered. In fact, although there is no provision that allows a company to make these thresholds stricter, it is, by a matter of principle, possible to add them to the company's Articles of Association. Nevertheless, as the thresholds set by the Act on Capital Market Business are already very stringent, it does not seem practical to make them even more so.

Dealing in derivatives is possible in the Czech Republic.

According to the Act on Capital Market Business, a shareholder is obliged to notify both the target company and the Czech National Bank if a certain threshold (see 4.1 Principal Stakebuilding Strategies, above) is reached or exceeded. The Act also requires notification where the respective shareholder reduces its share of all voting rights below these thresholds. A notification must be given about every action, excess or reduction of any of the thresholds without undue delay, but no longer than within four working days from the moment the shareholder has become aware or could possibly become aware of the fact giving rise to the obligation to notify. The notification to the Czech National Bank may be in Czech or English.

In the Czech Republic, voluntary offers are usually done in private; therefore the general public does not know the terms of either the offer or the deal. Nevertheless, there are general notification obligations for the commercial register, so certain information may be made available to the public that way (see 4.2 Material Shareholding Disclose Threshold, above).

With regard to joint-stock companies, a public bid must be launched where certain requirements are met. According to the Business Corporations Act, Section 322, a bidder must launch a public bid if it intends to make a bid towards more than 100 people or intends to acquire more than 1% of the total registered capital, unless exemptions set by the Business Corporations Act apply. In the event of a public bid, the bid documents must include the identification of the bidder, the purchase price (or how the purchase price will be determined), the time period for the acceptance of the offer and reasons for launching the bid. In relation to listed joint-stock companies, obligations set by the Takeover Act are very similar.

To determine whether transaction documentation must be disclosed, various factors must be taken into account. In general, it is not mandatory to disclose a deal prior to closure of the deal, as the resulting consequences need to be published in the commercial register once this has happened and publishing in the commercial register counts as disclosure (see 4.3 Hurdles to Stakebuilding, above).

Certain documents, such as the merger project, must be disclosed prior to closure of the deal. Stricter disclosure requirements apply to listed joint-stock companies.

Where an issuer has an obligation to publish certain information, the law usually also sets a time limit for fulfilling such an obligation; if not, the issuer is obliged to publish without undue delay. Because the failure to meet such a time limit gives rise to consequences, the issuer usually meets those requirements.

A due diligence report is a crucial aspect of almost every transaction. Although there is no legal obligation to draw up a due diligence report, acquiring companies rarely sign transaction documents prior to obtaining due diligence findings. The compiling of a due diligence report is very often necessary to fulfil the duty of care that every member of a statutory body owes to his company (see 8.1 Principal Directors' Duties, above). According to this duty, every member must act in the company's best interest and must make a decision based on informed grounds; ie, a member of a statutory body cannot fulfil his or her duties towards a company if a decision is based on vague and incomplete information.

The scope of every due diligence differs, as there is no framework set by the law and each of them must meet the transaction’s specific requirements. However, due diligence reports usually focus on the area of the target's corporate issues (eg, compliance with the law of the Articles of Association or share purchase agreements), employment and executive contracts, intellectual protection rights and disputes (both impeding and existing), as well as titles to the target's property.

It is also very common that a satisfactory outcome of due diligence is set as a condition for a successful completion of the transaction.

Under Czech law, both standstills and exclusivity are allowed. In general, standstill agreements aim at prohibiting interested parties from making another offer, or acquiring or selling the target company’s shares for a limited period of time. Forms of standstill may even be found in legal acts, for example, pursuant to the Act on Capital Market Business, Section 23, a bidder cannot modify or revoke the bid once the bid has been launched (only very few exceptions apply).

Contrary to this, exclusivity agreements are negotiated in favour of both the seller and the buyer, as these agreements prohibit companies from negotiations with other potential buyers or sellers. Exclusivity agreements are quite common the in Czech Republic, whereas standstill agreements are rather rare.

Generally, when a private bid is launched, the terms of the bid may be further negotiated between the parties. Contrary to this, the terms of public bids are not subject to negotiation, as they are made towards a wide range of people. Also, according to the respective provisions of both the Business Corporations Act and the Takeover Act, every public bid must include the purchase price or method of determining the purchase price. It is also presumed by both acts that the bid would be either accepted or rejected, but would not be negotiable. For example, with respect to a squeeze-out, the squeezed-out minority shareholders are not allowed to negotiate the purchase price while making the decision at a general meeting; they may only seek additional compensation through negotiation with a majority shareholder or by bringing a civil action.

The length of the acquisition and sale process depends on various factors, such as the chosen method of acquisition, the scope of due diligence (see 5.3 Scope of Due Diligence, above) and the target’s size. Also, because of the necessary notification and authorisation processes set by the Takeover Act for companies listed on the regulated market, the acquisition or sale of a listed company usually takes significantly more time than the acquisition or sale of a non-listed company, for which such strict rules do not apply.

In general, because of a strict legal framework and timeframe, an acquisition of a listed company can take up to approximately five months, whereas a medium-sized, non-listed company may be acquired within a few weeks. However, a cross-border acquisition may take several months or even years.

Mandatory Offer Threshold for Listed Companies

According to the Takeover Act, a shareholder who reaches or exceeds 30% of the total voting rights in a company, ie, a decisive share of voting rights, is obliged to make a mandatory bid to all shareholders of the company to take over their shares. The bid must be approved by the Czech National Bank and must be made within 30 days of when the shareholder in question obtains the decisive share.

Every shareholder whose shares are about to be taken over by a shareholder with a decisive share of voting rights shall be offered payment corresponding at least to the highest price for which it acquired the shares leading to the takeover bid (the 'premium price'). If it is impossible to determine the premium price, the consideration must represent at least the average prices for which the respective shares were traded on the European regulated market during the six months prior to the point at which the offer obligation arose (the 'average price').

Mandatory Offer Threshold for Non-listed Companies

According to the Business Corporations Act, Section 395, minority shareholders of a joint-stock company where the majority shareholder owns 90% or more of the voting rights and 90% or more of the registered share capital together may request the purchase of their shares by the majority shareholder. If requested, the majority shareholder must launch a public bid according to the Business Corporations Act, Sections 322 et seq and offer minority shareholders a fair, expert opinion-based consideration.

Czech law expressly allows that consideration may be paid in both cash and shares. However, cash is more common. It is also common that the consideration is not paid in full at once, but the parties involved agree to pay part on/prior to the day of the signing of the takeover documents and the remainder in a few instalments over the following months. A part of the consideration may be further used as a retention that secures breach of representations and warranties given by the seller.

Takeover offers may be launched as conditional for both listed and non-listed joint-stock companies. Nevertheless, a conditional offer is only allowed as long as the fulfilment of the condition does not solely depend on the bidder’s discretion, or that of persons co-operating with the bidder.

One of the most common acceptance conditions is the seller's acquisition of a certain amount of shares in the target company, which enables the bidder to become a majority shareholder or to be able to squeeze-out minority shareholders. Other common conditions are the gaining of the approval of respective supervisory authorities (see 2.2 Primary Regulators, above), and the satisfactory outcome of due diligence of the target company or certification that it is not in default, ie not bankrupt or in any potential risk of bankruptcy. For example, although the transaction documentation was not disclosed, it was publicly known that the completion of one of the most significant acquisitions planned in 2019, the acquisition of Czech and Slovak branches of Home Credit  and Air Bank by Moneta Money Bank, was conditional upon the approval of the relevant authorities (the Czech National Bank and the Anti-monopoly Office; see 2.2 Primary Regulators, above) and the satisfactory outcome of due diligence. Legal due diligence of the respective branches of Home Credit and Air Bank was completed at the end of January and its outcome led the representatives of Moneta Money Bank to make an attempt to renegotiate the terms of the deal. As the representatives of Home Credit and Air Bank were reluctant to agree on different terms of the deal, the deal did not take place.

Bidders usually seek the majority of 50%, 66.66% or 90%, depending on the thresholds that are necessary to adopt a resolution at a company's general meeting.

According to the Business Corporations Act, resolutions regarding general corporate matters (eg, the appointment or dismissal of members of the statutory or supervisory body) must usually be approved by 50% of the voting rights, ie, a simple majority. However, resolutions concerning more serious corporate manners (eg, amendments to a company's Articles of Association) must be approved by the majority of 66.66% of the voting rights, ie, a qualified majority. When a majority shareholder intends to squeeze-out minority shareholders, it must hold 90% of the voting rights (see 6.10Squeeze-out Mechanisms, below).

The statutory thresholds may be modified in the company's Articles of Association but only in order to increase them, ie, the thresholds cannot be lower than those provided by the Business Corporations Act.

The requirement to obtain financing is not prohibited by law in the Czech Republic. Although it is very common to pay the purchase price or give consideration in a few instalments, it is quite rare to agree upon a condition that the takeover documents become effective upon obtaining financing by the bidder.

Nevertheless, according to the Takeover Act, the bidder must be able to prove that it possesses a sufficient amount of funds to cover the purchase price or consideration in total, or demonstrate how the money will be procured.

Deal security measures are not common in the Czech legal system. Nevertheless, as the leading principle of Czech civil law is that nothing is prohibited unless it violates the law, parties to a contract may agree on any measure to secure their mutual obligations (eg, standard representations and warranties, contractual penalty, retention, etc), as long as it complies with the law. For example, under the Czech Civil Code, if a penalty is disproportionately high, it may be reduced by the court decision. However, the court must consider all the relevant circumstances of the case (eg, the purchase price). It should also be noted that when the parties stipulating a disproportionately high contractual penalty are business entities, the courts are rather reluctant to reduce the penalties the parties agree on.

Moreover, parties may include in their contract a provision regarding the grounds on which each party is entitled to terminate the contract by paying a certain amount of severance, ie, a break-up fee, as well as including a provision that the terms of the bid may not be modified.

Shareholders usually intend to go beyond the protection and instruments provided by the law. Minority shareholders often seek additional ways to improve their position towards majority shareholders. In general, rights and obligations attached to shares may be added, modified or excluded, as long as the purpose of the shares and the shareholders' participation in the company is maintained.

In practice, these additional governance rights usually consist of modified rules for profit distribution, the appointment and dismissal of members of a company's bodies, the right to veto or other rights.

It is possible to distinguish between two methods whereby the additional governance rights are allocated to shareholders. The first implements such additional rights directly into the respective shares (the respective rights remain with the shares even after their transfer); the second adds them through shareholder agreement (the respective rights usually remain with the particular shareholder and are not transferred with the share as they are vested in the owner's person).

Shareholders are allowed to vote by a proxy who proves his or her authority by a power of attorney granted from the respective shareholder. However, pursuant to the Business Corporations Act, a power of attorney to represent a shareholder at a general meeting must contain information for which general meeting it applies (it may be granted for one general meeting, for general meetings taking place within period of time set in the respective power of attorney, or for general meetings taking place in future for an indefinite period of time). A power of attorney should also specify the company whose general meeting it applies to (however, it is also possible to grant a power of attorney to represent a shareholder at general meetings of all companies it holds shares of). Moreover, a power of attorney must also denote who the principal, ie, the shareholder to be represented, and representative are.

The so-called 'squeeze-out' mechanism is governed by the Business Corporations Act, Sections 375 et seq, meaning that a shareholder holding at least 90% of the voting rights and 90% of the registered share capital in a joint-stock company may initiate a general meeting aiming at the adoption of a decision that all remaining shares in the company would transfer to the respective majority shareholder. Nevertheless, every minority shareholder is entitled to receive fair and expert opinion-based consideration.

As listed joint-stock companies are governed by special acts, different requirements apply, eg, a notification to the Czech National Bank is compulsory and there is no need for an expert to be involved.

It is not prohibited under Czech law to commence negotiations with the target company's shareholders prior to the launch of a bid. Moreover, it even seems a logical step to negotiate the terms of a bid with shareholders and then launch a bid, as the previous agreement may make the whole process of acquisition easier.

According to the Takeover Act, the bidder may modify the amount of consideration but only to the benefit of the target company’s shareholders; therefore, the amount of consideration may only be increased. The Czech National Bank must be notified of this change within five working days prior to making the change public. Also, the Czech National Bank is entitled to prohibit the bidder from publicising any changes.

According to the Takeover Act, Section 48 shareholders are not bound by irrevocable commitments when a competing takeover bid is launched, unless the time limit for the acceptance of the previous bid (the one with irrevocable commitments) has expired. Nevertheless, the irrevocable commitments agreed upon before the bid is launched shall be fulfilled in pursuance to the provision of the Civil Code and common principles of Czech civil law certified in the Civil Code.

Czech law distinguishes between mandatory and voluntary takeover bids. The latter are not subject to disclosure, and thus the terms of the takeover and acquisition documents are not usually made known to the public. Generally, takeover bids are made voluntarily, and thus the public is unaware of the terms of the bid.

In contrast, under the Business Corporation Act and Takeover Act, mandatory bids must be made public. Such bids do not have to be made public unless certain requirements are met; typically a public bid aiming at obtaining control over a listed company or offering shares to a wide range of people must be made public.

The extent of documentation disclosure depends on the method of acquisition. With the acquisitions of shares, assets or an enterprise, there is generally no need to disclose transactional documentation to the public (unless certain requirements are met, eg, launching a public bid, see 7.1 Making a Bid Public, above). However, for mergers and de-mergers, certain documents are automatically disclosed to the public, eg, a merger project must be filed with the collection of deeds maintained by the Czech commercial register and made available online to the public, which protects creditors of the companies participating in the merger. Also, there must be official note made in the Commercial Journal on such filing.

On the regulated market, it is very common that entities are obliged to produce their financial statements. For example, under the Act on Capital Market Business, Section 36 a prospectus must contain information on the issuer's assets and liabilities, the financial position, profits and losses, as well as the future development of the business. The issuer’s financial status and, where applicable, that of the third party guaranteeing a repayment of the securities, must also be included.

However, every entity registered in the commercial register is obliged to file its financial statement with the collection of deeds under sanction of CZK100,000 or even liquidation of the company by the court in case of repeated breach of such obligation. Therefore, companies' financial statements, as well as their audit reports, are usually known to the public.

The extent of the disclosure depends on the method of acquisition (see 7.2 Type of Disclosure Required, above). There are usually two key documents that are used to initiate and structure the M&A deal process – a term sheet and a letter of intent. The term sheet briefly sums up fundamental terms and conditions of an intended merger or acquisition. The letter of intent (the Memorandum of Understanding) is a preliminary agreement that precedes a definitive binding agreement (eg, share purchase agreement) and outlines main points of the contemplated transaction such as an overview of the deal and its structure, timeline, due diligence process, confidentiality, exclusivity or governing law. Both the term sheet and letter of intent are usually non-binding documents, except for some provisions like non-disclosure, exclusivity or governing law.

The final deal document (a definitive purchase agreement) varies depending on the type of transaction. For example, a share deal is made through a share purchase agreement, an asset deal is made through an asset transfer agreement, and mergers further require a merger project. In cross-border transactions, a framework purchase agreement is usually concluded together with registration purchase agreements within particular jurisdictions. The first draft of the definitive purchase agreement is more commonly executed by the buyer and then reviewed by the seller.

In most transactions, there are a variety of other associated documents as well, including shareholders agreements (typically regarding the future co-operation of the seller and the buyer in a joint venture) or documents relating to intended corporate changes or changes in management (typically shareholder’s resolution on change of articles of association and managing directors, contracts with new managing directors, etc).

Directors are obliged to act with a duty of care (péče řádného hospodáře), meaning that they must exercise their powers as board members with necessary loyalty, knowledge and care. Also, directors must comply with the requirements of the business judgement rule (see 8.3 Business Judgement Rule, below) and always act in the company's best interest. Nevertheless, there are no special duties regarding the acquisition that directors owe to the company.

Although the Czech legal framework does not include any special director's duties towards the public, they may be assumed implicitly. For example, the general public is protected by the director's duty to publish changes regarding the company in the commercial register. Also, the Transformation Act contains provisions aiming at the protection of creditors (see the Transformation Act, Sections 35 et seq).

Although not prohibited under Czech law, it is not common to establish special or ad hoc committees in the event of an acquisition. Nevertheless, every company is allowed to establish a committee to meet (specific) needs and requirements a certain acquisition may have.

A conflict of interest is not usually dealt with through establishing a special committee. In the event of a conflict of interest, a member in question must inform the other members of the statutory body and supervisory board, or if no such board has been established, the board member must inform all shareholders. A member who appears to have a conflict of interest is usually excluded from voting in such a matter.

The business judgement rule was incorporated into Czech law in 2014 and serves as a safe harbour to members of statutory bodies, ie, they are not liable for damage they cause to the company as a result of their decision, provided that they acted in good faith, their decision was based on relevant information and they reasonably assumed that they acted in the company's best interest. For example, based on the decisions of the Supreme Court of the Czech Republic, if members of statutory body sell a company's real property for a price which is significantly lower than its open market value, such transaction may result in the breach of duty of care of the respective members as they did not act in compliance with the business judgement rule. The business judgement rule thus emphasises the fact that members of statutory bodies can make mistakes in business judgement when making their decision, as sometimes the consequences of these decisions may not be predictable. The business judgement rule prevents them from being liable if it is proved that they acted with due managerial care, ie, every requirement of the business judgement rule was met. 

Although legal provisions do not oblige the directors of the acquiring company to seek independent outside advice, it is very common that directors do so. Also, it is highly recommended to seek independent advice because directors can only fulfil their obligations (see 8.1 Principal Directors' Duties and 8.3 Business Judgement Rule, above) if they make their decisions on an informed basis. To make an informed decision, the acquiring company’s directors should obtain a fair opinion on value of the target company as well as an expert opinion on the target’s company’s issues, such as their compliance with the law, taxes and accounting regulations. Nevertheless, no advice will exempt them from their obligation to act in the company’s best interests or their other duties.

A member of any company's body must report every potential conflict of interest to other members of the body of which it is member and to the supervisory body, and if no supervisory body has been established, to the general meeting. If the respective body, ie, the supervisory body or general meeting, finds that there is a conflict of interest, or a danger of one occurring, the member in conflict may be suspended from execution of his or her function for a defined period of time.

No distinction between friendly and hostile takeovers is made in the Czech Republic. Therefore, takeovers of both types are permitted and the same rules apply to either. However, friendly takeovers prevail in practice and hostile takeovers are somewhat rare. 

In the Czech Republic, one of the most recent widely known hostile takeovers took place in May 2018. Here, the enterprise J&T exercised its shareholder´s rights as a creditor at a general meeting of the company CEFC. The shares had been pledged in favour of J&T and the debtor was in default with exercising its contractual obligations to J&T.

In the event of a takeover, both friendly and hostile, the statutory body of the target company must make all efforts to inform shareholders about every detail of the bid, the consequences of a proposed acquisition, its risks and other factors, to ensure that every shareholder is able to make a free and informed decision regarding the bid. Also, every member of the statutory body of the target is obliged to act in the target's best interest from the moment the intention to launch a bid becomes known to the target company, during the process of the negotiation, until its completion.

Although Czech law does not provide members of the target's statutory body with a wide variety of legal defence measures, members have a plethora of other means at their disposal, provided that they meet legal requirements.

To protect the target against hostile takeovers, the statutory body may take various precautions. Defence measures may be divided into two groups: the first aiming at taking action to make the target less economically attractive, and the second aiming at finding a better investor. 'Suicide pills' may serve as an example of a measure of the first group. The purpose of the suicide pills measure is to put the target into a less favourable position economically, and therefore discourage the potential acquirer from making the acquisition as a result. The second group may be represented by a 'white knight', a method aiming at finding alternative offers.

There are no specific directors’ duties with respect to hostile offers or acquisitions in general. However, there is plethora of general duties with which every director must comply. Directors of the target must always act in the target's best interest, and therefore, every defensive measure taken must follow the target company's best interest.

To say no to a bid, directors must prepare a memorandum analysing the transaction facts, the consequences of the acceptance and rejection of a bid, and evaluating their economic aftermath. This memorandum must then be passed on to shareholders so they can make an informed decision at the general meeting. That is, the final stage of saying no takes place at the target company's general meeting, not at the meeting of the target's statutory body.

In general, saying a baseless 'no' to a bid constitutes a serious breach of a director’s duties. Every bid should be given careful consideration, with an evaluating memorandum drawn up and a final decision made by the target's shareholders. 

Litigation in the area of M&A is not very common in the Czech Republic, especially due to the costs of court proceedings as well as their duration. Parties tend to reach an out-of-court settlement or call for arbitration in the case that multiple jurisdictions are involved.

The provisions the Business Corporations Act, Section 390 grant any squeezed-out minority shareholders the right to claim a majority shareholder in order to receive additional compensation. Also, a civil action is often brought to compensate for a breach of representation and warranties or confidentiality. For example, in the United Bakeries case there was a dispute over a deposit of CZK100 million, which was paid in advance by the prospective buyer. As the acquisition was not completed, the potential buyer brought a civil action in order to have the deposit returned.

Disputes regarding M&A transactions may occur at any stage of a transaction, both pre-post-completion, as well as disputes to settle various issues, such as the adequacy of consideration or disputes over the ownership of the shares that are about to be subject to a transaction.

From experience, the majority of actions in connection with M&A transactions are brought after the deal is completed, and fulfilment of the purchase price or post completion conditions is a very common subject to these civil actions (typically when the purchase price can be modified according to certain covenants or other conditions).

Shareholder activism is not very common in the Czech Republic; however, it becomes a more known and more used tactic in order to persuade companies to act in a certain way or to undertake an action wanted by a shareholder activist.

Shareholder activism is primarily regulated by the Business Corporation and the Transformation Act, which provide a shareholder activist with various means such as the right to obtain an explanation of any corporate issue at a general meeting and the right to protest and then contest the validity of a resolution adopted by the general meeting at the court proceeding.

However, shareholder activists may also exercise other defence measures not expressly set by the law, which seem even more effective. One of these measures is private communication with members of a statutory body, by which a shareholder activist intends to obtain information about a company. Although the law does not prohibit this measure, board members who respond to these intentions must not put the shareholder activist in an unfairly favourable position over other shareholders.

Also, as the prevalence of the internet is increasing, social media has become a very strong defence measure, as all information posted online may become known to the general public within a very short period of time.

It is very rare in the Czech Republic to see shareholder activism aiming at discouraging or encouraging companies to enter into M&A transactions. However, there are some important and noticeable exceptions, especially in the area of hostile takeovers (eg, J&T v CEFC – see 9.1 Hostile Tender Offers, above).

In general, shareholder activists usually aim at non-financial goals (but very often with financial motivations regarding the outcome), especially in the case of disagreements with a company's politics. By this token, activism is common in the areas of business that may have negative social or environmental impact on the society (eg, in 2016, activists demonstrated against the purchase of mines and power plants in Germany by Czech investment group EPH).

Activists usually do not put the completion of a transaction into danger or postpone its effectiveness. Although a certain quorum must be met for the parties to the contract to accept a deal, it is rare that the deal is not completed due to interference caused by activists. For example, in the case of purchase of mines and power plants (see 11.2 Aims of Activists, above), the deal was closed regardless the demonstrations in Czech Republic as well as in Sweden.

CHSH Kališ & Partners s.r.o.

Týn 639/1
110 00 Prague 1 - Staré Město
Czech Republic

+420 221 111 711

+420 221 111 725

office@chsh.cz www.chsh.cz
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CHSH Kališ & Partners s.r.o. forms part of the CHSH international network of law offices, which has its main seat in Austria and other offices in Belarus, Bulgaria, Hungary, Moldova, Romania and the Slovak Republic, and a total of around 180 lawyers. The close and ongoing collaboration between CHSH offices and co-operating law offices in other jurisdictions, as well as its Lex Mundi membership, enables the firm to assist clients even beyond the CEE region. CHSH Kališ is based in Prague and focuses on M&A and restructuring and insolvency, banking and finance, litigation and arbitration and competition. The Corporate team is particularly experienced in distressed transactions, whether at the pre-insolvency stage or during ongoing insolvency proceedings. It is also active in significant national and international transactions taking place on the Czech market, including asset deals, share deals and mergers (carried out mainly by way of the transformation of companies).

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