Corporate M&A 2020 Comparisons

Last Updated April 20, 2020

Law and Practice

Authors



CERHA HEMPEL Kališ & Partners forms part of the CERHA HEMPEL (formerly 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 CERHA HEMPEL 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. CERHA HEMPEL 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.

Despite a moderate decline in deal volume and deal value across the global M&A market in 2019, and rumours that an economic recession is coming soon, the Central and Eastern European (CEE) M&A markets seemed relatively stable. The Czech market remained one of the most attractive in the CEE region in 2019, especially due to political, financial and social stability, a safe investment environment, a skilled and highly-educated workforce and competitive labour costs, its geographical location and reliable infrastructure and its well-established research and development capabilities.

According to data provided by EMIS (Emerging Markets Information Service), the number of M&A transactions in the Czech Republic decreased by 16% (from 188 deals in 2018 to 158 deals in 2019); however, the total deals value increased by 4.2% (from EUR5.44 billion in 2018 to EUR5.67 billion in 2019), which was pushed up by the EUR1.8 billion acquisition of gas distributor innogy Grid by a consortium led by Macquarie of Australia. The estimated undisclosed deal value increased to EUR8.49 billion in 2019 from EUR3.68 billion in 2018.

In 2019, the majority of investments in the Czech Republic (approximately 60%) were conducted by domestic investors. Major foreign investors were from Germany, France, Australia and South Korea. In terms of foreign direct investments, based on the latest data the largest investor in the Czech Republic is the Netherlands, followed by Germany, Luxembourg and Austria.

Strategic investors are still involved in most of the transactions in the Czech M&A market. Nevertheless, the volume and value of deals that involved private equity firms, including financial investors such as asset management companies, funds, finance institutions and investment banks, continued to increase year by year. The private equity sector has grown significantly in recent years and is expected to retain its strong position, since plenty of companies are preparing for a succession-related transition or seek external capital to develop their business, and there is lack of public market liquidity. The advantage of private equity is that it allows sellers to remain shareholders and receive upside from a subsequent sale.

Apart from the strong appetite of international investors for large acquisitions, there is a growing trend in transactions with respect to small- or medium-sized companies, as they are reaching a stage that requires an external investments expansion of their business. Many shareholders or family companies are also tending to sell their shares and retire. 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 and are now considering retirement.

Several high-value acquisitions executed by both Czech and foreign investors contributed to a considerable increase in the average deal value in the Czech M&A market in 2019. Such an increase may prove the high-level quality of the Czech target assets and ongoing growth of investors’ demand for these assets. Both international and local investors eagerly compete for the assets that increase their price.

Before the COVID-19 outbreak, the latest economic forecast of the European Commission predicted a slight decrease in the growth rate in the Czech Republic (from 2.4% in 2019 to 2.2% in 2020 and 2.1% in 2021), which should not have had a significant impact on M&A market. As the COVID-19 pandemic has spread across the world, the global economy has rapidly shut down due to national governments’ implementing emergency restrictions to protect public health and, therefore, the M&A pipeline is slowing.

The first estimates show that number of M&A deals decreased by 25% to 30% in the Czech Republic during Q1 2020 compared to Q1 2019. The GDP of the Czech Republic is predicted to fall by 5% to 10% in year 2020 and grow by 1% to 3% in 2021. Nevertheless, the current COVID-19 situation is unprecedent and the extent of economic downturn will depend on many factors such as length of quarantine period and production breaks, pace of post-pandemic economic recovery and efficiency of government aid measures to support business.

Vert limited M&A activity is expected in the short-term (ie, in the second quarter and third quarter of 2020), since investors need time to analyse the current COVID-19 situation and review their investment strategy. Furthermore, investors may face a lack of financing from banks and price finding will be difficult under the current volatility and uncertainty. However, it is believed that the number of M&A transactions will be increasing in the Czech Republic in mid-term (ie, in the fourth quarter of 2020 and into 2021), when the global economic could begin to return to “new normal”.

M&A activities in the mid-term will probably focus on catch-up of postponed deals and strategic investments and repositioning. The economic slowdown will also bring numerous opportunities for investors to acquire distressed assets at a favourable price. In addition, the Czech Republic has a relatively low debt-to-GDP ratio (32.6%), and therefore the government is able to provide large fiscal subsidies in order to support economic growth and deal with consequences of the COVID-19 pandemic.

The most active sector in the Czech M&A market was real estate and constructions, with 48 deals in 2019 according to data provided by EMIS. Investors were interested in office building projects, shopping centres and logistics centres. The recent development of warehouse and distribution centres has been stimulated by a growth in online shopping. The boom of e-commerce puts pressure on traditional retail business; however, shopping centres still remain attractive to investors due to a stable economy and consumer spending. Special concern about the Czech commercial real estate came from South Korean investors; for instance, Korean group business conglomerate Hanwha Investment & Securities acquired the Waltrovka office complex in Prague for EUR250 million, which was ranked in the top five deals in the Czech Republic in 2019.

The second position in the Czech M&A market was earned by the IT and telecommunications sector with 28 transactions on record, ahead of the manufacturing sector in third place with 27 deals, which seemed to be faced with a decline. An increase in the IT and telecommunications and media segment was driven by the PPF Group’s acquisition of Central European Media Enterprises (CME) assets and Vivendi’s purchase of M7 Group operations, which were ranked as the second and third largest deals in the Czech Republic in 2019. Also, food and beverage and finance and insurance are included in the sectors that raised the number of M&A transactions compared to the previous year, 2018. Big deals were concluded in the energy sector, for example, the acquisition of the gas distributor innogy Grid and the purchase of Alpiq Generation by Sev.en Energy Group.

Under Czech law, a private M&A acquisition may be structured as a purchase of shares in the target company (a share deal) or business assets (an asset deal, which can be either the purchase of particular assets or the purchase of a business enterprise, ie, assets that create a separate business unit). The share deal is considered to be the easiest method of business acquisition, particularly because there is no transfer of the target’s business, since both the assets and liabilities pertaining to the target’s business remain with the target company. On the contrary, the asset deal requires a transfer of the target’s assets and liabilities from the seller to the buyer. The parties opt for one method or the other depending on tax consequences, the scope and nature of the target business, liability matters or risks identified during the due diligence procedure.

With regard to a listed joint-stock company, whose shares are admitted to trading on a regulated market on the Prague Stock Exchange, an acquisition of its shares may become more complicated as strict rules under the Takeover Act (Act No 104/2008 Coll) apply. Takeovers of a listed joint-stock company do not occur frequently, since there are not many companies that collect capital on the Czech stock market.

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) or by being asked by minority shareholders to take over the company through the sell-out mechanism (see 6.2 Mandatory Offer Threshold).

Other methods of acquisition are mergers in the form of both merger by absorption (sloučení), merger by formation of a new company (splynutí) or demergers and spinoffs. Mergers are less flexible compared to the shares or assets deals, since they require the fulfilment of statutory time limits for notifications and shareholders’ approvals.

Cross-border mergers or mergers of companies of different legal form, such as the 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 the 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). It is also very common that acquisitions must be approved by relevant authorities in other countries; for example, the acquisition of furniture chain KIKA by XLCEE-Holding, that also operates XXX Lutz and Möbelix furniture stores, had to be approved by the Czech, Slovak, Hungarian and Romanian Anti-monopoly Office in 2019.

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, the acquisition of financial institutions (eg, banks), investment funds, asset management companies, or listed joint-stock companies 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. For example, the PPF Group’s acquisition of Central European Media Enterprises (CME) should be acknowledged by the broadcasting regulator once the transaction is completed.

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 key sectors, such as defence, banking, energy, healthcare, and the chemical or pharmaceutical industry, for which new stricter rules will be applied to non-EU (non-EEA) investors, including EU investors that have an ultimate beneficial owner outside of EU (EEA) territory, and therefore foreign investments may be subject to the control of, in particular, the Ministry of Industry and Trade.

The Office for the Protection of Competition protects economic competition in the Czech Republic. Under the Act on the Protection of Economic Competition, acquisitions are subject to the approval of the Czech Anti-monopoly Office when the total net turnover of all merging competitors, ie, those participating in an acquisition, is greater than CZK1.5 billion (approximately EUR60 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 EUR10 million) for the same period. If these requirements are met, a notification must be filed.

Approval of the Czech Anti-monopoly Office is further required when the aggregate net turnover of at least one competitor participating in the merger, a competitor or the part that is being acquired, or at least one of the competitors creating a joint venture exceeded, in the latest accounting period in the Czech Republic, CZK 1.5 billion and, together the aggregate worldwide net turnover of any involved competitor, in the last accounting period exceeded CZK1.5 billion. There are no exceptions to these rules.

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, Section 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 the employees’ representatives (eg, a trade union or works council) on the automatic transfer and on the terms of the acquisition (ie, the date of the acquisition, or the legal, economic and social effects on the affected employees) 30 days prior to the transfer at the latest. If there are no employee representatives, the employees must be informed individually. If the seller (current employer) and/or the buyer (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 the 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) 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. The European Union adopted new regulation establishing a framework for the screening of foreign direct investments into the EU territory in 2019, which is currently being implemented in the Czech Republic

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 to the 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). 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 adopted the new regulation 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 (see 4.2 Material Shareholding Disclosure Threshold). 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).

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 its equivalent in foreign currency) or 3% of all voting rights of the target business with registered capital exceeding CZK100 million (or its equivalent in foreign currency), 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 all of the voting rights in the target company have been achieved, regardless of the total amount of registered capital of the target company. Notifications may be made in Czech or in English.

The Czech National Bank and target company must be notified within four business days of when a shareholder obliged to inform becomes aware of the fact that the above-mentioned thresholds are met.

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 sole shareholder.

Since 2018, every legal entity registered in the Czech commercial register is obliged to provide the respective register with information on its ultimate beneficial owner. This obligation arises out of 5th AML EU Directive implemented in Czech law by an amendment of Act No 304/2013 Coll, on Public Registers (Section 118b). The information on the ultimate beneficial owner is not publicly available, but it is registered in the companies’ files by the courts maintaining the respective commercial register.

Czech authorities have not enforced any sanctions for the failure to uphold this obligation so far; however, certain limitations in relation to the participation in public procurements or subsidies, or with regard to creditor’s rights in insolvency proceedings, may apply. Although the sanctions should have been implemented as of January 2020 as required by EU Directive No 2018/843 amending the 5th AML Directive, the respective Czech law has not been adopted yet.

The thresholds described above (see 4.1 Principal Stakebuilding Strategies) 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 permitted in the Czech Republic as there is no general restriction on the type of consideration to be offered. When it comes to a voluntary bid, a bidder may offer monetary consideration or consideration in derivatives, and every addressee of the respective bid chooses which type of consideration he or she prefers. However, in the case of a mandatory bid, no such choice is possible, as a bidder must treat all addressees of the bid equally.

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) 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.

Furthermore, with respect to non-listed companies, the statutory body of these companies is obliged to notify every change in ownership structure to the commercial register, and such data is publicly available (with an exemption of joint-stock companies having more than one shareholder). This applies to companies’ beneficiary owners, as well (see 4.2 Material Shareholder Disclosure Threshold).

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 Disclosure Threshold).

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).

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). 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. Legal due diligence reports usually focus on the area of the target’s corporate issues (including the ownership title to the shares), finance and security contracts, contracts with key business partners, employment and executive contracts, intellectual protection rights and disputes (both impeding and existing), as well as titles to the target’s major assets, such as real estate or intellectual property. Buyers usually also require financial and tax due diligence on the target’s company.

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, 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.

Such exclusivity agreements may be included in introductory documents such as a letter of intent, term sheet or non-disclosure agreement. A breach of the exclusivity obligation would not cause an invalidity of the shares or asset transfer to another buyer but, nevertheless, could trigger a potential claim of the bidder for a contractual penalty (if agreed) or damages.

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. 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) and the target’s size. Also, because of the necessary notification and authorisation processes set by the Takeover Act, the acquisition or sale of a company listed on the regulated market 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, mergers and cross-border acquisitions may take several months as they are subject to statutory time limits.

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, Section 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 a breach of representations and warranties given by the seller.

Furthermore, consideration may be offered in both monetary form and in the form of derivatives (see 4.4 Dealings in Derivatives).

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 cooperating 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), 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 the 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) 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 6.10 Squeeze-Out Mechanisms).

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.

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 the 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 by 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 regarding the general meeting it applies to (it may be granted for one general meeting, for general meetings taking place within a period of time set in the respective power of attorney, or for general meetings taking place in the 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, Section 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). However, for mergers and demergers, 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 an official note made in the Commercial Journal on such a filing.

On the regulated market, it is very common that entities are obliged to produce their financial statements. For example, there is specific information that a prospectus of shares must contain (under the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC).

Thus, a prospectus must contain, inter alia, 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 the sanction of CZK100,000 or even liquidation of the company by the court in the case of a repeated breach of such an obligation. There is also a sanction under the Accountancy Act (Act No 563/1991 Coll), ie, a sanction in the amount of 3% of the total amount of assets of the company that is in breach of the obligation to disclose its financial statement.

Therefore, companies’ financial statements, as well as their audit reports, are usually known to the public. In practice, however, it is very common that companies do not disclose their financial statements for years (although obliged to do so) and they have yet to be punished with a sanction.

The extent of the disclosure depends on the method of acquisition (see 7.2 Type of Disclosure Required). 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 more complex transactions requiring several conditions precedent or cross-border transactions, a framework purchase agreement is usually concluded together with registration purchase agreements (transfer deed) 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, including side agreements on purchase price, 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 a shareholder’s resolution on the 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 due care. Also, directors must comply with the requirements of the business judgment rule (see 8.3 Business Judgement Rule) and always act in the company’s best interest. There are no special duties regarding the transactions that directors owe to the company, since the shareholders are in charge of negotiations and decisions on deals, especially in the case of a share deal. Nevertheless, directors of the target provide the necessary assistance and documents within the due diligence process and closing.

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 Transformation Act, Section 35, et seq).

Among others, the duty of care includes the obligation to file an application for the initiation of insolvency proceedings without undue delay after the director has become aware of the company’s bankruptcy, or should have become aware of the company’s bankruptcy when acting with required duty of care.

A director who breaches the duty of care shall be obliged to return to the company any benefit which they obtained by acting in violation of the duty of care and to pay damages to the company. If the director fails to pay damages to the company, they are obliged (as a guarantee) to the company’s debts to its creditors in the extent of unpaid damages in the case that the company fails to pay them.

In the case that the director fails to file an application for the initiation of insolvency proceedings (if required), they are liable to the company’s creditors for the loss they caused them by breaching this obligation. The burden of proof with regard to the fulfilment of the duty of care lies on the director, unless the court decides that it is not justifiable.

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, the 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 on such a matter.

The business judgement rule was set up by Czech case law and was incorporated into Czech law in 2014. It serves as a safe harbour for members of statutory bodies, ie, they are not liable for damages 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 a 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.

Thus, the business judgement rule 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.

Generally speaking, Czech law does not oblige directors to seek outside advice. However, most companies (whether listed or non-listed) do so, as in-depth, experienced knowledge of the specific area is needed. For example, it is very common that companies engage with accountancy companies regarding keeping their accounts.

The same applies to M&A transactions; although no legal provision obliges the directors of the involved companies to seek independent outside advice, it is very common for directors to do so. Therefore, during M&A transactions experts from various areas (eg, law and economics most frequently) are involved. Of course, the engagement of experts usually depends on the value of the transaction in question.

It is highly recommended for the directors of companies to seek advisory from experts, as directors can only fulfil their obligations (see 8.1 Principal Directors’ Duties and 8.3 Business Judgement Rule) if they make their decisions on an informed basis. In the area of M&A transactions, eg, in order for an acquiring company to make an informed decision, the acquiring company’s directors should obtain a fair opinion on the value of the target company as well as an expert opinion on the target company’s issues, such as their compliance with the law, taxes and accounting regulations. Nevertheless, no outside advice will exempt directors 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 the execution of his or her function for a defined period of time.

A member of the board of directors or supervisory board must also inform of their intention, or the intention of their family or a legal entity influenced or controlled by them, to enter into a contract with the Company, including the terms and conditions of the contract. The respective body may prohibit the conclusion of such a contract.

The board members also cannot conduct potentially conflicted business activities according to the Act on Business Corporations or company’s articles of association that may modify the non-compete rules applied to the board members.

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 both. However, friendly takeovers prevail in practice, and hostile takeovers are somewhat rare.

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.

Civil action is usually brought to compensate for a breach of representation and warranties or confidentiality. For example, in the publicly known United Bakeries case (a potential acquisition of a company operating in the bakery business by another company operating in the same field), 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 return the deposit. Furthermore, the provisions of 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.

It is also possible to bring an action against the Czech Anti-monopoly Office that is authorised to reject a transaction that is of such an extent that it is possible to affect the market (see 2.4 Antitrust Regulations). However, it is not a common practice in the Czech Republic, as the Czech Anti-monopoly Office very rarely prohibits mergers.

Disputes regarding M&A transactions may occur at any stage of a transaction, both pre- and 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.

Nevertheless, from our experience, the majority of actions in connection with M&A transactions are brought after the deal is completed, and the fulfilment of the purchase price or post-completion conditions is a very common subject of 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 Corporations Act 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.

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 impacts 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 the purchase of mines and power plants (see 11.2 Aims of Activists), the deal was closed regardless of the demonstrations in the Czech Republic as well as in Sweden.

CERHA HEMPEL Kališ & Partners

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110 00 Prague 1 - Staré Město
Czech Republic

+420 221 111 711

+420 221 111 725

office@chsh.cz www.cerhahempel.cz
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Law and Practice in Czech Republic

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CERHA HEMPEL Kališ & Partners forms part of the CERHA HEMPEL (formerly 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 CERHA HEMPEL 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. CERHA HEMPEL 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.