Corporate M&A 2024 Comparisons

A wide range of negative factors still played a huge role in the Czech M&A market in 2023. These include high inflation and interest rates, the war in Ukraine, pressure on profit margins, supply chain disruption and an energy crisis. However, the volume of transactions achieved in 2023 indicates a recovery. The impact of the COVID pandemic on the Czech M&A market was almost non-existent in 2023.

Notable transactions include the acquisition of NET4GAS and RWE Gas Storage by CEPS (the Czech Transmission System Operator), Česká spořitelna’s (Erste Group) acquisition of loan portfolios from bankrupt Sberbank CZ and of Hello Bank from BNP Paribas, CVC’s and EMMA Capital’s acquisition of Packeta (logistic and e-commerce solutions) and Carlyle’s acquisition of Meopta (a developer and producer of optical and opto-mechanical components).

The top trends in the Czech M&A market in the last 12 months include:

• consolidation of the energy market;
• shift to green technology/sustainability;
• increasing popularity of locked-box pricing mechanisms, a close-to-nil liability concept, warranty and indemnity insurance and earn-out structures; and
• exits by domestic entrepreneurs from their companies established in the 1990s and early 2000s.

These trends are expected to continue in 2024.

Due to the increasing scarcity of available financing sources and the rise of financing costs, the proportion of equity financing has increased. Deals are not as competitive as before. However, the market is still generally on the seller-friendly side, despite the M&A market having cooled off a bit during the past two years.

The Czech economy is highly dependent on the automotive industry and energy-intensive manufacturing. Recovery from the impact of the COVID pandemic and adaptation to the challenges outlined in 1.1 M&A Market seem to be somewhat slower compared to other countries in the region.

Industries that have recently seen significant M&A activity include energy, logistics, manufacturing, retail and the banking sector. Software, automation, digitisation and robotisation, and  telecommunications are becoming increasingly attractive sectors.

The two main acquisition structures used most frequently in the Czech Republic are share deals and asset deals.

Share deals involve the acquisition of the shares or ownership interest in the target company directly from its current shareholder(s). All assets, liabilities, licences, authorisations, employees, etc of the target company are retained in their entirety. The business of the target company is therefore not altered and continues without any interruption.

In asset deals, the purchaser buys specific pre-selected assets of the target company. Such sets of assets may be comprehensive to such an extent that they form part of the target company’s business (or even its whole business). Subject to the fulfilment of certain conditions, the purchaser may select which (potentially problematic) assets or liabilities remain outside of the scope of the transaction.

Thorough legal, financial and tax due diligence is highly recommendable in both types of structures as it helps to discover and address appropriately the main potential risks of the purchaser upfront.

In addition to the typical transaction structures described above, purchasers may wish to explore alternative structures. These include joint ventures, ie, sharing of ownership/control/profits, or mergers/demergers of target companies.

The primary regulators for M&A in the Czech Republic are:

• The Czech Office for the Protection of Competition (Úřad pro ochranu hospodářské soutěže). This authority is responsible for ensuring compliance with competition laws, including reviewing mergers and acquisitions to assess their potential impact on competition in the Czech market (also see 2.4 Antitrust Regulations); and
• The Czech National Bank (Česká národní banka). The Czech National Bank supervises financial institutions and may exercise regulatory oversight in cases where M&A activities involve entities such as banks or financial services companies.

In addition to the above, and depending on the particular industry sector of the M&A activity, other regulators may also be relevant to a particular deal, such as (i) the Energy Regulatory Office, (ii) the Civil Aviation Authority, (iii) the State Institute for Drug Control, etc.

The Czech Republic generally welcomes foreign investment and has an open investment climate.

As a member of the EU, the Czech Republic generally adheres to EU rules on the free movement of capital and investment within the EU. This means that investors from other EU member states generally face few restrictions when investing in the Czech Republic. However, there are certain sectors of business where restrictions or regulations on foreign investment may apply.

The main restrictions on foreign investment in the Czech Republic are imposed by the Act on Review of Foreign Investments, which sets out rules for the review of certain foreign investments and certain obligations of foreign investors.

The Ministry of Industry and Trade examines foreign investments, conducts consultations, negotiates terms and conditions, decides on foreign investments and monitors compliance with the obligations set out in the respective laws.

In some areas, foreign investment is not allowed without clearance, eg, investments into companies that deal with arms and military equipment or operate critical infrastructure. For details, please see 2.6 National Security Review.

The primary antitrust rules applicable to business combinations in the Czech Republic are contained in the Competition Act. In general, it prohibits mergers and acquisitions in the following situations: agreements, practices and decisions restricting competition, abuse of a dominant position and anti-competitive behaviour.

The purchaser may be obliged to notify the Czech Antitrust Office of certain mergers and acquisitions that meet certain thresholds. The Czech Antitrust Office reviews these transactions to determine whether they would significantly impede competition in the Czech market.

For transactions that meet the criteria set out in the EU Merger Regulation (EUMR), the European Commission is responsible for reviewing mergers and acquisitions that affect competition within the EU, including the Czech Republic. Transactions falling under the EUMR may bypass national competition authorities such as the Czech Antitrust Office.

It is important for companies involved in business combinations in the Czech Republic to carefully assess the applicability of the antitrust rules and ensure compliance with merger control requirements. Failure to comply with antitrust requirements may result in significant fines or penalties, as well as potential challenges to the settlement of the transaction.

In general, acquirers ought to take note of the fact that Czech labour law is relatively strict on employers. Employees enjoy fairly strong rights and benefits.

The most important labour law regulations that should draw the attention of acquirers include:

• Transfer of employees. Acquirers are to ensure a smooth transition for employees by facilitating the automatic transfer of their employment contracts to the acquiring entity, preserving their existing rights, benefits and seniority. This may involve amending contracts and informing employees of any changes resulting from the transfer.
• Informing the trade union. Before the effective date of the transfer of rights and obligations arising from the employment relationship to another employer, the parties are obliged to inform the trade union and the works council, at least 30 days before the transfer of rights and obligations to another employer, and to discuss with them, with a view to reaching an agreement, the fixed or proposed date of the transfer, the reason for the transfer, the legal, economic and social consequences of the transfer for the employees and the measures envisaged in relation to the employees.
• Non-discrimination and equal treatment. Acquirers must comply with the laws on non-discrimination and equal treatment in the workplace to prevent any discriminatory practices based on protected characteristics such as gender, age, disability or ethnicity.

In the case of foreign investments that may jeopardise national security or internal or public order (eg, arms and military equipment or critical infrastructure), the Ministry of Industry and Trade may initiate (ex officio) proceedings to review the particular foreign investment.

In response to the war in Ukraine, the EU has been taking additional measures to restrict Russian investment in its member states, including the Czech Republic. These measures include a ban on financing Russian state-owned companies, restrictions on financial transactions with Russian banks and the Central Bank of Russia, and a ban on the re-listing of shares of Russian state-owned companies on EU stock exchanges. These measures reflect the specificities of the Russian economic and financial sector and aim at restricting financial flows and investments from Russia to the EU.

Pinpointing the most significant court decisions or legal developments related to M&A in the Czech Republic over the past three years will vary depending on specific perspectives and industry sectors. Generally speaking, public M&A deals are very rare, and the majority of deals are private. Accordingly, the disputes arising from takeovers are infrequently subject to public scrutiny before courts. However, there is one notable exception – squeeze-out disputes over fair compensation – see 10.1 Frequency of Litigation.

It is safe to say that Czech courts continue to uphold the general principles introduced in 2014, which represented a substantial overhaul of corporate and civil law. Some of the key principles that the courts have confirmed include:

• Due care requirements. Czech law recognises the business judgement rule, which provides directors with a “safe harbour” as long as they have acted in good faith, in an informed and defensible manner, and in the company’s best interests, regardless of any negative outcomes.
• Status of the majority shareholder in squeeze-out. The courts have ruled that a special purpose vehicle (SPV) company temporarily holding the status of the majority shareholder in a squeeze-out (at least 90%) cannot benefit from the squeeze-out mechanism under Czech law. The majority shareholder may implement the squeeze-out solely in accordance with the purpose for which it is intended – that is, simplifying the shareholder structure and streamlining the management through a sole shareholder. The purposeful and temporary consolidation of shares directly conflicts with the purpose of the squeeze-out mechanism.
• Default interest in squeeze-out. Default interest is relevant if the courts increase the amount of fair compensation for minority shareholders in squeeze-out. The majority shareholder must then pay default interest on the additional payment of the fair compensation awarded by the courts to minority shareholders. This default interest is calculated from the day when the minority shareholder handed over its shares and the majority shareholder had to pay the fair compensation. The exposure for the majority shareholder might be significant, given that the average squeeze-out litigation over the amount of fair compensation usually takes five to ten years to play out in courts.

As for legal developments, notable pieces of new legislation that were introduced during the relevant period include Act No. 34/2021 Coll., on Foreign Investment Screening, enacted in 2021 (see 2.3 Restrictions on Foreign Investments), and Act No. 37/2021 Coll., on the evidence of ultimate beneficial owners (which amended the definition of the ultimate beneficial owner and introduced sanctions for non-compliance), also enacted in 2021.

The Czech act on takeover bids has remained essentially unchanged since the incorporation of the EU directive back in 2008. Accordingly, there have not been any significant changes to the Czech takeover regulations over the past 12 months, nor is there anything to indicate that any such changes might be forthcoming in the months ahead.

Stakebuilding strategies concerning public companies are rather rare and almost non-existent for private companies. With that said, such strategies typically involve the gradual acquisition of publicly traded target company shares through open market purchases (acquisition from minority shareholders at the stock market) or private negotiations (acquisition from significant shareholders). However, it is important to note that bidders are not allowed to abuse any inside information obtained during due diligence.

Stakebuilding before a mandatory offer (see 6.2 Mandatory Offer Threshold) triggers a premium consideration requirement. The consideration in a mandatory offer must correspond, at a minimum, to the highest price paid by the bidder for target company shares during the 12 months preceding the offer. It is important to note that there are no triggers for private companies or for stakebuilding in a public company that remains below the mandatory offer threshold.

Under the relatively strict Czech implementation of the Transparency Directive (2004/109/EC), a person shall notify the company and the Czech National Bank if its direct or indirect share of voting rights of public companies reaches, exceeds or falls below the thresholds of 1% (or 3%, depending on the amount of registered capital), 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50% and 75%. The Czech National Bank publishes the notifications on its website, and the general public may access such data.

The company, as the issuer, is also required to comply with the notification requirement if it acquires its own shares above the said thresholds. However, the company can fulfil this requirement by publishing the notification on its website.

For private companies, there are no such thresholds, but information about shareholders and their respective share amounts is publicly available in the Commercial Register in the case of limited liability companies.

Companies operating in the Czech Republic have the ability to establish different rules regarding stakebuilding thresholds or other related aspects through their articles of incorporation or by-laws (such as notification to the supervisory board).

Hurdles to stakebuilding generally include (i) necessary approvals from authorities (including a merger control authority) in connection with stakebuilding, (ii) voting limitations concerning different share classes available to the bidder, (iii) the mandatory offer threshold, and (iv) reporting obligations in the mandatory offer about the acquisition of shares (including the share price) in the target company during the 12 months preceding the bid.

Derivatives transactions are permissible in the Czech Republic. Financial derivatives are traded either over the counter (OTC) or on traditional exchanges.

A person shall notify the company (and the Czech National Bank, in the case of a publicly traded company) once such person reaches, exceeds or falls below the thresholds stated in 4.2 Material Shareholding Disclosure Threshold. Czech competition law further stipulates certain notification requirements if the acquisition of shares would establish control over the company.

When acquiring shares in private or public companies, shareholders do not have to reveal their intention regarding the purpose of the acquisition.

As an exception to the above, a bidder (shareholder) in the case of a public company shall publicly announce that the bidder has made a final decision to initiate the steps leading to a takeover bid or that circumstances have arisen that have given rise to a bid obligation. The bidder shall then include information regarding its intention with the company in the bid (such as changes to the current business, changes concerning the employees, and so forth).

There is no obligation to disclose the details of the transaction (or any other information related thereto) to the public if the deal is private (ie, the parties to the transaction as well as the target company are private companies).

If the deal is not private, the bidder shall disclose the deal without undue delay. Such disclosure shall include (i) information that the bidder has decided to make a takeover bid (voluntary takeover bid) or, in the case of a natural person, that they have taken a final decision to initiate the steps immediately leading to a takeover bid, or (ii) that circumstances have arisen which have given rise to a bid obligation (mandatory takeover bid).

This disclosure should be done transparently and in such a way as to prevent a selective announcement in terms of who is being notified (as would be the case, eg, if the announcement is made via regional publication only). Publication with national reach is recommended, whereas the contents of the announcement should be relevant to the actual intention of the bidder.

In order to protect inside information and prevent any market distortions, the bidder shall take measures to avoid any premature and unequal dissemination of the information that it is considering or has formed the intention to make a takeover bid; the same shall apply in relation to steps that will result in the creation of a bid obligation. Therefore, the offeror shall instruct all persons who carry out activities for it in connection with the takeover bid of their duty of confidentiality and the prohibition on the use of inside information and shall take measures to prevent the dissemination of inside information and its use.

The rules on the disclosure of inside information in accordance with the Market Abuse Regulation may apply.

Obligatory public disclosures in M&A deals are rare since the vast majority of deals in the Czech Republic are private (see 5.1 Requirement to Disclose a Deal).

Market practice tends towards an active approach of the parties. They usually disclose basic information on the deal either very soon after the deal is settled or once the information on the pending deal is publicly accessible (eg, if the deal is subject to approval by the Czech Antitrust Office, which makes all announcements public).

The scope of due diligence performed in a negotiated transaction typically covers various aspects of the target company’s operations, finances, legal status and other relevant areas. The specific areas covered may include financial, legal, tax, operational, technical or environmental due diligence. The purpose of this due diligence process is to assess the target’s assets, liabilities, potential risks and overall suitability for the proposed transaction.

In a public takeover, persons who have obtained confidential information about the bid must keep it confidential (in order to prevent market distortions) until the bid is publicly announced (see 5.1 Requirement to Disclose a Deal). As a result thereof, the due diligence process in case of a private acquisition is more open than in case of the acquisition of a public (listed) company.

In terms of the impact of the pandemic, the due diligence process has not changed significantly. More focus is aimed at areas relating to the verification of legal compliance if the target company received government funding in relation to the pandemic. Restrictions on travel and face-to-face meetings may have promoted greater reliance on remote due diligence methods such as virtual data rooms, video conferencing and electronic document sharing.

If the target company is a private company, it is standard market practice for the buyer and seller to enter into an exclusivity (and confidentiality) agreement, at least for a limited period of time. This motivates the buyer to effectively invest its time and financial/human resources in a particular transaction and, at the same time, the seller is aware of the expected timing of the transaction. Standstill agreements are not common in private M&A transactions, as the additional increase of shares in the target company by the shareholder is usually regulated by protective measures set out in a shareholders’ agreement or similar agreement.

If the target company is a public company, the bidder and the target company are prohibited from entering into exclusivity agreements or similar agreements. This is to protect the value of the target company and to prevent unequal dissemination of information about the target company. The use of standstill agreements (ie, restrictions on the acquisition of additional shares in the target company) in (hostile) takeover bids is not common. However, this may be due to the fact that historically there have been only a limited number of cases of attempted hostile takeovers. There is not enough experience and knowledge of such procedures.

In addition to the above, standstill agreements by definition cannot be used in the case of a mandatory takeover offer or supplementary takeover offer, as in such cases, the bidder is obliged to acquire additional shares in the target company.

It is common for tender offers that all material terms and conditions of a takeover bid are set out in an offer document. The legal requirements for such documents vary, eg, depending on whether the bid is mandatory, voluntary or supplementary. See 7.1 Making a Bid Public.

The duration of M&A transactions varies a lot, depending on many factors such as the intensity of negotiations, the level of regulation or the level of involvement of third parties and/or impact of the transaction on them. Private transactions are usually closed within six months depending on whether the transaction is subject to antitrust regulation or not (see 2.4 Antitrust Regulations). Public transactions usually take longer; the average duration lies somewhere between six and 18 months.

The governmental measures taken to address the COVID pandemic did not create major practical delays or impediments to the deal-closing process. However, the economic side effects of the pandemic did influence the deal-closing process in quite a number of sectors (ie, most significantly, in real estate) due to increased risks and the inability of purchasers to put a price tag on such risks.

An obligation to launch a mandatory offer kicks in once the threshold of at least 30% shareholding (voting rights) in a public company is acquired. There are some very narrowly defined exceptions to this rule. The obligation to make the offer may be fulfilled by the investor itself or any member of its group. In the latter case, both parties are jointly and severally liable for all mandatory offer obligations.

The minority shareholders have the right to sell their shares to the majority shareholder once the majority shareholder acquires a 90% share in the company. This applies to both private and public companies.

Both cash and shares (in-kind) consideration may be used. This also applies to public offers.

In private transactions, cash consideration is still more common but there is an upward trend towards using shares consideration as part of the consideration. The shares part of the consideration will typically be smaller than the cash part (usually somewhere between 10% and 30% of the purchase price).

Locked-box price determination is becoming more popular in comparison with cash-free, debt-free adjustments of the purchase price. This makes it easier to finance the purchase price and lowers the post-closing uncertainty for both parties relating to the total amount of the purchase price and its payment.

Earn-out structures of the purchase price have become more popular during the last couple of years due to higher valuation uncertainty caused by economic developments (in particular in the context of the COVID pandemic and high inflation rates in 2023).

The mandatory takeover offer shall be addressed to all shareholders. It must be unrestricted and unconditional and cannot be revoked. The Czech National Bank may require the bidder to prove that it has sufficient funds to finance the entire bid. The Czech National Bank may also require the bidder to provide an appraisal to evidence the adequacy of the consideration and may adjust the consideration in certain circumstances.

The binding period of the mandatory takeover offer is at least four weeks. There is not any specific maximum limit, but the Czech National Bank holds that the binding period should generally not exceed ten weeks. If the bidder, as a result of the mandatory takeover offer, acquires shareholdings exceeding 90%, it is obliged to launch a supplemental takeover offer.

Unlike the mandatory takeover offer, voluntary takeover offers may be launched as a partial takeover offer (ie, an offer relating to a limited number of shares) or a conditional takeover offer (whereas the offer may only be tied to a condition which does not depend on the discretion of the bidder). The voluntary takeover offer is not subject to regulation of the consideration. As a general rule, voluntary takeover offers may not be launched within one year after the announcement of the results of a mandatory takeover offer or after a previous voluntary takeover offer.

While the bidder may determine the minimum acceptance threshold in its voluntary takeover offer, the mandatory takeover offer shall be unrestricted and unconditional in this respect.

The thresholds usually considered by bidders are:

• over 50% of voting rights (simple majority), which usually enables the shareholder to make simple majority decisions such as the appointment of board members or dividend distributions;
• two-thirds of voting rights, which usually enables the shareholder to make decisions such as increasing the registered capital and issuance of new shares;
• three-quarters of voting rights, which usually enables the shareholder to make even more serious decisions such as decisions on mergers; and
• 90% of voting rights, which gives the shareholder the right to start a squeeze-out process (while also giving the minority shareholders the right to sell their shares to the majority shareholder).

It is legally possible to structure a private M&A transaction so that the settlement is dependent on the purchaser obtaining the financing. However, this is usually not accepted by the seller. Quite to the contrary: sellers usually seek some sort of reassurance that the purchaser has secured the financing before entering into the later stages of the negotiation, prior to entering into binding agreements at the latest.

For public offers, financing shall be secured upfront and the Czech National Bank may request the bidder to prove that it has sufficient funds to finance the bid.

The bidder may generally seek any kind of deal security measure that is commercially negotiable. The general freedom of contract applies. The COVID pandemic did not lead to any material shifts in this regard, with one exception: purchasers are trying to negotiate a material adverse change clause more often than they did before the pandemic, to protect themselves against unforeseen occurrences that may adversely affect the target (including disruptions such as the COVID pandemic).

Where there is a multitude of shareholders, it is common to extend the protection and instruments afforded under statutory corporate law either by entering into a shareholders’ agreement or at least by extending the articles of association. These documents usually contain clauses addressing the right to appoint/dismiss board members, reserved matters with veto rights of the minorities, restrictions on share transfers, anti-dilution protection, escalation/deadlock clauses and exit rights.

Shareholders may vote by proxy and this is common practice. Simple written power of attorney is usually sufficient. In some cases, a certified signature of the shareholder on the power of attorney is required (ie, notarised and apostilled or even super-legalised, where applicable).

Even though it is generally possible for a shareholder to give power of attorney to a board member, this is not common practice at public companies. Public companies usually offer their shareholders long-distance voting (eg, per rollam voting, voting via email or post). Proxy fights are practically non-existent.

A squeeze-out mechanism is available for joint-stock companies (but not for limited liability companies). Once the shareholding of a single shareholder (as opposed to a group of shareholders, even if they are members of one and the same group of companies) reaches 90%, that shareholder has a right (but not the obligation) to buy out the minority shareholders. The same result can be achieved by transferring assets to the majority shareholder. The only substantial difference is that the target company is consequently liquidated.

The minority shareholders are entitled to receive fair compensation for their shares. However, disputes over whether compensation was fair do not in and by themselves lead to cancellation of the squeeze-out process.

Irrevocable commitments to tender or vote by principal shareholders of the target company are rare. From the negotiation standpoint and depending on the shareholder structure, the bidder would usually approach the main shareholder first, to try and privately negotiate some kind of commitment to sell its shares before launching a public offer.

The takeover bid itself (not the announcement – see 5.1 Requirement to Disclose a Deal) can be made public only by publication of an offer document. A draft of the offer document has to be announced to the Czech National Bank within 15 days from the announcement of the offeror’s intention to make a takeover bid. The offeror may publish the announced offer document unless the Czech National Bank prohibits the publication. Note that different rules apply in the case of a mandatory takeover bid.

The offer document (for details, see 7.2 Type of Disclosure Required) shall be published in at least one nationally distributed daily newspaper and at the same time in a manner allowing remote access; publication in a manner allowing remote access shall not be required if the offer document is made available to the public in written form free of charge at the registered office of the target company and at the registered office of the offeror. Where the offer document is published in a manner allowing remote access and where the offeror or the target company has a website, it shall be published on that website.

The articles of association of the target company may specify additional means of publication of the offer document. Where the target company’s shares are admitted to trading on a foreign regulated market, the offer document shall also be published in the state of such foreign regulated market.

At least ten working days before the publication of the offer document, the offer document shall be delivered by the offeror to the board of management and the supervisory board of the target company.

In the case of a takeover bid, the offer document shall contain at least (i) identification of the bidder, (ii) the shareholdings of the bidder in the share capital of the target company, (iii) the essential elements of the agreement of sale or exchange, ie, in particular, (a) the designation of the participating shares which are the subject of the takeover bid, and (b) particulars of the consideration offered for the participating shares and, where applicable, a sufficiently precise method for determining the consideration, (iv) the average price and, in the case of a mandatory takeover bid, the premium price of the participating shares and justification for the amount of the consideration offered, (v) the maximum amount of participating shares to which the takeover bid is limited or the minimum amount of participating shares whose acquisition is conditional, (vi) the period during which the takeover bid is binding, (vii) the manner of announcing the acceptance of the takeover bid, (viii) the procedure for the transfer of securities and the conditions and method of payment of the price or other consideration, as the case may be, (ix) rules for the revocation of acceptance of the takeover bid or, where applicable, for withdrawal from the contract created by the acceptance of the takeover bid, (x) the intentions of the offeror concerning the future activities of the target company, its employees and members of its bodies, including planned changes in employment conditions or relocation of the target company’s premises, and information on the offeror’s intentions concerning its future activities to the extent that they will be affected by the takeover bid, (xi) information on the sources and method of financing or otherwise securing the consideration, (xii) the applicable law governing the internal affairs of the target company, the applicable law governing contracts concluded pursuant to the takeover bid and the courts having jurisdiction to settle disputes arising out of the takeover bid, and (xiii) details of the supervisory authority which is competent to oversee the takeover bid, including details of the approval of publication of the takeover bid.

In the case of a mandatory takeover bid, the offer document shall also contain the reasons for which it is being made and a description of the methods used to determine the form and amount of the consideration, details of the type and amount of consideration given or agreed for each acquisition of shares of the target company by the offeror or a person co-operating with it, and the number of shares acquired in each transaction if such transaction was negotiated in the last 12 months prior to the commencement of the offer (or else a statement that no such transaction was negotiated).

Although financial statements are not expressly required to be disclosed along with the offer document, it is recommended that financial statements prepared in accordance with the Czech accounting principles, in particular an annual report with financial statements, be disclosed in order to comply with the obligation to disclose the source and method of financing or other security (see below).

The offer document shall contain, as a minimum, information on the sources and method of financing or other security for the consideration.

In particular, the bidder shall indicate in the offer document whether it intends to finance the takeover exclusively from its own resources or from intra-group resources or whether it intends to finance the takeover entirely/partially from external resources.

Furthermore, the Czech National Bank may require the bidder to demonstrate that it has sufficient resources to finance the takeover bid and to document the origin of these resources.

The offer document shall be disclosed in full (See 7.1 Making a Bid Public and 7.2 Type of Disclosure Required).

In the context of private M&A deals, no public disclosure of transaction documents is required.

Company directors (including members of a supervisory body) have to follow general fiduciary duties such as due care and loyalty. These general fiduciary duties prioritise the interests of the company over the interests of the directors, shareholders or stakeholders. In other words, the directors shall act in the best interests of the company as a whole, taking into account the long-term interests of the company, its shareholders and other stakeholders. If a breach of directors’ duties has been committed, the court may rule that the directors must provide compensation for the loss of the company, and in some instances the directors may be personally liable toward the creditors.

General fiduciary duties remain unaffected in private deals. In the process of a business combination of a public company, however, Czech law provides for certain additional duties.

In the process of a business combination of a public company, the directors have to follow the same general fiduciary duties and prioritise the interest of the company as a whole. However, there is one notable modification to this rule. Czech law states that the directors may not frustrate the shareholders’ opportunity to freely decide whether to accept or refuse the takeover bid – such an obligation being considered a duty of neutrality.

In practice, the duty of neutrality means that once the directors become aware of the likelihood of receiving a takeover bid, the directors’ general fiduciary duties are modified to the extent that the directors may not (i) adopt measures that would adversely influence the shareholders’ opportunity do freely decide whether to accept or refuse the takeover bid (such as withholding information from the shareholders) or (ii) undertake any actions that could stave off the takeover bid unless the company’s general meeting has sanctioned such actions, or the law requires such actions, or such actions fall within the ordinary course of the company’s business.

Nevertheless, the directors may actively pursue a competitive takeover bid or even submit their own competitive takeover bid without breaching any principal directors’ duties, as Czech law expressly allows such actions.

Business combinations concerning a public company are relatively rare. Due to the unique nature of these transactions, both the bidder and the target company will typically establish a special committee to evaluate the bid, handle potential conflicts of interest, and consider potential issues and synergies. For details on conflicts of interest, see 8.5 Conflicts of Interest.

Members of the special committee are exempt from the duty of neutrality and can actively oppose the takeover bid, unlike the directors. However, the special committee may not absorb the duties of directors in connection with the business combination, and the directors remain ultimately in charge of the business combinations. Thus, while the directors may consider the inputs of the special committee, the special committee’s ability to influence the business combination is significantly limited.

Czech law recognises the business judgement rule, which provides a “safe harbour” to directors as long as they have acted in good faith, in an informed and defensible manner, and in the best interests of the company, regardless of any negative outcomes.

Czech courts have continually upheld the business judgement rule in management liability cases and emphasised that the courts should focus on assessing whether the decision-making process was sound, rather than evaluating the substance of the business decision and its consequences. Nothing suggests that the courts will take a different approach to takeover situations; with that said, the body of relevant case law is minimal.

Directors involved in a business combination – private or public – commonly seek independent outside advice from various professionals to assist them in evaluating the transaction, understanding its implications and fulfilling their fiduciary duties.

Some common forms of independent outside advice include financial, legal, accounting, tax or strategic advisers. By seeking independent outside advice from professionals with expertise in various relevant areas, directors can enhance their understanding of the transaction, mitigate risks, and make informed decisions that are in the best interest of the company and its shareholders. Independent advice also helps demonstrate good governance practices and transparency in decision-making.

The Business Corporations Act contains a detailed regulation of conflicts of interest between the company and members of its bodies. A member shall notify the relevant bodies if there is a potential conflict between the member’s interests and those of the company. Failure to do so may result in the conflicted member’s personal liability. In public takeovers, the members of corporate bodies shall further obey the duty of neutrality, ensuring that they will remain impartial.

Shareholders are only subject to the duty of loyalty which, while widely applied across different legal fields, generally does not apply to takeovers.

It is customary for advisers to thoroughly assess potential conflicts of interest before accepting any engagements.

Hostile tender offers are not prohibited in the Czech legal system, which implies their permissibility. However, they are rare because of the small number of publicly traded companies with high capitalisation. The takeover process usually involves friendly negotiations with the target board of directors to increase the likelihood of a successful takeover bid.

The directors in a public company have to follow the duty of neutrality once they become aware of the likelihood of receiving a takeover bid. Once the duty of neutrality becomes relevant, the directors may not undertake any defensive measures that could stave off the takeover bid unless the company’s general meeting has sanctioned such actions, or the law requires such actions, or such actions fall within the ordinary course of the company’s business.

Nonetheless, the directors may freely put in place defensive measures before becoming aware of the likelihood of receiving a takeover bid or actively pursue a competitive takeover bid and even submit their own competitive takeover bid after becoming aware of the likelihood of receiving a takeover bid, without breaching any principal directors’ duties.

Directors of a private company may undertake any defensive measures as long as they follow the general due care requirements and act in the company’s best interest.

Various defensive measures can make the conditions of a hostile takeover more difficult. The directors and shareholders are likely to implement some of the defensive measures well in advance of receiving a takeover bid, as implementation in the latter stages would become troublesome. These advance defensive measures typically include (i) issuance of different share classes, where one share class has stronger voting rights and such shares remain in the hands of founders (making them virtually inaccessible to the bidders), (ii) implementing a higher quorum of voting rights at the general meeting for certain reserved matters (such as change of by-laws, recall of directors, issuance of new shares, and so forth), making the company less attractive for a takeover through creating obstacles for the bidders, and (iii) purchase of own shares by the company.

Another common defensive measure may be the so-called “white knight’s” response, in which the directors actively pursue a competitive takeover bid. The white knight’s response typically becomes relevant only once there is a bid to compete with.

Other defensive measures one may usually see in different jurisdictions such as “poison pills”, “suicide pills” or “golden parachutes” are either not permissible or impractical under Czech law.

The COVID pandemic has not materially influenced the use of defensive measures.

At all times, the directors are obliged to act with due care in the company’s best interest, which may or may not be aligned with the interests of the directors or shareholders of the company. In public companies, the directors have to follow the duty of neutrality. Despite this, the shareholders may instruct the directors to adopt certain defensive measures in response to a takeover bid (see 8.1 Principal Directors’ Duties and 8.3 Business Judgement Rule).

As long as the directors act with due care and in the best interest of the company, they effectively have the means to block a private business combination by adopting defensive measures, though the ultimate decision lies with shareholders.

By contrast, in a public business combination, the directors must follow the duty of neutrality and their ability to “just say no” is significantly limited. This means that the directors may not adopt measures that would adversely influence the shareholders’ opportunity to freely decide whether to accept or refuse the takeover bid, though the directors may express their opinion (even a negative one) on the takeover bid in the management report on the takeover bid.

Litigation in connection with M&A deals (especially in connection with the squeeze-out of minority shareholders) is quite common in the Czech Republic. This is mainly due to the fact that the legal fees for initiating a dispute and related costs are still low in comparison to the value at stake.

However, the overall number of M&A-related court proceedings concerning complex or high-value M&A deals is on the decline. This is due to the fact that the parties are increasingly using more sophisticated provisions in the transaction documents which help to resolve issues between the parties in advance or without the interference of courts. Moreover, the expertise of the Czech courts in resolving complicated M&A transactions may not always be reliable and the prospects of such proceedings may be rather unpredictable. Standard court litigation may easily take two or three years to reach an enforceable decision, with complicated cases lasting well over five years.

Czech courts require high standards of proof for litigation concerning damages, and the courts are generally reluctant to award high damages claims or consequential damages. Therefore, the contracting parties usually rely on contractual penalties and tend to avoid litigation involving claims for damages based on statutory provisions or general terms of the contract.

If the parties have concluded an arbitration clause in the transaction documents or agreed that the dispute shall be resolved by an arbitration court, the dispute may be brought before a Czech arbitration court (eg, the Arbitration Court attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic).

Although the reputation of the arbitration court has been tarnished in recent years, it is not unusual for parties to choose arbitration, as the costs of proceedings are very similar to those of court proceedings, but arbitration is usually much quicker.

There is no consistent pattern as to the exact stage at which litigation is brought. Litigation may be brought at any stage of the deal. The period that is most likely to give rise to a dispute is the period of six to 12 months from the settlement of the deal. This is the time when the purchaser has already gained detailed information about the target company on the one hand, but one is still reasonably close to the settlement of the deal on the other hand.

Czech statutory law recognises the concept of pre-contractual liability (culpa in contrahendo) and general duty of good faith and fair pre-contractual negotiation. However, litigation concerning pre-contractual liability is not common, unless the parties agreed on specific contractual penalties in a binding term sheet, letter of intent or similar pre-contractual instrument.

In the context of the COVID pandemic, a certain type of buyer’s behaviour could be observed, namely the use or sometimes even abuse of MAC (material adverse change) clauses in connection with the occurrence of the pandemic. These provisions were used by buyers in order to (i) terminate the deal, (ii) delay the deal for at least a certain period of time, or (iii) re-enter into additional negotiations on the terms of the transaction (usually wishing to modify the purchase price). Despite this, “broken-deal” disputes are not common in the Czech Republic.

Shareholder activism is present in the Czech Republic and its role has been increasing over the past years, but not dramatically. Most commonly, activist shareholders make use of their minority rights under the Business Corporations Act. For example, they use their rights to (i) request that extraordinary general meetings be called, (ii) request information from the company, (iii) challenge resolutions of the general meeting at court, or (iv) request additions to the agenda of general meetings.

In more extreme cases, activist shareholders also seek to initiate legal disputes with majority shareholders (typically over the alleged misuse of majority shareholders’ rights) or board members (typically over alleged breaches of their fiduciary duty).

The possible influence of minority shareholders on M&A transactions should always be assessed as a part of the due diligence exercise and be taken into consideration during transaction structuring and post-closing structuring (eg, when setting up stock option plans).

Other potential activists, such as trade unions, play a significantly less substantial role in M&A transactions in the Czech Republic.

Shareholder activism is most frequently aimed at increasing the value for minority shareholders to the detriment of the majority shareholders. Typical cases include boycotting the squeeze-out procedure, making it hard for the majority shareholder to divest or onboard a new investor.

Activists seeking to encourage companies to enter into M&A transactions, spin-offs or major divestitures are almost non-existent in the Czech Republic. The COVID pandemic had hardly any impact on shareholder activism.

Shareholder activists do sometimes interfere with the completion of transactions. However, it is more common for them to interfere in the early stages of the M&A process, and usually some sort of an agreement is reached in order to mitigate the risk of troubles in the later stages of the M&A process. All parties usually want to avoid entering into disputes before courts.