In 2022, there was a slowdown in deal activity due to a combination of political (most notably the invasion of Ukraine) and economic factors (in particular, rising interest rates and cost of capital combined with double-digit inflation and increased labour costs). In 2023, deal activity has picked up, and there is renewed interest from private equity houses in the Czech market and the broader CEE region, although it is unlikely that this will match the unprecedented investment drive during the pandemic years, especially 2021.

Overall, the focus of the Czech private equity world appears to have shifted from manufacturing targets to more innovative and complex industries such as services, health and pharma, and IT.

One notable development in recent years has been the growing preference for partial investments resulting in joint ventures with existing owners. This is in contrast to the prior focus of private equity firms on acquiring either full ownership or super-majority stakes in companies. While co-investment by selling founders or incoming managers has long been a staple on the market, we are now seeing an increasing number of transactions between various types of investment groups, eg, private equity houses joining forces with private wealth/family offices.

As noted in 1.1 Private Equity Transactions and M&A Deals in General, due to the impact of rising interest rates and high inflation, the market experienced a slowdown in 2022. In 2023, activity is on the rise again, however, the composition of private equity houses that are active in the Czech market has changed significantly. Local private equity firms, which were previously very active in mid-sized and larger deals, have now shifted their focus towards smaller ticket transactions. Established international private equity firms that previously focused on the region continue to maintain a presence; however, their numbers have slightly diminished, and the market has seen a dearth of new entrants. These existing firms now face increased competition from local sources of private wealth, including ultra high net worth individuals, family offices, and large privately-held corporates, who have emerged as active investors both locally and globally.

The three most significant developments for investors in general, including private equity funds, were the introduction of:

• a foreign direct investment regime in various countries in the CEE and SEE region;
• the EU-wide Foreign Subsidies Regulation; and
• an increase in potentially applicable sanctions.

Both the foreign direct investment regime and the Foreign Subsidies Regulation require investors to assess whether their limited partner/ultimate beneficial owner base could trigger the need for compulsory filings for prior approval of the intended transaction. As these regulations are relatively new, there is a distinct lack of established market practice in numerous jurisdictions within the CEE region, as well as a limited number of precedent transactions. This creates additional uncertainty in deal-making. Beyond the immediate concerns of uncertainty and increased costs, the most significant long-term impact on private equity houses could be the need to assess their investor and limited partner (LP) composition in terms of how itcould affect the fund’s operational efficiency and capacity to complete successful transactions.

The recent proliferation of sanctions (predominantly in response to the war in Ukraine) has had a significant impact on transactions within the CEE and SEE region, and extended warranties addressing sanctions risk, KYC and AML, and pre-signing confirmations are now being introduced in almost every transaction. Since the sanctions risk is ongoing, a new standard of introducing provisions resolving potential sanctions issues in shareholder agreements has emerged.

Other than in relation to industry-specific regulators, transactions in the Czech Republic will need to be analysed from the perspective of Czech and European anti-trust/merger regulation, Czech foreign direct investment regulation and European Foreign Subsidies Regulation.

The responsible regulator for anti-trust/merger matters is the Czech Office for the Protection of Competition (at the local level) and the European Commission (at the EU level). Anti-trust/merger regulation is less of a concern for private equity funds that are not yet present in the relevant market and/or are not involved in the relevant industry as they will be unlikely to give rise to a concentration. However, private equity funds should nevertheless perform a regulatory analysis confirming the need for merger clearance, in particular where the private equity fund is performing an add-on transaction or where the fund is of considerable size. A specific question for private equity funds is whether the relevant fund is separate from any other funds which may share a fund manager or LPs or be otherwise connected to the acquiring fund.

Czech foreign direct investment regulation seeks to regulate investors whose ultimate beneficial owners and controlling shareholders are persons from non-EU countries and, where the investment is into certain regulated areas of business, the investment will require prior approval. The relevant authority responsible for implementing and overseeing the Czech foreign direct investment landscape is the Czech Ministry of Industry and Trade. Currently, the following areas will trigger the need to obtain prior approval before the transaction is implemented:

• targets involved in the handling, research, development, innovation or organisation of the life cycle of military material;
• targets operating critical infrastructure;
• targets administering information or communication systems belonging to critical infrastructure or targets administering information systems belonging to an essential service or targets operating an essential service; and
• targets involved in developing or manufacturing dual-use goods.

In all other cases involving an investor from non-EU countries, an assessment should be made by the parties to the transaction as to whether the respective non-EU investor should apply for voluntary clearance in order to avoid the risk that the investment will be subject to ex officio review by the Ministry within the time limit of five years from the completion of the investment.

The European Foreign Subsidies Regulation framework is administered by the European Commission and is aimed at investors and/or transactions who have received state support from non-EU countries. The FSR Regulation applies only to (i) targets that had at least EUR500,000,000 in EU-wide turnover in the preceding financial year and (ii) transaction/investors who have received, in the last three years, foreign financial contributions of EUR50,000,000. The latter threshold involves, among others, investments by LPs and portfolio companies and covers not only direct grants and subsidies but also government contracts, government guarantees and specific support/relief (eg, in relation to renewable energy). It is therefore very likely that large private equity funds may easily meet the latter threshold.

Detailed and thorough due diligence exercises by way of a virtual data room prepared by the target (and, to a lesser extent, the seller) in response to a buyer’s request list remain the dominant approach to due diligence. This is coupled with a rigorous Q&A process, and the buyer is expected to have conducted standard searches of online public registers (in practice done by the buyer’s advisers). Management meetings and calls as well as site visits are frequently offered to buyers but are not seen as a replacement of the due diligence process and the information shared in these forums is not accepted as duly disclosed.

Key areas requiring special attention as part of legal due diligence include the verification of title (including the clearance of any third-party rights, including encumbrances, and confirmation of the existing shareholder structure), related-party transactions, compliance with laws, licenses, disputes and litigation and existing indebtedness and payables of the target group. In contrast to other jurisdictions, Czech due diligence tends to largely avoid detailed due diligence regarding pensions and pension schemes since almost all targets will confirm that they have no specific schemes in place other than mandatory state contributions. Instead, Czech due diligence tends to focus on employment-related issues. Two commonly examined areas include the reclassification of contractors as employees – a matter with substantial compliance and tax implications – and the simultaneous employment and performance of office by statutory board members.

Vendor due diligence is not uncommon in auction-type deals and usually takes the form of a vendor due diligence report or a more high-level fact book. However, due to the comprehensive and detailed approach to buyer due diligence (as described in 4.1 General Information) as well as the relative perceived bias inherent in the vendor due diligence reports, vendor due diligence is rarely seen as satisfactory by private equity buyers and confirmatory due diligence is usually performed. This may be limited to a “top-up” due diligence covering areas omitted from the vendor due diligence report but often results in full-fledged due diligence.

Although the vendor due diligence report or fact book is often replaced by a standard due diligence exercise, reliance on the vendor due diligence report is often required. Where a “top-up” or limited due diligence exercise is performed, reliance will be expected and given. Reliance is also often given when required to obtain bank financing and/or when warranty and indemnity (W&I) insurance is sought.

From a documentation standpoint, the dominant acquisition structure is through a private sale and purchase agreement, which often takes the form of a framework agreement covering all of the terms of the transaction. Additional transaction documents, including a shareholder agreement for transactions where less than 100% of the target is acquired by the private equity buyer, are typically appended as agreed form documents or schedules to such framework agreement no later than on its signing. The actual acquisition itself is implemented on completion by way of completion actions and short-form transfer documents, which differ depending on the corporate form of the target and are pre-agreed in the framework agreement.

The terms of the transaction documents tend to cover substantively the same areas in both a private transaction and an auction sale and rarely differ in a structurally significant way. A competitive auction process often enables the seller to secure a more favourable commercial position. Specifically, in a highly competitive auction, sellers can expect better consideration terms, such as tick-up fees, interests, or earn-outs. Additionally, they can expect more transaction certainty, with a limited number of conditions precedent and a more likely “hell or high water” covenant. Further, warranty and indemnity cover will be significantly narrower and the related limitations of liability will be more beneficial to the seller.

It is very rare for a private equity fund to be involved in a transaction directly. Instead, they tend to invest through a special purpose vehicle established solely for the acquisition of the target. For reputation and tax reasons, investments into the Czech Republic are predominantly done using either Dutch or Luxembourg companies as special purpose vehicles. While historically popular, Cypriot, Maltese and Swiss companies are very rarely encountered. Some private equity funds also look to invest through companies located in the Channel Islands, particularly Jersey, and Guernsey, although these entities have become less attractive since Brexit.

The main exception to the non-involvement of the private equity fund is in relation to certainty of funding where the fund may be required to issue an equity commitment letter or back the funding warranties given by the special purpose vehicle. When a private equity buyer is exiting from a transaction, the fund may, in rare and specific circumstances and where the fund has the power to do so, step in as a guarantor for the seller.

Given the current state of the financial markets, fully equity-funded deals are becoming more prevalent. However, when there is a compelling economic rationale, it is still common for private equity transactions to be financed through a combination of equity and debt.

Sellers will generally expect to see confirmation of certainty of funds no later than on signing. For the equity portion, this confirmation will be preferably in the form of either equity commitment letters or, less preferably, in the form of a warranty/undertaking (backed/guaranteed by the private equity fund or fund manager) confirming that funds will be available on completion. Commitment letters from lenders with regard to having certain debt funds committed are also sought at signing but it is not unusual that for cost and timing reasons the seller takes sufficient comfort from “highly confident letters” or other less formal indications given by the lenders coupled with a strict obligation of the buyer to deliver the funds on completion – ie, without a funding condition precedent.

Due to the size of the typical private equity transaction in the Czech Republic, it is more common that private equity buyers acquire targets on their own with the sole co-investors being either founders who only partially sell down their stake in the target and/or managers (both existing and new).

That said, in very large transactions, where private equity buyers are often in competition with strategic investors, private equity houses have shown readiness to form consortia with other private equity houses as well as external co-investors who have either a strong target industry presence and/or expertise. In these relatively isolated cases, private equity players have usually sought co-investors from outside their own LP base, showing a preference for corporate/strategic co-investors instead.

While fixed price mechanisms without a locked box are very uncommon, locked-box and completion accounts adjustment consideration mechanisms are both widely used without there being a general market preference for either. Which mechanism will be applied is always deal- and market-specific and, on occasions, the parties will be ready to discuss hybrid consideration mechanisms such as a locked-box mechanism with regular adjustments to the headline value based on pre-agreed valuation principles. In practice, there tend not to be significant differences in the approach to consideration mechanisms between transactions involving private equity buyers and those involving corporate or strategic buyers.

Roll-overs are quite common, with existing founders preferring to only sell down a portion of their shareholding and remain a shareholder by virtue of their existing shareholding (without contributing a portion of the proceeds of the sale to the target).

Earn-outs are not uncommon but there seems to be a strong preference among parties to avoid the complex negotiations and drafting relating to earn-outs and, as a result, earn-outs will most usually feature as “sweeteners” in auction processes.

Partially deferred consideration is not very frequent unless it is used as mechanism giving the buyer comfort that the seller is an entity of sufficient substance to stand behind its claims. That said, in such situations the parties seem more ready to escrow a portion of the consideration for a period post-completion rather than use a deferred consideration mechanism. In very specific circumstances, vendor loans have been used to bridge a gap in funding.

In the pre-pandemic years, the use of ticker fees/interests in locked-box or fixed-price consideration structures significantly decreased due to the low interest rates and the perceived limited impact on the value of money over the interim period between signing and completion. Nowadays, ticker fees/interests are resurfacing but there does not seem to be a market standard approach and these are negotiated on a transaction-by-transaction basis.

The main consideration applied when determining the need for a ticker fee/interest is the length of the interim period between signing and closing. In short- to medium-length interim periods (roughly three to five months), ticker fees/interests will not always be accepted by sellers, while there is a much-increased likelihood that a ticker fee/interest will apply in transactions where the long stop date is six months or more.

Share purchase agreements with a “completion accounts adjustment” consideration structure will almost inevitably work with a dedicated expert, often an impartial Big Four auditor firm, to whom disputes are to be referred in case the parties fail to reach an agreement on the consideration adjustment within a pre-set timeframe. While it appears rarer nowadays, some share purchase agreements refer the consideration adjustment dispute to more than one expert (where each party appoints one expert and a third independent expert is in turn chosen by such party-appointed experts). The expert’s (or experts’) opinion is almost always final and binding and not subject to review (in the absence of an obvious mistake or malpractice on the part of the expert).

In fixed-price and locked-box consideration scenarios, referrals to experts (eg, in relation to what constitutes leakage or whether the ticker calculation is correctly applied) are almost unheard of and financial experts/advisers are involved at the pre-signing due diligence stage to confirm the enterprise value to equity value bridge.

Most share purchase agreements (and even more so in the case of agreements with private equity sellers) are only conditional on mandatory and suspensory regulatory approvals and on the resolution of due diligence findings which would otherwise amount to a deal-breaker. Such due diligence-related conditions are relatively rare and usually include, for example, the renewal of critical trade licenses and key supplier/customer agreements, which cover a very significant portion of the target’s business or the resolution of third-party disputes that could adversely impact the entire business.

Financing conditions are not common at all, and the parties will be expected to obtain all shareholder and other corporate approvals in advance of signing. The obtaining of change of control approvals under existing target agreements (other than in relation to the critical business agreements described above) is usually not structured as a condition but rather as a pre-completion obligation.

Material adverse change provisions have made a reappearance and are again becoming more visible after a period when they were generally outright rejected in the majority of deals. That said, the current trend is still to reject material adverse change provisions. However, if the buyer insists on a material adverse change provision and it is in a sufficiently strong negotiation position, very deal-specific material adverse change clauses are sometimes included. In contrast to broad and generic clauses, these specific clauses do not cover general market developments impacting the entire relevant industry, but rather usually include specific numeric materiality thresholds defining the minimum impact that the relevant adverse change must have had in order to be perceived as material.

While “hell or high water” provisions continue to be a heated topic in any negotiation with a regulatory condition, the outcome of such negotiations will, in the vast majority of cases, result in a buyer accepting a limited “hell or high water” condition under which the buyer is only required to accept remedies that do not impact its existing portfolio companies (this is particularly relevant where such buyer is already active in the relevant industry – eg, in an add-on situation). In competitive auction processes and/or in deals with a well-positioned seller, private equity-backed investors that are not yet active in the relevant region or industry have, in limited circumstances, been able to offer up a full “hell or high water” provision on the basis that the perceived risk of any regulatory conditions being imposed was remote/theoretical.

Due to the relatively recent introduction of foreign direct investment legislation and the lack of sufficient precedent transactions that would illustrate the possible impact and/or scope of any remedies imposed by the regulator, buyers will often argue that a distinction should be drawn between the standard of the buyer’s obligations in relation to their satisfaction of merger-control conditions, on the one hand, and FDI conditions, on the other hand. Consequently, foreign investment conditions are almost always only subject to a reasonable efforts obligation (or, rarely and in the case of a strongly positioned seller, best efforts) and no “hell or high water” applies.

As can be expected, there is generally a very strong push-back against any break fees, however, where a satisfactory “hell or high water” protection is not agreed upon, break fees will often be negotiated in lieu of the comfort that a “hell or high water” provision would otherwise give the seller. Reverse break fees are unusual and will only be negotiated where the acquisition agreement includes a sell-side condition with a high risk of not being satisfied.

Where a break fee is offered, it is usually carefully crafted to ensure that it is only triggered where the transaction does not complete due to:

• the failure to satisfy all of the conditions precedent for which the buyer is responsible (regardless of actual culpability – ie, the buyer is expected to assume the risk of not obtaining all compulsory approvals and for not delivering any required third-party consents or other conditions); and
• the failure to complete the transaction on completion; the break fee will almost inevitably make it clear that it will not apply where the triggering event is caused by or contributed to by the seller.

Czech law will generally enforce break fees even if they have a punitive element to them. For this reason, the size of the break fee is usually in excess of anticipated sunken costs and, in order to have an incentivising effect, tends to represent a significant value of the transaction (often in tens of percent of the transaction value – eg, 20%-50%).

Acquisition agreements will generally be terminable only for the following reasons:

• failure to satisfy all conditions precedent by the long stop date;
• failure to complete all completion steps (either during the first attempted completion or during a postponed completion); and
• the occurrence of a material adverse change. but only in the limited cases where this has been negotiated.

Termination for breach of fundamental warranties prior to or on completion is sometimes also added as a reason for termination; however, it is more common to cover issues such as lack of authority or lack of title under the “failure to complete” termination reason.

In the absence of any extraordinary circumstances, the typical long stop date would be between three and nine months from signing.

Generally, the type of risk allocation is the same in transactions with and without private equity-backed parties.

One significant area where the approach to risk may differ somewhat between private equity-backed parties and corporates is in the steps taken to ensure that the party giving undertakings and warranties is capable of fulfilling them, since private equity-backed parties will often be one-off special purpose vehicles. Nevertheless, it is common to see parent guarantees, escrowed funds, and W&I insurance both in private equity deals as well as in deals involving corporates.

Warranties and indemnities are given by the seller and it would be very uncommon to have the management give warranties (there is no accepted equivalent of a management warranty deed).

Warranties are always given subject to any matters disclosed as part of the due diligence, in publicly accessible registers and subject to any matters known to the buyer, while indemnities will not be qualified by disclosure. Both warranties and indemnities will be qualified by a roster of limitations of liability, including (but not limited to) customary anti-double counting, the conduct of third-party claims, provisions and reserves in accounts, mitigation, and due notification provisions as well as the monetary and time limits set out below. The scope and extent of the limitations of liability do not differ between transactions with and without a private equity-backed party.

General tax covenants for full tax liability pre-completion are very non-standard in the CEE region and parties will usually only accept specific indemnities for specific identified tax matters. An identical approach is generally taken towards indemnities in other areas as well.

Typical limitations on liability for warranties and indemnities would be as follows:

• de minimis of 0.1% of transaction value;
• tipping basket of 1% of transaction value;
• operational/business and tax warranties capped at 10%-30% of deal value;
• overall liability cap at 100% of the consideration actually paid;
• time limit of 12–24 months after completion for operational/business warranties;
• time limit of two to three years after completion for fundamental warranties;
• time limit of three to six years after completion for tax warranties; and
• specific time and monetary limits will be negotiated on a case-by-case basis for specific indemnities.

W&I insurance has established itself as a permanent feature of the Czech M&A landscape and is particularly common in transactions involving private equity (being less popular with corporates). Most W&I policies will cover all warranties (subject to customary carve-outs, which broadly follow the London market standard) including tax and fundamental, however, the coverage will almost always not be sufficient to amount to full title insurance (which can be taken out separately, particularly in real estate transactions).

Escrow mechanisms are still often used and will usually be set up in lieu of deferring a part of the purchase price as cover for any claims (warranty, indemnity or other). The sum escrowed is usually only a part of the liability limit for operational or business warranties but it will usually be available to cover any type of claim under the relevant acquisition agreement.

While the number of litigations resulting from acquisition documents has increased since the financial crisis in 2008/2009, the overall amount of such litigations still remains quite small. Slow and overburdened courts (for Czech law-governed agreements) and the high cost of arbitration or, as the case may be, overseas court proceedings, remain the main deterrents for escalating disputes to litigation. A significant majority of initiated claim processes are resolved by settlement and mutual agreement between the parties before formal proceedings have even commenced.

In our experience, the most frequently litigated provisions of acquisition documents in private equity transactions are earn-outs (especially where the parties have not agreed on a separate dispute resolution mechanism through an expert determination) and warranties, particularly warranties relating to the target’s accounts and compliance with laws.

The Czech capital market is relatively limited in scale, which naturally impacts the scarcity of public-to-private deals. Rather than constituting a trend, such transactions typically occur on an individual, case-by-case basis.

The board and supervisory board of the target are required to maintain neutrality (unless the General Meeting approves particular steps against the bid or unless the board members seek a competing bid). Within five business days of receiving the bid, the board and supervisory board are obliged to prepare a joint position paper, including a view on whether the bid is in the interests of the target’s shareholders, employees and creditors, and an assessment of the offered consideration.

Relationship agreements are uncommon in the context of takeovers and are not provided for by the law. That said, they might be relevant in the context of more complex takeover structures.

Shareholder disclosure thresholds for a Czech company listed on a regulated market in the EU are 1% (if the issuer’s registered capital exceeds CZK500,000,000 or equivalent in other currencies), 3% (if the issuer’s registered capital exceeds CZK100,000,000 or equivalent in other currencies), 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50% or 75%; this is to be reported when a person (or group of persons acting in concert) exceed these percentages or their shareholding drops below the thresholds. The reporting is made to the Czech National Bank and to the issuer. In the context of takeovers, the most relevant threshold is 30%.

The relevant threshold in the context of takeovers of a Czech public company is 30% of voting rights. Once reached or exceeded, it triggers the obligation to launch a mandatory takeover bid, unless an exemption applies. Shares held by co-operating entities would be added for these purposes. Voting rights that may be, directly or indirectly, influenced by a person would be attributed to such person.

The Czech Takeover Act also provides for an additional threshold, namely 90% of voting rights, which, if reached or exceeded as a result of an unlimited and unconditional takeover bid, provides for the obligation of the bidder to launch a supplemental takeover bid.

Cash or shares/securities or their combination may be offered as consideration, with certain limitations/specifics applicable to mandatory takeover bids.

In mandatory takeover bids, the minimum price to be offered is the highest price for which the bidder(s) acquired the shares in the target during the past 12 months (premium price). If the premium price cannot be determined, the minimum price to be offered is the weighted average for the past six months. The Czech National Bank, as the competent regulator, may adjust the price so that the price is adequate in certain situations (eg, market disruptions, low liquidity, significant changes in the target’s situation, etc). If illiquid securities are offered as consideration, a cash alternative is mandatory.

In the context of voluntary takeovers, it is permissible for the bid to be conditional on factors outside the bidder’s control, such as obtaining regulatory approvals (eg, antitrust clearance). However, mandatory tender offers must be made unconditionally.

Regarding financing, the Czech National Bank (as the competent regulator) may require proof of funds during the review of the bid. This effectively rules out making a bid conditional upon securing financing. The bidder needs to have appropriate arrangements in place prior to launching the bid.

The law does not provide for any deal security measures that a bidder could seek, and the market practice is limited in this respect. Most takeovers on the Czech market have been plain vanilla takeovers with only a few (contemplated) transactions having more sophisticated structures.

This is only relevant in the case of voluntary takeovers, as mandatory takeover bids need to be unlimited, covering all shares of the target. Various corporate actions require various thresholds and quorums. Depending on the intended actions, the bidder should consider in advance what percentage of voting rights needs to be achieved in the bid. Again, market practice in this respect is rather limited.

There is no dedicated mechanism for a debt push-down in respect of less than 100% shareholdings. Indeed, where the desired outcome is to acquire less than 100%, this is most typically structured as an acquisition of 100% by an SPV, into which the sellers reinvest (rather than downright selling less than 100%). If debt is employed in the SPV to fund the acquisition, the target is typically merged into the SPV, thus achieving a push-down of that debt. Also, such debt push-down is typically linked to the acquisition.

While structures do exist to push down some debt without an acquisition taking place, they were subject to challenges and thus connected to some level of risk. An example is dividend recapitalisation, in which the company draws a loan to fund a dividend distribution. More recently, however, debt push-down structures in general have faced increased scrutiny, especially by tax authorities, as sponsors obviously expect interest on any debt to be tax-deductible.

Regarding squeeze-out, the required threshold is 90% of all shares/voting rights and the process is rather straightforward. However, in the context of takeovers, a supplemental takeover bid is triggered if the bidder acquires at least 90% of voting rights in the target as a result of an unconditional bid for all shares of the target. It is generally expected that shareholders would tender their shares in such a bid in the given circumstances (expected squeeze-out).

While the law does not provide for solicitation practices, they do occur in practice, generally on a preliminary and non-binding basis. Such solicitations are often part of public-to-private strategies during the transaction structuring phase. This includes considerations of whether to launch a voluntary takeover bid or, alternatively, reach the relevant threshold that would necessitate a mandatory takeover bid. Any binding commitment to tender/vote would most likely trigger reporting (and potentially other) obligations and we have not seen such arrangements on the local market.

Management incentivisation is a common feature in the Czech market and private equity houses usually make somewhere between 5% to 10% of the equity available for such incentivisation schemes.

The dominant management incentivisation schemes either involve (i) sweet equity in the form of common shares issued at a low value, and (ii) employee stock option plans structured in a tax-efficient manner – these can include phantom shares, indirect shareholding through a “management special purpose vehicle company” or option rights.

In the case of founders who sell down only a part of their investment and roll over a portion of their initial shareholding, the founder will usually be elevated to the level of a co-investor with the private equity buyer and will not otherwise participate in any additional incentivisation scheme.

Vesting provisions are generally common and often cover a period of up to five years from the date on which the relevant manager became a participant in the incentivisation scheme.

Good leavers will be most often defined as leavers due to: (i) death or (ii) incapacity. A manager will be perceived as a bad leaver in all other situations. On occasions, we have seen a “neutral leaver” category covering specific situations, such as leavers who were made redundant as part of a business restructuring or similar. These “neutral leavers” did not forfeit their rights from the incentive programme upon becoming a leaver but were only entitled to a portion of the upside they would have received had they been good leavers.

Non-compete and non-solicitation undertakings are commonly applied to managers, especially where the company has a private equity shareholder.

Czech law takes a different approach to employees (typically managers and other employees) and persons holding a corporate office (ie, board members). In the former case, the relationship between the target and the relevant person is governed by employment law while in the latter case it will be governed by contract and corporate law. As a result of this, the form, scope, and length of the various restrictions imposed on the managers and board members may differ. The restrictions are usually introduced in the form of an employment contract or contract for performance of office, as appropriate for the relevant role. One notable feature of having these restrictions in place in an employment contract for a period after the expiration of the term of the employment is that the employer will be required to provide consideration for such undertakings. Furthermore, while a non-compete in a non-employment relationship can be justified for a period of up to two to three years after the expiration of the original contract term, in an employment scenario the maximum length of the non-compete restrictions is limited to one year from the termination of the employment relationship.

There is a strong preference among private equity investors to ensure that shares issued to/held by management are non-voting, have no specific vetoes akin to reserved matters, cannot prevent an exit, are non-transferable and do not benefit from anti-dilution protections. In order to enable the private equity shareholder to effect an exit, these management shares will be subject to a drag-along right.

Since private equity shareholders will often acquire a majority or close-to-majority stake in the target, the private equity shareholder will expect to have representation at all board levels (where more than one board is established), more frequently in the form of full voting board members and less frequently in the form of observers. Broad information rights are standard for holders of more than 20% of the shareholding, which is almost always the case for private equity investors.

Reserved matters coupled with deadlock resolution mechanisms (which sometimes involve resolution by way of call/put options or shoot-out scenarios) are commonly applied, and private equity buyers will generally be well-positioned to negotiate a generous package of rights. These will normally include vetoes over the following matters:

• material changes to the business plan and/or annual budget;
• material contracts;
• any corporate changes and changes to constitutional documents;
• material acquisitions and disposal;
• appointment of board members;
• winding-up and insolvency;
• material employment matters;
• funding matters;
• related-party transactions;
• tax and residency matters; and
• exits.

In general, a private equity fund backing a majority shareholder in a Czech business corporation should not be liable for the actions of such corporation. However, in certain circumstances, this rule may not apply.

For instance, if the private equity fund used its influence in a Czech corporation to influence, either directly or indirectly, in a decisive and significant manner, the behaviour of a business corporation to the determent of such business corporation, it shall compensate such damage (unless the fund proves that it could have reasonably assumed, in good faith, that it was acting on an informed basis and in the justifiable interests of the influenced business corporation).

Similarly, if a private equity fund were to hold any form of directorship or corporate office in a Czech corporation in breach of its duty to act with due care, it would be liable for any damage incurred by the corporation as a result thereof.

In the last two years we have seen an increasing number of “dual track” exits, with the vast majority resulting in a private sale rather than an IPO. We have seen an occasional “triple track” process, but these are not very common.

It is not common for private equity owners to roll over (rollovers being more commonly used by founders selling to private equity players) or reinvest, however, we have seen situations where one private equity fund has exited by way of selling to another private equity fund managed by the same fund manager. At any rate, these situations are very rare.

Drag rights and tag rights are commonly used in private equity transactions and will generally be strongly skewed in favour of the private equity-backed party, which almost always retains the unlimited ability to trigger and manage the exit process (usually after a post-completion lock-up period has first expired). Drag rights are perceived as one of the methods that private equity-backed parties can use to implement an exit; however, they are rarely used in practice and exit processes tend to be jointly pursued by the shareholders at the end of the investment period.

For this reason, drag rights in private equity deals tend to be granted to the private equity-backed party who can drag all remaining shareholders in case of a full exit. Partial or proportional drag rights are less common and more deal-specific.

Tag rights are generally given to all shareholders in a private equity transaction and will be applicable in case of a sale resulting in a change of control or a sale of a significant share in the company (often 50% or more).

While institutional co-investors will often have consultation or (in case of a strong co-investor) veto rights on an exit and the use of drag rights, management minority co-investors will usually not be given the right to pursue an active role in managing the exit.

There is limited IPO experience on the local market, with a number of Czech-based IPOs not limited to Czech companies/Prague Stock Exchange, but, rather, performed on foreign exchanges (Amsterdam/London) with a foreign company (Dutch NV/English Plc) as the issuer. This has an impact on market practice, including lock-ups, relationship agreements, etc.

In an IPO, the investment banks will typically require a lock-up arrangement in respect of the selling shareholder, the company and the executive directors/management.  Typical lock-up periods are 180 or 360/365 days, but we have also occasionally seen longer periods (eg, 720 days).

In the Czech market, relationship agreements are not typical and not specifically provided for under Czech corporate law. However, we have seen relationship agreements in the context of Czech-based IPOs conducted on the London Stock Exchange, where they are mandatory in certain circumstances. We have also seen them in the context of deals where the selling shareholder had a business that potentially competed with the issuer (due to the determined IPO perimeter) or where the issuer was dependent on services provided to it by the selling shareholder (or its affiliates outside of the IPO perimeter).