M&A transactions in the Czech Republic – what can you expect from the legal angle?

Since the so-called “Velvet Revolution” of 1989 which brought complete changes in the political and legal climate in the Czech Republic (then called Czechoslovakia), the level of experience of Czech lawyers drafting and negotiating M&A transactions has developed from nearly no knowledge to standards comparable with other developed countries. The concepts, structures, and vocabulary used for many years in Western Europe, Asia and the U.S. are now generally known and accepted by the Czech legal community dealing with transactions. And this is indeed what a foreign investor should expect from his Czech counsel assisting in an M&A transaction.

The legislation

A completely new “Civil Code” and “Act on Corporations” effective as of 1 January 2014 have impacted the documentation of M&A transactions. These new laws allow more flexibility in structuring transactions by basically leaving the content of share or assets sales contracts to the free will of the parties. Given this flexibility, foreign parties may – to some extent at least – rely on many of the concepts and principles with which they are familiar in their home country, although some details may be approached differently by Czech law.

Sometimes specific Czech regulatory aspects may play a significant role; these can be for example statutory merger clearance requirements or investment incentives-related conditions. In a few specific cases, other governmental consents may be required (defense sector, certain critical industries and services etc.).

The transactional round

The typical transactional process does not differ from what is found in other developed European countries. Hence, it includes the various steps performed in transactions whether structured as a “private sale” or an “auction process”. Most Czech transactional lawyers are generally familiar with the terms and concepts such as “teaser”, “information memorandum”, “due diligence”, “preliminary/definite agreements”, “completion/closing” etc. It is worth mentioning that there are typically different expectations as to the length and complexity of the transactional documents for a small or midsize transaction with Czech family-owned business when compared to large corporations owned by foreign investors or large Czech private equity groups.

Czech transactions sometimes involve exclusivity arrangements aimed at limiting the seller’s ability to negotiate the deal with another prospective buyer until a binding contract is signed.

Occasionally, a “break-up fee” is charged to buyers who walk away from the transaction without justifiable reason. Non-disclosure or confidentiality agreements are common, however, it may be difficult to enforce them in practice. Last but not least, shareholder agreements are quite frequent with all the various minority protection rules, options, drag/tag along rights and other universally applied concepts.

Foreign parties should be aware that it is unrealistic to expect that during the closing session and the related “money for shares swap”, the purchase price will be paid exactly on the closing day if the parties have accounts in different Czech banks or if their banks are located abroad. A separate escrow mechanism must be used or one of the parties must agree on the establishment of an interim bank account that would only exist for a limited period of time and be maintained by the other party’s bank just for the purpose of closing-related money transfers.

Asset sales

Although share transfers generally prevail over asset deals, many transactions are still structured as asset deals. Here, it is important to draw a distinction between the two major types of asset deals as recognized under Czech law, i.e. (i) the so-called “sale of enterprise” and (ii) sale of selected assets and liabilities (sometimes referred to as “cherry picking”). The use of Anglo-Saxon precedents for these types of contracts is actually less frequent and there is some Czech mandatory legislation that must be taken into account when entering into these transactions.