As investors' expectations in the global economy improve, M&A activity on the market begins to gather pace. As is often the case in the fourth quarter, there is pressure to close many deals before the year-end; this is no different in the Czech Republic. However, the last quarter of 2013 has an added significance, as it is the last period in which transactions will be governed by the existing Civil Code and Commercial Code.
Acquisitions are complex transactions, as companies are organisms that are subject to perpetual change. Purchasers often seek to mitigate the various risks that may occur between signing and closing, or thereafter. This is often achieved through purchase price adjustments. The new Civil Code and new Act on Business Corporations are due to come into effect shortly, and will introduce changes to such mechanisms.
The new Civil Code has been passed by Parliament and is due to take effect from next January. Although it contains no specific provisions relating to representations and warranties in share purchase agreements, it is based on the fundamental principle of the free will of parties to contract as they wish. It is hoped that the code will encourage courts to issue more practical interpretations of the law in this area.
The regulation of financial assistance must be taken into account when structuring many M&A transactions. Financial assistance in relation to acquiring shares in joint-stock companies in the Czech Republic is regulated in line with European legislation. Assistance in connection with acquiring a shareholding in a limited liability company is separately regulated by Czech law.
As in any M&A transaction, the legal due diligence process is an important part of the acquisition of a Czech limited liability company. A number of issues must be considered when carrying out due diligence. Many of these are neither new nor surprising for a foreign investor and can be resolved before closing the acquisition, but a number of country-specific issues may also arise, deriving from the provisions of Czech law.
Czech law continues to undergo considerable change in adapting to the pace of today's free market economy. There appears to be an overall move away from the rigid and formalistic legal doctrines of the past in favour of modern legal concepts. Although this may not have a direct effect on the number of M&A deals in the country, it will undoubtedly positively influence the costs and timing of transactions.
A recent amendment to the Commercial Code lifts the complete ban on a company providing any financial assistance in relation to acquiring its own shares. However, even after the amendment, the ban still applies to both limited liability companies and joint stock companies. This update looks at the conditions under which financial assistance can be provided by these companies.
The Supreme Court recently issued a controversial judgment stating that guarantees falling under Section 196a of the Commercial Code need not be appraised by a court-appointed expert in order to be valid. However, while the judgment may decrease transaction costs and speed up business transactions, it remains to be seen whether it will be accepted as authority by the lower courts and legal scholars.
Investors are often confronted with uncertainty regarding a seller's legal title to shares in a joint stock company or an ownership interest in a limited liability company. This update looks at certain title issues that often arise when undertaking due diligence prior to acquiring a Czech target.
The new Act on the Transformation of Companies recently came into force. The act implements the EU Cross-Border Mergers Directive and the principle of freedom of establishment within the European Union, and clarifies the legal regulation of transformations.
When a transaction is structured as the transfer of a part of an enterprise or as an asset deal, the parties must be aware of two contentious legal questions concerning whether the transaction requires approval from the general meeting and whether it must comply with Section 67a of the Commercial Code.
Section 196a was incorporated into the Commercial Code in 1996 and has since been amended several times. It attempts to address some of the agency problems that can arise within a corporate enterprise. However, it is a major source of legal risk in Czech intra-group transactions as it is vaguely drafted and inconsistently interpreted.
The Ministry of Justice has prepared a draft bill to implement the EU Directive on Cross-Border Mergers of Limited Liability Companies. The timing for implementation is not yet certain; however, it is likely that the EU implementation deadline of December 15 2007 will be met.
A further amendment to the Commercial Code is being reviewed by Parliament. Among other things, the amendment substantially simplifies asset deals and deals involving the sale of a business, and introduces a new form of demerger (ie, spin-off). By introducing spin-offs, it will bring Czech corporate law further into line with the regime in other EU countries.
A new law which gives controlling shareholders of Czech joint stock companies the option to squeeze out minority shareholders for reasonable monetary compensation has been amended after minority shareholders complained that their rights in obtaining adequate payment for their shares were not protected sufficiently in the squeeze-out process.
A new law on the squeeze-out of minority shareholders of joint stock companies has taken effect. Majority shareholders of Czech joint stock companies now have the option of squeezing out minority shareholders against payment of adequate monetary compensation, promoting greater flexibility in the corporate life of the company.
Increasingly, the leveraged buyout structure is the preferred method for acquiring shares in target companies where financing consists primarily of funds borrowed from third parties. The initial and subsequent long-term borrowing used for the buyout is usually secured by the target company's assets.
The Income Taxes Act has been amended to restrict the deduction of tax losses in the event of a change in shareholder structure resulting, for example, from a restructuring or merger. The amendment also allows non-deductible expenses to increase the acquisition price of shares and thus reduce the taxable profit realized in the event of the sale of those shares.
The notification duties for shareholders of listed companies have been amended. Although the changes are not drastic, it is important to be aware of them, given that shareholders who fail to comply with the disclosure rules may be prevented from exercising the voting rights attached to shares whose acquisition is not reported.
Once proposed amendments to the Commercial Law have been passed, it will be possible to issue bearer shares in uncertificated form only. Certificated bearer shares infringe the security and transparency of the capital market, and their abolition is welcomed with a view to bringing greater transparency to M&A transactions.