Legal aspects of M&A transactions in the Czech Republic

Within thirty years after the fall of the communist regime, the Czech Republic has firmly re-established its position as industrial and commercial powerhouse of the CEE region. Thanks to the open market and long-term interest of foreign investors, the M&A market in the Czech Republic is alive and booming.

Due to the steady stream of foreign investments, the M&Atransactions in the Czech Republic are in general carried out in accordance with M&A international standards. However, thereare certain local specifics arising, for example, from historical context or are based on specific local legal requirements which may caught a foreign-based investor by surprise. The aim of this article is to provide a brief overview of such most common local specifics.

Structuring of M&A transactions

Most transactions in the Czech Republic are structured as a typical share-deal or an asset-deal type of transactions. However, Czech law also offers another alternative called “transfer of an enterprise” which combines some specifics of both of the above types of transactions.

An enterprise consists of a set of assets and liabilities which pertain to the performance of a specific business activity. By way of an example, an enterprise of a production company may consist of its machinery, stocks, employees, real estate (suchas a warehouse or a production plant), business receivables as well as of its liabilities (such as financing debts or trade receivables). An enterprise also encompass contracts relating to such business.The transfer of an enterprise then consist of a concurrent transfer of all of such assets, liabilities and contracts as going concern by way of a single agreement.

The benefit of this type of transactions is the possibility to acquire a whole ongoing business portfoliowithout the need to acquire the legal entity currently holding such assets. This transaction may therefore eliminate some of the risks relating to hidden liabilities pertaining to the target company or, for example, share title related risks.

Due diligence specifics

The due diligence process in the Czech Republic does not substantially differ from such procedures in other European countries. However, there are certain areas or topics which may be rather unusual:

• Real estate cadastre – Although the Czech real estate cadastre contains records dating back even several centuries and any new entries are being meticulously verified, Czech legislation doesnot provide any statutory warranty concerning correctness and completeness of the real estate cadastre records. Therefore, a prospective purchaser of a Czech real property should not fully rely only on the records publicly available in the real estate cadastre but should rather request a title warranty from the seller. In addition, a due diligence review of the ownership title chain is also advisable and a market standard.
• Restitutions – During the former communist era,a vast number of real properties were confiscated by the state. Following to the fall of the communist regime, the Czech state started to transfer the properties back to their original owners in the so call “restitutions” proceedings. Although most of the restitution proceedings was already completed years ago, there may be a few specific cases which may be still pending nowadays.
• Pension scheme – Although some Czech specifics require an additional due diligence work, there are also some areas which are very straight forward compared to other jurisdictions. The pension scheme is one of such topics, as the pension system in the Czech Republic is state-operated and funded by mandatory deductions from the employees’ salaries.

Conclusion

As in any other jurisdiction, contacting an experienced M&A legal advisor familiar with both the local specifics and also the international standardd which will guide the investor through the transaction isa crucial element which may determine the potential success of the transaction.