Czech Republic: The International Comparative Legal Guide To Mergers & Acquisitions 2012 – Czech Republic - Part 1

This article appeared in the 2012 edition of The International Comparative Legal Guide to: Mergers & Acquisitions 2012; published by Global Legal Group Ltd, London

1 RELEVANT AUTHORITIES AND LEGISLATION

1.1 What regulates M&A?

The regulation of M&A in the Czech Republic is split in several acts. The main source of regulation is Act No. 513/1991 Coll., the Commercial Code (the " CC "). Apart from its provisions on the formation, organisation and management of different types of companies, it also sets conditions on the acquisition of shares. In case of an M&A in the form of an asset deal, the special provisions of the CC apply to the transfer of enterprise or its part.

With regard to joint-stock companies, the CC regulates public offers for the purchase or exchange of securities. This regulation applies to the acquisition of securities to which are attached shares on the registered capital or on voting rights of the target, or securities to which are attached rights to obtain the aforementioned securities. The regulation deals with mandatory as well as voluntary offers, regardless of whether the company is publicly traded or not. This regulation does not apply if: (i) the offer is made to less than 100 shareholders; (ii) the purchase is targeted toward securities whose total nominal value does not exceed 1% of the issue volume; or (iii) the offer is made exclusively on the regulated market

The CC also regulates the process of squeezing out minority shareholders. The owner of subscriber securities in a company whose total nominal value is at least 90% of the company's registered capital to which voting rights are related, and to which at least a 90% share in voting rights in the company is related, is entitled to ask the board of directors to convene a general meeting that will decide on the transfer of all remaining subscriber securities in the company to themselves.

The general rules for a contract on transfer of shares in a joint-stock company are contained in Act No. 591/1992 Coll. on securities, which sets the general conditions for transferring securities, with or without consideration (donation).

A special regulation of the CC applies to limited liability companies. Unless the Articles of Association provide otherwise, a shareholder may, with the approval of the General Meeting, transfer its share (ownership interest) to another shareholder. If the Articles of Association allow, a shareholder may transfer their share to a third party. If a limited liability company has a single shareholder, the share is always transferable to third parties.

Another important source of regulation in the M&A area is Act No. 104/2008 Coll. on takeovers (the " TA "). The TA regulates takeover offers addressed to the owners of shares issued by a joint-stock company seated in the Czech Republic, whose securities are admitted to trading on a regulated market, i.e., it regulates situations where the bidder intends to gain control over a publicly traded company. It also deals with issues related to cross-border takeover offers.

Another possible legal source for M&As is Act No. 125/2008 Coll. on Transformations. This act governs mergers, de-mergers, asset takeovers by a majority shareholder and changes of company legal form.

Act. No. 256/2004 Coll. on undertakings on capital markets (the " AUCM ") has a profound influence on publicly traded companies. It regulates a wide range of areas, from protection of the market via regulation of the provision of insider information to market manipulation and the duties of specific subjects participating on the capital market, including listed companies.

In addition, Act No. 143/2001 Coll. on protection of economic competition sets specific rules for acquisitions without cross-border effect on the EU market.

Other acts related to M&A include Act No. 6/1993 Coll. on the Czech National Bank, which regulates the tasks and competences of the body supervising the financial market.

1.2 Are there different rules for different types of company?

There are different rules for acquiring a share (ownership interest) in a limited liability company and a joint-stock company. The rules for joint-stock companies also differ based on whether its securities are publicly traded or not. These differences are based on the fact that some provisions apply only to the publicly traded shares and can be, in general, characterised as deeper control and stricter regulation over the transfer of publicly traded shares.

For limited liability companies, the transferability of shares (ownership interest) depends on the wording of the articles of association. A shareholder may, with the approval of the general meeting, transfer their share to another shareholder, unless otherwise specified by the articles of association. The share can be transferred to a third party only if the articles of association allow so. The articles of association may make the transfer of a share to a third party subject to the general meeting's approval. If the company has a single shareholder, a share is always transferable to third parties.

For joint-stock companies a bearer share is transferable without limitations. The transferability of registered shares might be limited, but cannot be excluded by the articles of association.

Further regulation relates to the shares of publicly traded companies. According to the TA, the rules of a mandatory takeover bid, as well as of a supplementary takeover bid, apply to such shares.

The mandatory takeover bid applies when a shareholder of the target company obtains a decisive share of voting rights. The TA sets the decisive share of voting rights at 30% of votes. The duty to make a bid does not apply, however, if the shareholder does not actually control the target company despite having a 30% voting share. Under the CC, a shareholder (or persons acting in concert) having 40% of voting rights are controlling persons with respect to the company. If all the conditions are met, the shareholder shall make a takeover bid to all other owners of the target company's securities within 30 days from the day following the date of acquisition or exceeding this decisive stake.

The duty to make a supplementary takeover bid applies to publicly traded securities. The duty to make a supplementary bid arises if the bidder has made an unlimited and unconditional takeover offer and consequently acquired the securities of the target company representing at least 90% of the voting rights and capital of the target company. In such a case, the bidder shall make a supplementary offer within 30 days of the date of the binding takeover offer to all owners of participating securities of the target company.

The TA also regulates voluntary bids, i.e. bids made freely at the discretion of the bidder. This regulation is rarely used in practice, however. In most cases, the buyers prefer direct negotiations with the owners of the shares and use the regulation of the CC and the Act on Securities for the transfer.

1.3 Are there special rules for foreign buyers?

Czech law does not specify any special duties or obligations based on the origin of the buyer.

One exception is the TA, which regulates that foreign bidders with a domicile or registered office outside the Czech Republic must entrust their representation in matters relating to the takeover bid to a lawyer or a person authorised to provide investment services in the Czech Republic. This rule does not apply if the bidder has established a branch in the Czech Republic.

There are also several exceptions with regard to the target that affect foreign buyers' chances of acquiring shares. For instance, a licence for trade with military material cannot be granted if more than 49% of the company's registered capital is of foreign origin.

Direct investment, including acquisitions made by foreigners in the Czech Republic, with a volume of more than CZK 1,000,000 (approx. EUR 40,000) must be notified to the Czech National Bank.

1.4 Are there any special sector-related rules?

The acquisition of shares within certain entities might be subject to specific limitations or restrictions. These apply mainly within the financial sector, where the approval of the Czech National Bank is generally required. Within the financial sector, the Czech National Bank acts as a supervisory body. For these reasons, the approval of the Czech National Bank is required when a person or persons acting in concert intends to acquire a qualified share in an investment firm, or to increase its qualified share in an investment firm in such a way that the share reaches or exceeds 20%, 30% or 50%, or to become the controlling persons of the investment firm. The same regulations apply to banks and insurance companies, where a person or persons acting in concert must have the consent of the Czech National Bank to acquire a qualified share, to increase a qualified share so that the share reaches or exceeds 20%, 30% or 50%, or to become a controlling person.

1.5 Does protectionism operate in favour of local owners?

In our point of view the Czech legal regulation cannot be considered protectionist. It does not impose any special administrative or financial burdens on foreign investors compared to national subjects apart from those mentioned in question 1.3 above.

1.6 What are the principal sources of liability?

The sources of liability can be found in most of the acts regulating M&A.

For limited liability companies it applies according to the Commercial Code that the transferor shall be liable for obligations passed on when its share is transferred.

The liability regulation for joint-stock companies is rather complicated and depends on the manner of acquisition.

A special rule on liability applies to mandatory public offers under the CC. If the subject has a duty to make a public offer and fails to do so, it may be required to conclude the transfer agreements or claimed for damages.

In case of a squeeze out, the minority shareholders might seek court protection if the consideration provided for their shares was not adequate.

The TA also governs several cases of origination of liability. If the bidder has the duty to raise the bid and fails to do so, damages can be claimed from him. If the bid document contains false or incomplete information, damages might be claimed from the bidder. A failure to make a mandatory bid also affects voting rights. Under the TA, the bidder (and persons acting in concert with him) cannot execute his voting rights in the target until he fulfils his duty and makes the bid.

The bodies of the target, as well as the bidder, are liable under the TA. These bodies are liable if their statement to the bid document contains false or incomplete information.

The TA also governs situations where the consideration for the shares is inadequate. In such cases, the seller may claim at court compensation of the difference between the provided consideration and the adequate consideration.

The AUCM contains special regulation of liability with regard to market manipulation and insider trading. This act defines insider information, as well as the duties of persons who dispose of such information. The Czech National Bank can impose a fine of up to CZK 10,000,000 (approx. EUR 400,000) for a breach of these duties.

2 MECHANICS OF ACQUISITION

2.1 What alternative means of acquisition are there?

The share (ownership interest) of a limited liability company can be acquired only by a share purchase agreement, apart from in special cases such as inheritance. This agreement can only be concluded voluntarily. The only exception to this rule is if the share was pledged. In such a case, if the shareholder (debtor) fails to comply with the pledge agreement (loan agreement) the creditor may sell the share either in a public tender or, if permitted by special legal regulation, at a public auction.

The shares of a joint-stock company also can be acquired from the owner against his will via a squeeze out.

As already mentioned in question 1.2 above, the TA regulates mandatory as well as voluntary takeover bids. The shares of a joint- stock company can be acquired via public offer. This procedure is described in more detail in question 1.1.

The shares of a joint-stock company can also be acquired by mutual agreement of a buyer and seller by concluding a share purchase agreement. In addition to the Commercial Code, share purchase agreements are governed by the Securities Act.

The different types of company transformations (mergers, spin- offs) might also lead to acquisition of shares of a joint-stock company, but this is rare compared to the above-mentioned methods.

2.2 What advisers do the parties need?

Both parties shall engage legal advisors who will advise them of the risks of the envisaged transaction. The buyer is further advised to hire an experienced financial advisor to help him with tax-related matters and to optimise the whole process.

In some cases, the legal regulation requires the assistance (opinion) of an expert on valuation of the due consideration for the transferred shares. For instance, an expert opinion must be submitted for a mandatory public offer.

Further entities must participate in the acquisition if the subjects of the transaction are securities of a publicly traded joint-stock company, such as a bank or a security broker.

In most cases, the buyer is also supported during the transaction by his investment bank.

2.3 How long does it take?

The duration of the process depends on statutory limitations, as well as on the size of the acquisition project. In our experience, acquisition processes take from a few months to over a year. The transaction itself usually follows an initial due diligence process. Within this process the risks related to the target are assessed from the financial and legal points of view.

The duration of the process depends on the means of acquisition. For instance, under the TA several duties must be fulfilled, starting with the preparation of a bid document following its publication, and approval of the Czech National Bank up to the conclusion of the agreements. The process might easily take over a year. On the other hand, the acquisition of a sole shareholder limited liability company might only take several weeks.

If the approval of the Office for the Protection of Economic Competition or a European Commission is required, the duration of the acquisition is substantially affected.

2.4 What are the main hurdles?

The hurdles are profoundly connected with the statutory regulation of the specific means of acquisition. The most burdensome processes are connected with the means of acquisition under the TA. This act sets steps and documents necessary for the acquisition of shares.

The possible intervention of the Czech National Bank which might also lead to prohibition of the bid, might under certain conditions, prolong the process.

The transaction is further prolonged if it is subject to approval of the Office for the Protection of Economic Competition or a European Commission.

2.5 How much flexibility is there over deal terms and price?

The transaction terms, as well as the price conditions, are rather limited within the acquisition according to the TA. The strictest regulation applies to mandatory bids. These bids shall be unconditional and cannot be cancelled by the bidder. If the bidder intends to change the terms, the changes only can be in favour of the addressees of the bid. In addition, the TA stipulates that the consideration cannot be provided later than within 60 days after the lapse of the time limit within which the addressees of the bid can accept it.

The statutory regulation of voluntary bids is less rigid than the mandatory takeover bid. Voluntary bids might be subject to certain conditions, whereas the fulfilment of the conditions cannot rely on the bidder. This typically applies to situations where the bidder requests the acquisition of a specific number of shares. In addition, voluntary bids can under certain conditions be cancelled or modified, if so stated in the bid documents and if properly reasoned. But if the modification relates to the consideration, it can never be less favourable for the addressees of the bid. The bidder has the duty to notify his intention to cancel or modify the bid at least five days prior to the announcement of the changes to the Czech National Bank. The Czech National Bank may prohibit the modification or cancellation of the bid if it is contrary to the TA.

The consideration for shares in case of mandatory bid under the TA might be cash or securities, or both combined. If the securities offered as a consideration are not traded on the regulated market, the cash always has to be offered as another consideration. The amount of consideration (i.e., the price) must correspond to the price for which the bidder or a person cooperating with the bidder acquired the shares to which the duty of a mandatory bid originated within the last 12 months before the bid. This is the so-called "Premium Price". If the price cannot be determined in this manner, the bidder shall pay the consideration in an amount corresponding to the average price for which the shares were traded on the regulated market within the last six months before the bid duty arose, i.e., for the "Average Price".

If a supplementary bid duty arose to the bidder, it shall offer as consideration the same price for which it acquired the shares upon the original takeover bid. The amount of consideration might be, under certain circumstances, modified by the Czech National Bank in order to provide adequate consideration for the shares. Furthermore, in order to determine the adequate consideration, the Czech National Bank may ask the bidder to submit the opinion of an independent expert. On the other hand, upon a motion from the bidder, the Czech National Bank may also decrease the amount of the consideration if the bidder acquired the shares in order to avoid the bankruptcy of the target company.

If the shareholders do not agree with the amount of the consideration provided, they may raise a claim to the court.

With regard to the public offer governed by the CC, the amount of the consideration shall be adequate to the value of the shares for the purposes of a mandatory public offer. The person making the offer shall prove the adequacy of the consideration by means of an expert opinion. If the shares are publicly traded, the party making the offer shall prove the adequacy of the consideration to the Czech National Bank, along with the submission of the public offer. An expert opinion is not required if the party making the offer proves the adequacy in another suitable manner.

Acquisition via a regular share purchase agreement (or an ownership interest purchase agreement in the case of a limited liability company) is quite flexible. The statutory regulation does not specify terms or prices; the contractual parties can agree on the terms. The only restriction with regard to securities (shares of a joint-stock company) is contained in the Act on Securities, under which the purchase agreement is valid only if the transferred securities are properly determined and the purchase price is set.

2.6 What differences are there between offering cash and other consideration?

Both can be offered under the TA. The TA also explicitly stipulates that cash and securities can be offered in combination; however, the consideration must be the same for addressees of the same share, i.e., the equal treatment rule applies. There is an exception in the case mandatory takeover bids where the securities offered as a consideration are not traded on a regulated market. In these cases, the bidder must always offer cash as an option. In our experience, the consideration is rarely provided in securities.

For mandatory bids the consideration might be, under certain circumstances, modified by the Czech National Bank or an expert opinion on its adequacy might be requested.

Almost the same applies to public offers under the CC, i.e., the consideration might be offered in cash as well as in other securities. For mandatory offers, the adequacy of the consideration shall be proven by an expert opinion or duly reasoned.

A special regulation applies to squeeze outs, where shareholders obtain only cash consideration whereas its adequacy might be supported by an expert opinion.

There are no special statutory regulations on the consideration regarding the acquisition of a limited liability company or another joint-stock company not mentioned above. The kind of consideration can be agreed by the parties to the share purchase agreement.

2.7 Do the same terms have to be offered to all shareholders?

Under the TA, all shareholders having shares with the same legal status have to be treated equally. Any differences might be based only on differences in transferred shares. If the bid was additionally modified and its conditions are more favourable for the addressees, these changes shall apply equally to the agreements already concluded upon the bid.

For the acquisition of a limited liability company or of a joint-stock company not mentioned above, the price and other terms are mutually agreed by the contractual parties. All the shareholders might not be provided with equal terms.

2.8 Are there obligations to purchase other classes of target securities?

Under the TA, as of the origination of the duty to make the bid, the bidder is obliged to make the bid toward all owners of securities of the target company. The type of share, therefore, does not have any impact on the duty to offer the purchase.

The same applies under the CC for squeeze out process, except that the bidder does not have the duty to make an offer. The bidder can decide whether he wants to squeeze out other shareholders from the company. If he decides to do so, however, his proposal relates to all shares of the target company, regardless of the type or class of share.

2.9 Are there any limits on agreeing terms with employees?

There are no limits with respect to the target company. Czech law does not require approval of the transaction from the employees' side.

Under the TA, the bidder and the board of directors of the target company must immediately inform the employee representatives (e.g., trade union) about their intentions, and if the target company does not have any representatives, they must inform all the employees about the intention to make a takeover bid and afterwards that the bid was made. In addition, the board of directors of the target company must hand over all the documents that it obtained with the prepared bid to the employees' representatives (or to the individual employees if there are no representatives). The board of directors shall inform them that they can make an individual statement to the bid and shall set a time limit for the submission of this statement so that it can be made public together with the statement of the bodies of the target company. The board of directors shall also deliver to the employees the statement of the bodies of the target company to the bid.

Under Czech labour law, the employer must inform its employees of its economic and financial situation and its probable future development. From this follows the general duty of informing employees of all information known to the target company that might influence its future situation, such as acquisition of the target company by the seller. If the transaction leads to legal succession of the target by the acquirer, the acquirer becomes the new employer by operation of law without any effects on the current employment relationships.

2.10 What role do employees play?

As follows from question 2.9, employees play a very minor role in the acquisition process. They usually must be informed of the acquisition, but cannot affect the process of the deal.

In some cases stipulated by law, the target's supervisory board consists of 1/3 of the company's employees. Therefore, the particular employee participates under the TA in the preparation of the statement to the bid of the bodies of the target company. As the employees' representation has only a minority in one of the target's bodies, in our opinion its influence on the statement is low.

2.11 What documentation is needed?

With regard to the bid under the TA, the bid itself is the key document. The TA determines quite precisely the necessary content of the bid. The bid shall contain the following: (i) identification of all participating subjects; (ii) shares of the bidder, as well as of the cooperating persons in the registered capital of the target and in voting rights; (iii) substantial data of the purchase agreement, such as determination of securities which are subject to the bid or the offered consideration; (iv) Average Price and, in case of a mandatory bid, also the Premium Price; (v) the period for acceptance of the bid; (vi) the process of transfer of the shares and conditions and methods of payment of the consideration; (vii) rules for cancellation of the bid; (viii) intentions of the bidder with regard to future activity of the target and its employees; (ix) sources and manner of financing of the consideration; (x) law governing internal matters of the target; and (xi) data on the authority which supervises the bid.

Mandatory takeover bids must also contain the reasons for the bid, as well as a description of the methods used to determine the form and amount of the consideration and data on acquisition of the target's shares by the bidder within the last 12 months or a statement that no such share transfer occurred.

In some cases an expert opinion on the provided consideration is required, either by law or by decision of the Czech National Bank.

Under the TA, the bid can be accompanied by a statement of a credible person other than the bidder confirming that the bid complies with law.

Another document which shall be prepared due to the takeover bid is to be issued by the target company. Under the TA, the bodies of the target shall prepare their statement on the bid. This statement shall contain the opinion of the bodies on the compliance of the bid with the target company's interests, the addressees of the bid, and the employees of the target and its creditors. The statement must also contain an opinion on the means and amount of the offered consideration.

According to the CC, similar documentation is needed for public offers, i.e., the public offer itself, the statement of the bodies of the target company, and an expert opinion on the adequacy of the consideration.

Other means of acquisition under the CC, such as voluntary agreement of a seller and a buyer, require generally only for a share purchase agreement. Agreement on pledge of shares (or another way of securing the loan) is common for acquisitions financed by a bank.

2.12 Are there any special disclosure requirements?

If the subject of the offer under the regulation of the public offer according to the CC is acquisition of publicly traded shares, the offer must be submitted to the Czech National Bank before it is disclosed to the public. The public offer might be published only after the lapse of a time limit within which the Czech National Bank might decide on its prohibition.

Under the TA, the bidder shall ensure that no premature and unequal distribution of information on his intention to make the takeover bid occurs. The bidder shall instruct all persons who carry out activities for him related to the takeover bid on their duty of confidentiality and the prohibition of the use of insider information under the AUCM and shall take measures to prevent the spread of insider information and its abuse.

The bidder shall disclose its intention to make the takeover bid if there are deep fluctuations in the course of the target's shares or if there are rumours or speculation regarding the takeover bid while it can be reasonably assumed that their origin is related to the preparation or reflection of the bidder 's takeover bid or acquisition of shares in the target company. This information also must be provided to the Czech National Bank.

The bidder must always immediately disclose information that its bodies decided to make a takeover bid or, if the bidder is a natural person, that it made the final decision to initiate immediate steps aimed at making a takeover bid, or that events occurred that result in a duty to make the mandatory bid.

Furthermore, the TA stipulates that the bidder may voluntarily notify the target company of its intention to make a takeover bid or of its intention to act in a way that a duty to make the mandatory takeover bid originates, even before this information was published, and negotiate with the target company.

After the bidder has published its intention to make the bid, it has to publish the bid document itself. There is a difference between a voluntary bid and a mandatory bid. In a voluntary bid, the bid document can be published without the explicit consent of the Czech National Bank. In a mandatory bid, the bid document can be published only with the consent of the Czech National Bank. In its decision, the Czech National Bank may also impose on the bidder the duty to publish more information than the bid itself. The contents of the bid which must be disclosed are described in more detail in question 2.11 above.

Upon receiving the bid document, the bodies of the target company have to prepare its statement to the bid. This statement is published. The statement of the target's employees might be published along with the statement of the target's bodies.

The AUCM regulates the notification duty of shareholders who acquire a certain percentage of voting shares on entities having shares or similar securities representing a share of the issuer admitted to trading on the regulated European market, which has a seat in the Czech Republic or in the territory of a state which is not a member of the European Union if the prospectus has been approved in the Czech Republic. The notification duty applies if the buyer acquires a certain share (3% - if the registered capital of the target exceeds CZK 100,000,000, and 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50% or 75%) on voting rights of the target company or decreases its share under these limits. The notification shall be made towards the target, as well as toward the Czech National Bank.

2.13 What are the key costs?

The key costs are related to the purchase price (consideration for shares) and other "internal costs". The buyer usually uses the services of legal counsels, as well as financial (tax) advisors. Other costs can include expert opinions and the costs of publishing the bid (public offer), as well as notary, court and administrative fees.

2.14 What consents are needed?

As a pre-requisite for any transaction, the proper internal decision of the respective bodies of the bidder is necessary, i.e., the bidder shall, at first, internally decide (approve) the intended acquisition. Depending on the Articles of Association, it might be the Board of Directors or the General Meeting that is competent to make such a decision.

Apart from the decision of the bidder on approval of the transaction, the consent of the Czech National Bank is sometimes required. The approval is necessary either because of the means of acquisition (mandatory takeover bid under the Takeover Act) or with regard to the entity whose shares are to be acquired (bank or investment company).

In addition, the Act on Protection of Economic Competition sets conditions under which approval from the respective authority (the Office for the Protection of Economic Competition) is required. The criterion is based on the net turnover of the merging competitors.

2.15 What levels of approval or acceptance are needed?

The target company does not have to approve or accept either the public offer under the Commercial Code or the takeover bid under the TA.

If the bidder (offering party) is an artificial legal entity, an internal decision on the takeover (offer) shall be made in order to pursue the acquisition process.

Under the TA there is a special rule for target companies called the "breakthrough rule". The general meeting of the target company may adopt a resolution stipulating that special rules will apply with regard to the takeover bid. Under these rules the limitations of transferability of the target's shares set by the articles of association or by agreement of the shareholders have no affect on the bidder. They might apply to limitations on exercise of voting rights. This decision of the general meeting shall be published in the Commercial Register and a higher majority of votes is necessary for its adoption (the same that applies for change of the articles of association).

If so set by the articles of association of a joint-stock company, the transferability of registered stock might depend on the consent of a target's body. If these conditions are not met, the share purchase agreement will be invalid, unless the acquirer acted in good faith.

In several means of acquisition the approval of a state authority is required. Sometimes the approval of related documents is necessary.

2.16 When does cash consideration need to be committed and available?

The consideration for acquisition of shares has to be provided within the time period set in the individual purchase agreement concluded according to the TA or CC. The only exception to this rule is the mandatory takeover bid under the TA. In such a case, the consideration has to be provided within 60 days as of the lapse of time for acceptance of the bid.

Under the TA, the Czech National Bank might request the bidder to prove that he has sufficient financial means for the bid and to prove its origin.

3 FRIENDLY OR HOSTILE

3.1 Is there a choice?

The Czech statutory regulation does not differ between friendly and hostile acquisitions, i.e., hostile acquisition can be deemed as permitted.

The TA stipulates a so-called neutrality duty on the part of the bodies of the target company. From the moment when the members of the board of directors or supervisory board of the target company become aware of facts from which it can reasonably be expected that a takeover bid will be made, they shall not take any measures which may cause: (i) the addressees of the takeover bid to not have the opportunity to freely decide on the takeover bid with the proper knowledge; and (ii) shall refrain until the moment when the results of the takeover bid are published from doing anything that could thwart it, unless this specific action is approved during the time for acceptance of the bid by the general meeting or the target company meets its obligation set by law or in the case of normal business operations. The board of directors may convene the general meeting to receive the consent to a breach of the neutrality duty. The members of the board of directors, as well as of the supervisory board, may also seek competitive takeover bids, even without the consent of the general meeting. Furthermore, under the TA, the members of the target's bodies may make the competitive bid themselves.

3.2 Are there rules about an approach to the target?

Under Czech law there are no special rules with regard to the target company. The TA merely states within the principles governing the Act that the target company may not be disproportionately limited in its business activity by the takeover bid.

Another provision of the TA stipulates that the bidder can approach the target even before its intention to make the bid (or duty to make a bid) is published. In this case, the bidder may deal directly with the target company. This rule is only used rarely, however, as opening negotiations with the company might lead to disclosure of the whole transaction and in the end hinder the successful target takeover.

3.3 How relevant is the target board?

The role of the board of directors of the target company is quite limited.

Under the TA, the bidder has the duty to inform the target company of its intention (duty in the case of a mandatory bid) to make a takeover bid. The board of directors and the supervisory board are obliged within five business days of the delivery of the bid documentation to prepare a statement on the bid, especially with regard to the compliance of the bid with the interests of the target company, the addressees of the bid, the target's employees and creditors. This statement must also contain information on differing opinions of the board of directors or supervisory board, as well as remarks on whether the particular members of the target's bodies were appointed to their function due to the influence of the bidder. The statement shall be delivered within two business days after its completion to the bidder and shall be published at his costs. The statement is also delivered to the Czech National Bank.

The board of directors also has duties towards the employees of the target company. It must immediately inform them (their representatives) about the bidder 's intention to make the bid. It shall also hand over all of the bid documentation that it obtained and shall inform them of the possibility to make an individual statement to the takeover bid.

One of the most important features of the board under the TA is that it can, along with the supervisory board and with the prior consent of the general meeting, take measures to hinder the takeover.

The members of the board can also seek a competitive takeover bid or make a competitive takeover bid themselves.

The Commercial Code contains a short regulation with respect to the role of the board. It merely states that the subject making a public offer must send the public offer to the target at least ten days prior to its publication. The board of directors and the supervisory board shall send the bidder a common statement to the public offer. This statement shall contain the same information as under the TA.

The CC does not contain a regulation with regard to the board for regular voluntary purchase agreements, though it might be regulated by the articles of association. The articles may stipulate that the transferability of registered shares might be limited by consent of the board of directors (or another body of the joint-stock company). A share purchase agreement lacking such approval of transfer will be invalid, unless the acquirer acted in good faith.

3.4 Does the choice affect process?

As already mentioned in question 3.1, the Czech statutory regulation does not distinguish between a hostile and a friendly acquisition. As described in detail in question 3.3 above, however, under the TA the board of directors may, under certain circumstances, take measures against the bidder, i.e., hindering the success of the bid. These measures will, of course, be taken only in case of a hostile bid. Furthermore, the bodies of the target company may themselves make a competitive bid against the original bidder. The bodies of the target company may also try to persuade the shareholders not to accept the bid in its statement to the bid documentation.

4 INFORMATION

4.1 What information is available to a buyer?

The main official sources of information for the buyer are the public registers kept in the Czech Republic.

In accordance with the statutory provisions of the Czech Republic, each company has to be registered in a Commercial Register kept by a respective court. This Register contains general corporate data of the company and of the history of the company. This register is available online on websites of the Ministry of Justice. The following data must be published for each company: (i) business name; (ii) legal form; (iii) Company Identification No.; (iv) registered seat; (v) line of business; (vi) members of the statutory body or of the supervisory body; (vii) registered capital; (viii) information on liquidation or bankruptcy; and (ix) shareholders of a limited liability company or the sole shareholder of a joint-stock company.

The Commercial Register also contains a Collection of Deeds where companies have to submit documents specified by law. The Collection of Deeds is currently being digitalised with the intention of making all documents available online (again, from the website of the Ministry of Justice). Until then all documents are freely accessible at the court holding the file of the company. The Collection of Deeds contains, in particular, the following documents: (i) foundation documents; (ii) account statements; (iii) articles of association; and (iv) certain decisions of the general meeting as set by law, etc.

The Czech National Bank keeps registers of certain subjects, such as banks, investment companies and issuers of publicly traded shares, which contain basic data on these subjects. This data is available on the website of the Czech National Bank.

Information on real estate owned by a specific company can be obtained either from the Land Register or from a notary (or a Czech Point). The Land Register is also available online.

The Industrial Property Office keeps an online, searchable register of intellectual property.

The Chamber of Notaries keeps a register of pledges for movable property or real estate that is not registered in the Land Register.

The Chamber of Executors keeps a public register of enforcements in the Czech Republic where the executors make remarks on the legal force of court decisions, on enforcement orders, as well as on termination of enforcement and further data.

4.2 Is negotiation confidential and is access restricted?

Under the TA there is limited space for any negotiations. The TA is based on the principle that all shareholders involved who have the same legal status (i.e., having the same type of shares) shall be treated equally. This rule excludes the possibility of negotiating on terms of the purchase agreement based on the bid. The bidder, however, might be interested to know the potential share he might acquire before the bid is made, i.e., the readiness of the shareholders to sell their shares. Under the TA, therefore, the bidder can directly negotiate with any of the shareholders. The bidder can decide which shareholders to deal with and which to approach first after publishing the bid.

Before the bid is published the bidder might, according to the explicit provisions of the TA, also contact the target and negotiate with its bodies.

In both of these cases all subjects participating in the negotiations underlie the confidentiality duty with regard to insider information.

They shall ensure that no premature and unequal distribution of information on the bidder 's intention to make the takeover bid occurs. They shall also instruct all persons who carry out activities for them related to the takeover bid on their duty of confidentiality and the prohibition of the use of insider information under the Act on Undertaking on Capital Market and take such measures to prevent the spread of insider information and its abuse. The same rule applies to anyone who gained access to this unpublished information from the bidder or from the target company.

For the acquisition of a limited liability company, under the Commercial Code the negotiations are usually confidential and only the future contractual parties are involved.

For public offers the offer is the same for any shareholder, usually with no negotiations.

4.3 What will become public?

In accordance with the TA, the bidder shall make public its intention to make the takeover bid in case of fluctuations in the course of the shares or if there are rumours or speculation regarding the takeover bid, while it can be reasonably assumed that their origin is related to the preparation or reflection of the bidder 's takeover bid or acquisition of shares in the target company. This information must also be provided to the Czech National Bank.

As soon as the bidder internally decides to make the bid or circumstances occur that mean the bidder has the duty to make the mandatory bid, it shall make this information public. Upon request, the Czech National Bank might postpone making this information public if doing so would hinder damages to the bidder and if the bidder protects access to the information.

The manner of making all of the above-mentioned information public shall be chosen so that the insider information cannot be misused, as well as that no market deformation might occur.

For further documents and information which shall be made public, see question 2.12 above.

The bidder shall make public the results of the whole procedure when the time limit for accepting the bid lapses. This information shall be made public without undue delay in the same manner in which the bid document was published. The bidder shall also send the results to the target's board of directors and supervisory board.

Under the Act on Undertaking on Capital Market, if the bidder reaches a certain share level it shall notify this to the Czech National Bank (for details, see question 2.12).

For voluntary share purchase agreements regarding a limited liability company, the buyer has to be introduced to the Commercial Register as a new shareholder. This duty does not apply to joint- stock companies with multiple shareholders. The share purchase agreement must also be submitted to the Collection of Deeds of the respective Commercial Register.

4.4 What if the information is wrong or changes?

The consequences depend on the type of information and circumstances.

The TA regulates the liability for damages caused by false or incomplete information in the bid. If this information is relevant for the assessment of the bid, each shareholder might claim the damages that it suffered with regard to this incompleteness or incorrectness. If the bid was supported by a statement from a reliable person that the bid is in compliance with the legal regulations, this person will be jointly liable for the damage together with the bidder.

If the statement of the bodies of the target company contains false or incomplete information the member of these bodies are jointly liable for the damage incurred to the shareholders.

If information changes it might lead the bidder to lose interest in the target. In such a situation, the bidder might try to cancel or modify the bid. The opportunities to do so depend on the type of bid. Mandatory bids cannot be cancelled. After publication they can be modified, but only in favour of the addressees. Voluntary takeover bids can be changed only if this is stipulated in the bid document and if the change is duly reasoned, i.e., when it is not based only on the discretion of the bidder. The consideration, however, can be changed only in favour of the shareholders. If the change of the bid follows the conclusion of an agreement under the conditions of the original bid, the changes shall be adopted to these agreements.

The bidder has to notify the Czech National Bank of its intention to cancel or modify the bid at least five days prior to publishing the changes. The Czech National Bank may decide to prohibit the changes.

Modification of the bid also affects the time limit for its acceptance. This period shall last for at least five business days from the moment of the publication of the change of the bid.

There is no special regulation on change of information with regard to voluntary acquisition (regular purchase agreement) under the Commercial Code. However, if any of the parties provide the other party with intentionally false information, this entity will be subject to general liability for damage.

5 STAKEBUILDING

5.1 Can shares be bought outside the offer process?

Under the TA, bidders are entitled to acquire shares of target companies before announcing the bid without any limitations. For transactions that are not regulated by the TA (most M&A transactions in the Czech Republic) shares can be bought outside the offer process.

During the time limit for accepting the bid, neither the bidder nor persons cooperating with him are allowed to take any legal steps leading to contractual acquisition of the securities under conditions that are different from those set by the bid. The TA contains several exceptions to this rule. For instance, the bidder gains shares as a result of his right of exchange connected with securities which he acquired before he decided to make the bid. During the acceptance period the bidder is also not allowed to sell any shares of the target company. The Czech National Bank may, however, approve an exception to this acquisition/sale prohibition.

If the aforementioned prohibition is breached, the bidder or a person cooperating with him cannot exercise voting rights connected with these unduly acquired shares for three years as of the occurrence of the breach.

If the bidder or a cooperating person acquired the shares within the time limit, starting with publication of the bid and ending with the lapse of the time for acceptance of the bid for more favourable conditions for the particular shareholder, it results in automatic modification of already concluded agreements based on the bid, as well as of the conditions stated in the bid.

5.2 What are the disclosure triggers?

The disclosure triggers are regulated by the AUCM. The shareholders have a notification duty towards the target and the Czech National Bank if it acquires a certain percentage of voting shares in the target which has shares or similar securities representing a share admitted to trading on the regulated European market, which has a seat in the Czech Republic or in the territory of a state which is not a Member State of the European Union if the prospectus has been approved in the Czech Republic. The notification duty applies if the buyer acquires, exceeds or decreases its share over 3% (if the registered capital of the target exceeds CZK 100,000,000) and 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50% or 75% in voting rights of the target company. The notification shall be done within four business days after the shareholder discovered or should have discovered that it has such a duty. The AUCM further regulates specific disclosure situations in detail, such as of persons acting in concert.

In joint-stock companies the sole shareholder has to be registered in the Commercial Register, i.e. if the shareholder acquires all shares of the target company he will be published in the publicly-available register.

5.3 What are the limitations and implications?

If the shareholder acquires shares of the target company connected with at least 90% of voting rights and registered capital through an unlimited and unconditional takeover bid, it has to make a supplementary takeover bid within 30 days. The consideration shall correspond at least to the consideration offered within the original bid.

If the shareholder acquires shares of 90% of registered capital and of voting rights it may proceed with a squeeze out and force the minority shareholders to leave the target. For details on squeeze outs, see question 1.1 above.

The other implications were already described in questions 5.1 and 5.2.

6 DEAL PROTECTION

6.1 Are break fees available?

Czech law does not regulate the concept of a break fee as a fee paid by a target company to bidders during an acquisition if the pending deal is terminated.

However, the general provisions of the CC stipulate the possibility of agreeing on a severance payment. If the parties include a provision in the contract that one or either party is entitled to terminate the contract by paying a certain amount as severance, the contract shall be terminated from the time of its conclusion if the entitled party informs the other party that they shall exercise their rights and pays the stipulated severance. This would only apply if the intended purchase agreement was to be concluded between the target and the acquirer. The company shall not reimburse loss of the bidder (costs of due diligence, etc.) for not concluding the agreements with the shareholders.

Czech law also acknowledges that breaking off negotiations on conclusion of an agreement without undue reason might lead to liability of the breaking party for the expenses that the other party already invested.

6.2 Can the target agree not to shop the company or its assets?

The board of directors and the supervisory board have to exercise their competences with due managerial care and with regard to the best interests of the company and of the shareholders. Under this condition the target may decide not to shop the company; however, it shall consider the advantages of the bid and evaluate other options, in particular competitive offers.

Under the TA, the boards may not adopt measures that can cause the addressees of the takeover bid (the shareholders) to not have the opportunity to freely decide on the takeover bid with the proper knowledge of all facts, i.e., the boards shall not hinder the shareholders in obtaining information. Furthermore, the boards may take steps to hinder the acquisition only with the approval of the general meeting, because it is the shareholders who decide on the approach to the bidder.

6.3 Can the target agree to issue shares or sell assets?

The general meeting of the target joint-stock company (the shareholders) may decide to increase the registered capital and issue shares. Each shareholder has the priority right to subscribe a part of the company's new shares to increase the registered capital in proportion to their share in the company's registered capital, providing the shares are subscribed by means of monetary contributions. However, the shareholders may agree among themselves on the scope of their participation when increasing the registered capital, i.e. also only the acquirer may obtain all the newly issued shares.

The assets can be sold at any time by the board of directors. This body ensures business management. Several limitations apply, however, to conclusion of contracts based on which the company will acquire or dispose assets, if the value of the assets acquired or disposed of in the course of one accounting period exceeds one third of equity, as calculated from the last annual financial statements, which requires the consent of the supervisory board. If the company issued securities that were accepted for trading on a European regulated market, the consent of the general meeting is also required.

As a general rule, in the process according to the TA, the bodies of the target shall refrain from any actions that may prevent or frustrate bids, unless these steps are approved by the general meeting of the target company. This means that if the issuance of shares or the sale of assets deters the bidder from making the acquisition, the board needs the consent of the general meeting.

6.4 What commitments are available to tie up a deal?

Under the TA, the boards of the target company shall issue their statement on the bid. To support the bidder the boards may recommend or confirm that the bid is in compliance with the legal regulation and provide its opinion on the offered terms. This can be made only if it is true, however. The boards cannot provide false statements; otherwise they will be liable for any damage incurred to the shareholders. Furthermore, the boards may not take measures under which the addressees of the takeover bid will not have the opportunity to freely decide on the takeover bid with the proper knowledge of facts. But this is not a commitment by which anybody will be bound to conclude the agreements.

With regard to the general provisions of the Commercial Code, the acquirer may conclude a future sales contract with the shareholders. Under this agreement one or both of the contractual parties undertake to conclude a future contract within the stipulated deadline for the subject of fulfilment which is defined at least generally, i.e., transfer of shares. The agreement must be executed in writing. The obliged party is obliged to conclude the contract without undue delay after it was called on to do so by the entitled party in accordance with the agreement. If the obliged party does not fulfil its obligation to conclude the contract, the entitled party may request that the content of the contract be determined by the court or by the party designated in the agreement, or may request the compensation of damage incurred to them through breach of the obligation to conclude the contract.

7 BIDDER PROTECTION

7.1 What deal conditions are permitted?

The permitted deal conditions are described in detail in question 2.5 above.

7.2 What control does the bidder have over the target during the process?

The buyer does not have any control over the target unless it is a shareholder, and even in such cases its competences are rather limited. As a shareholder, the buyer may exercise its rights stipulated by the CC. If it is a minority shareholder it may request the convening of the general meeting and propose its agenda. This does not mean, however, that it can force the bodies of the target to take any specific steps. The boards must exercise their competences with due managerial care and they cannot by their activity favour one shareholder over another. If they do not act in an unbiased manner, the affected shareholders may claim damages.

From this it follows that the buyer may influence the process on the basis of its voting rights at the general meeting. For the most critical company development decisions, the CC sets higher majorities which must be met in order for the general meeting to adopt resolutions. This is a rule in which Czech law protects the interests of minority shareholders.

Under the TA, the bodies of the target must remain neutral (see question 3.1), i.e., cannot be controlled.

7.3 When does control pass to the bidder?

Control can pass to the bidder after completion of the takeover bid under the TA. This is based on the results of the bidding process. The bidder might acquire 100% of shares, but it can also only acquire 1%. The bidder does not have to necessarily gain control over the target.

The buyer may also gain control over the company even with less than 100% of shares (voting rights), because it might have a sufficient majority to push through a resolution of the general meeting on election of members of the boards and through them influence the activity of the target. The majority that the buyer has to acquire depends on the wording of the articles of association; however, the buyer 's influence on the company's bodies is not unlimited. The members of the bodies shall always act with due managerial care and cannot act contrary to the company's interests. If they fail to do so, the shareholders may claim damages.

7.4 How can the bidder get 100% control?

The simplest way is to agree on a transfer of shares with all the shareholders.

Another way is to squeeze out the minority shareholders. A shareholder whose total nominal value of shares in the company is at least 90% of the company's registered capital to which 90% of voting rights are related is entitled to ask the board of directors to convene a general meeting to decide on the transfer of all remaining shares in the company to themselves. The adoption of the resolution by the general meeting requires the consent of at least nine tenths of the votes of all owners of subscriber securities. The minority shareholders who are to be squeezed out can claim that the resolution of the general meeting on squeeze out is invalid for a specific reason stated by the CC. They can also claim the inadequacy of the provided consideration for their shares.

Under the Act on Transformation, the shareholders or a respective body of the target may decide that the company will be dissolved without liquidation, whereas the company's assets, including rights and obligations from employment relationships, will be taken over by one of the shareholders.

8 TARGET DEFENCES

8.1 Does the board of the target have to publicise

Under Czech law, the board of directors of the target is not obliged to publish discussions. The board has the duty to inform the employees and to prepare a statement on the bid. The statement shall include information on whether the bid complies with the interests of the target company, the addressees of the bid, employees, creditors and an opinion regarding the type and amount of the offered consideration.

8.2 What can the target do to resist change of control?

The target's possibilities are limited without the approval of the general meeting. The statutory bodies of the target can comment on the bid in the obligatory written statement (see the answer to question 8.1 above). The statutory bodies of the target are explicitly allowed by the applicable law to seek a better bid or to place a competing takeover bid themselves.

With the approval of the general meeting of the target, changes in the registered capital, restructuring and sale of assets or purchase of new assets are common means to resist change of control.

8.3 Is it a fair fight?

There is no special regulation regarding the relationship between the target statutory bodies and the bidder. Generally, the target's board of directors must remain objective and must refrain from any actions that could prevent or frustrate bids, unless approved by the general meeting of the target (for details, see the answer to question 8.1 above).

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