Category: Czech Republic

As the COVID-19 pandemic keeps reshaping the M&A environment across Europe with only deals at the late stage proceeding further, we may also expect the advent – albeit slow and gradual – of distressed M&A in the Czech Republic as businesses fall into financing difficulties. Some businesses will strip off non-core assets, while others will end up in bankruptcy. In each case, this instability presents a wide array of options for strategic investors.

The purpose of this article is to remind market players of selected key features of distressed M&A transactions while pinpointing a couple of specific features under Czech corporate and insolvency laws we deem worth considering given the current circumstances.

For further details on changes to Czech corporate law and insolvency proceedings as a result of COVID-19 you may also refer to the following articles: Czech Republic: LEX COVID and changes to corporate law or Czech Republic: LEX COVID – Changes to insolvency proceedings. 

Features of distressed M&A

Generally, while an official definition of distressed M&A is lacking, it is fair to conclude that the distress element relates to financial, business, operational or other form of company instability with potential to quickly bring the company to the verge of insolvency procedures.

Distressed M&A transactions differ from traditional M&A transactions mainly due to their overall timing where the escalated pace aimed at limiting restructuring harm results in transactions taking weeks rather than months. Naturally, this is reflected in the due diligence process, which concentrates on matters that are critical for the buyer, and the transaction documents negotiation process, where discussions about the scope and limitation of representations & warranties, available remedies or deferred purchase price commonly do not happen. In other words, transactions proceed quickly with a clean exit for the seller, typically the insolvency administrator.

The insolvency administrator generally plays a central role, as it liaises with several groups of stakeholders whose interests must eventually be aligned. The buyer should be in a position to present a strong plan to the target’s creditors, key customers, employees and management, and proceed in a manner that does not put the signing/closing of the transaction at risk due to (preliminary) information leakage.

Shareholder in bankruptcy

While many investors may find themselves in a “waiting mode” they should still be mindful that time remains a key driver in a distressed M&A. Against this backdrop, and given that the most common company form in the Czech Republic is a private limited liability company (s.r.o. / GmbH / LLC), the investors should duly consider the impacts of the bankruptcy of a shareholder in a Czech private limited liability company on its ability to dispose with its share in such a company.

Essentially, upon a shareholder being declared bankrupt (prohlášení konkurzu) it will be the company that will dispose of a share owned by such a shareholder in an auction, using proceeds (decreased by auction costs) to be paid to the shareholder or into its insolvency estate as a settlement share. While other shareholders generally have a pre-emptive right, its use is limited due to insolvency law restrictions (e.g. in case other shareholders are from the same group). The investor should generally avoid such a situation as it brings additional complexity to the transaction structure.

Finally, the issue is not limited to shareholders subject to Czech corporate laws, i.e. it must be assessed whether under the legal regime applicable to the shareholder (e.g. German law) the shareholder would be deemed bankrupt or not.

Dynamics of insolvent business sale

In a distressed situation, the investor should be aware that once the company becomes insolvent during the sale process, it is the insolvency administrator who takes the lead when ensuring the business operation of the company and the disposal of its assets, while creditors have a decisive say.

When selling the assets from the insolvency estate, the insolvency administrator will seek the approval of the creditors’ committee and in certain cases even the approval of the insolvency court to the terms of such a sale. As noted above, there is no or only limited room for contractual negotiations.   

A suitable way to go forward in a distressed M&A process could be to use pre-packaged reorganisation (where possible). The advantage is a significant acceleration of the procedure, the possibility to agree on the reorganisation plan and associated documentation in advance, and the possibility to choose the insolvency administrator, all in alignment with the creditors.

Needless to say, the best possible scenario would be to achieve the implementation of the transaction before the insolvency and avoid the complexity and pressure related to the insolvency proceedings. This would not, however, eliminate the potential risk of the transaction being challenged by the insolvency administrator in order to claw back a fraudulent transfer or a transfer that constitutes an undervalue or a preference. Therefore, it will be important to ensure that the transaction will not result in the preferential treatment of certain creditors and will be performed for an adequate consideration, i.e. it should not be a too-good-to-be-true deal.

Conclusion

All in all, distressed M&A requires a knowledgeable investor with a decent restructuring track-record combined with an experienced advisory “task force” team able to skilfully manoeuvre in a narrow set of market standard conditions applicable to a distressed M&A transaction, as well as mindful of current COVID-19 specifics.

Certainly, COVID-19 brings an added twist to M&A transactions, including distressed M&A, such as travel restrictions limiting in-person management meetings or site-reviews in a due diligence process, buyer’s protection under SPA (disclosure, W&I insurance, etc.), merger clearance decision delays and many others, which all need to be carefully evaluated against the particular deal background.

By Vladimir Cizek, Partner, and Natalie Rosova, Attorney at Law, Schoenherr

PwC Legal has advised Varroc Lighting Systems, a Czech manufacturer of headlamps, on the expansion of a syndicate of creditors which had provided financing to the company. The banking syndicate was advised by Dentons.

The syndicate of lenders consisted of four large Czech banks, PwC Legal reported, and three bilateral factoring agreements.

“What was interesting about the case was the fact that the original banking syndicate was expanded from two to four and the number of factoring companies from two to three,” explained PwC Legal Attorney at Law Daniel Pikal, who led his firm’s team on the deal. “We thus had to unify the terms with a total of seven entities of the creditors’ party.”

Dentons’s team included Partner Daniel Hurych and Associate Jan Hrivnak.

Editor’s Note: After this article was published CEE Legal Matters learned that the full banking syndicate consisted of Komercni Banka, Ceska Sporitelna, Ceskoslovenska Obohodni Banka, and Raiffeisenbank. 

Weinhold Legal has advised technology security start-up Resistant AI on its recent venture financing round. The co-lead investors are Credo Ventures and Index Ventures, with Seedcamp and other angel investors contributing as well.

According to Weinhold Legal, “Resistant AI was founded in 2019 by Cognitive Security founder Martin Rehak, together with other ex-Cognitive team members and develops systems to protect AI systems from targeted manipulation, adversarial machine learning attacks and advanced fraud. In its relatively short existence so far, Resistant AI has been engaged by a number of global businesses to advise upon their AI software security systems and to provide world-class solutions. The firm will use its newly raised capital to expand its presence in the US and global software security markets.”

Weinhold Legal’s team was led by Partners Pav Younis and Martin Lukas and included Associate David Hlavacek.

Weinhold Legal did not reply to our inquiry on the matter.

The Czech Constitutional Court did not repeal the Act on Significant Market Power, as demanded by a group of senators almost four years ago. However, the judges stated that the provision on limiting the amount of suppliers’ payments to customers with significant market power to 3% of the supplier’s annual sales, is unconstitutional.

“It is not a reasonable means to achieve the objective pursued by the Act, as it forces the parties to the supplier-customer relationship to negotiate the limitation of the amount of all monetary performances of the supplier for related customer services by a fixed amount, whereas the maximum amount cannot be determined in advance,” the Constitutional Court stated.

This decision is of fundamental importance for the future cooperation of suppliers and customers, especially in the promotion of supplier products, marketing events, setting business strategies in the sale of products, etc.

By Claudia Bock, Attorney at Law, Schoenherr

Prorogation clauses are forum-selection clauses in contracts between entrepreneurs, who agree in writing on the local jurisdiction of a first-instance court for disputes arising out of or in connection with their business matter, unless the law states otherwise and prescribes an exclusive jurisdiction. It is possible to enter into a separate prorogation agreement instead of a contractual clause with the same effect.

This practice constitutes a good representation of freedom of contract and the emphasis is put on the maxim pacta sunt servanda  (“agreements must be kept”). In line with the freedom to agree on the jurisdiction of courts of one country, entrepreneurs are explicitly allowed to select their local jurisdiction as a place of adjudication for possible disputes. A prorogation clause may refer to a specific litigation or cover any and all disputes arising from the contract. The law requires that prorogation clauses be in writing and be sufficiently certain to allow an independent third party to be able to identify the intended forum any doubts. In practice, the parties often choose a court in the jurisdiction of the seat of one of them, or by some other party-related factor. It is also possible to agree on prorogation by reference to the General Terms and Conditions available online as indicated in the written contract, if they were known to the counterparty or attached to the contract on its execution. However, parties contracting under Czech law should be aware of the battle-of-forms issue where the “knock-out” rule of contradictory prorogation clauses can lead to the applicability of the general rules of a local jurisdiction under the Czech Civil Procedure Code.

In practice, there were problems related to the exclusivity of prorogation clauses. In contrast with Regulation (EU) No. 1215/2012 of the EP and the Council of 12 December 2012 on the jurisdiction, recognition, and enforcement of judgments in civil and commercial matters (recast) (the “Brusel I Bis (recast)”), the Czech Civil Procedure Code does not expressly stipulate that the chosen jurisdiction must be exclusive. It was therefore unclear whether a general prorogation clause without reference to exclusivity would exclude the option of the parties filing a lawsuit with a court that has jurisdiction by operation of law. This question was resolved by the Constitutional Court of the Czech Republic, which rejected the opinions of legal commentators and ruled that prorogation clauses that did not include a remark about the exclusion of courts with jurisdiction by operation of law were nonetheless to be interpreted as exclusive. The Constitutional Court argued that as the law grants entrepreneurs such discretion, it falls within the parties’ constitutional rights to do as they wish un-less prohibited by law. Public law should respect the will of the parties to the fullest possible extent, therefore where the parties express their will for a specific jurisdiction but do not express their will towards general jurisdiction, they are to be understood to have intended to exclude the latter.

Another unclear feature about prorogation clauses is their elasticity with factual changes over time. If a prorogation clause states that jurisdiction is to be determined based on the seat of one of the parties as of the date of execution of the contract and later the company moves its seat, it is unclear whether the prorogation remains with the court with jurisdiction attached to the original seat or if it moves to the company’s new seat. Legal commentators unanimously state that prorogation aligns with the place on the date of execution. Adjudication on this matter is awaited.

All of these scenarios relate to domestic settings. Cases with an international element will generally be resolved by international treaties or norms (such as the Brusel I Bis (recast), bilateral treaties on legal cooperation, etc.), and will be assessed on a case-by-case basis. The Czech Supreme Court has ruled that for cases with an international element, unless it is clear from the prorogation clause that the parties intended to agree on the jurisdiction of a particular court, such arrangements should be understood as agreements on the choice of international jurisdiction or the jurisdiction of a particular country.

Although there are potential risks attached to prorogation clauses, with careful and clearly defined wording, the use of prorogation clauses should predominantly be beneficial for entrepreneurs to achieve clarity at the initial stages of a dispute.

By Tomas Matejovsky, Partner, and Petr Benes, Senior Associate, CMS Prague

This Article was originally published in Issue 7.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

Baker McKenzie has advised Kofola CeskoSlovensko on its acquisition of Karlovarska Korunni and Ondrasovka food and beverage companies. 

Kofola is a soft drink producer with production facilities in the Czech Republic, Slovakia, Slovenia, Croatia, and Poland. The company has almost 2,200 employees, and its sales last year reached CZK 6.4 billion.

Karlovarska Korunni, which was founded in 1878, bottles and sells Korunni mineral water. It is the third highest selling brand of bottled water in Czech Republic and the second in Slovakia. Ondrasovka is a food & beverage company based in Prague. Together, the  two companies generated revenues of CZK 850 million in 2019.

The Baker McKenzie team was led by Partner Libor Basl and included Senior Associate Lukas Hron.

 

Petr Vybiral has been promoted to Partner at Allen & Overy in Prague, effective on May 1, 2020, as part of a global promotion round involving a total of 29 new partners worldwide.

According to Allen & Overy, “Petr has extensive experience in representing various parties on a wide range of financing and capital markets transactions, including loan and bond financings, refinancings and restructurings, public takeovers, equity issues and offerings, covered bonds, regulatory capital instruments, derivatives, and structured finance transactions. He has also advised major financial institutions and corporations on the capital markets and other financial regulations in the Czech Republic and assisted in the preparation of their standard documentation in the space of loans, securities, derivatives and other structured finance products.”

Vybiral, former Counsel, has a Master’s degree in law from the Charles University and a BA in economics from the University of Economics – both in Prague. He also has an LL.M. from the University of Columbia. Prior to joining Allen & Overy in 2006 he spent almost a year and a half with Linklaters.

“In these difficult times it’s heartening to share this positive news,” commented Global Managing Partner Andrew Ballheimer, referring to all 29 new partners. “This group demonstrates the breadth of expertise we have globally at A&O and, importantly, shows that our focus on female progression in recent years is having a positive impact. I extend my congratulations to all the new partners and wish them the very best as their careers progress.”

“I am very pleased to welcome this group to the partnership,” added Global Managing Partner elect Gareth Price, who assumes his role on May 1, 2020. “They are a clear representation of the exceptional talent we foster across the world. I look forward to working alongside the new partners to support our clients and our people as they navigate the current challenging conditions and in the continued success of the firm in the years ahead.”

Roman Kramarik, Partner at JSK in Prague, is making every effort to distance himself from politics, although he reports that “you can’t even call it politics anymore, but rather a showing off of the state’s executive power.”

Kramarik reports being worried what the future might hold for the Czech Republic. “We don’t know how far this might go. As a result of the recent pandemic outbreak, the executive is able to take even more control over our lives.” He sighs. “In the end, we might find ourselves in times worse than those during Socialism.”

Kramarik reports that Czech Republic is in a three-week lockdown, and he says he is happy with the Government’s fast reaction in imposing measures to stop the spread of the virus. “The Czech Government was one of the first in the region – if not the first – to impose these measures,” he notes. “In addition to the lockdown, people are obliged to wear face masks everywhere outside their homes. The poor availability of most products during the Socialist times taught the Czechs to be DIY experts. This included sewing. So our wives have pulled the sewing machines from the cabinets and knit loads of masks at home overnight. Within a day from announcement of the masks mandate, everybody was already wearing them. Even the widow of the late President Havel, who is an actress when theaters are open, got involved. So the true heroes of this war in our country are not only the hospital staff and firemen, but also our wives. And that’s even before I mention home schooling.”

He says that the crisis could have a negative impact on European integration, as, “even though the EU Commission imposed some measures, its general response was perceived as disappointing, and this might mean that the future of EU is at stake.”

As in most other countries, recent legislation in the Czech Republic has mainly been focused on the pandemic. For instance, Kramarik says, “a new law on Insolvency has been quickly proposed and is now being approved in the Parliament. Government has started handing out money to those in need, but their measures are seen as somewhat insufficient and too budget-minded. Other countries have been much more generous.”

The Czech Republic’s economy is heavily based on export, Kramarik says, mainly to Germany. As a result, the impact of the crisis on Germany’s economy is extremely significant to Czech prospects, as “if Germany catches a cold, we might suffer from something much, much more serious.” In addition, he says, “Prague has always been a tourist hotspot, and the fact that travel has been completely banned has hit hard. A lot of people whose livelihoods depend on tourism, such as waiters, guides or people who used to rent places on AirBnB, are going to struggle.”

Like so many, Kramarik concedes that there is a discrepancy between what he hopes will happen and what he is bracing for in the foreseeable future. “I hope that the situation goes back to normal in the next few months, and that our most serious worries will remain only the cancellation of events and certain travel restrictions,” he says. “Those things may hurt, but they are not essential for the economy, regardless of how frustrating they will be.” Unfortunately, he says, “what we must be prepared for is much worse. The crisis might have colossal effects. The globalized economy’s response to this unprecedented disruption could be hiding something we can’t even predict at this point. Because it is unknown, it is hard to prepare. And panic is not a preparation. In fact, self-induced damages from the panic can do more harm to the economy than the virus and all of the restrictive measures combined.”

Ultimately, Kramarik looks to the past for analogy. “Take September 11th – most people worried that the world would not remain the same, when they watched the twin towers live on TV, as they were collapsing. And did it change? Certainly much less than people feared. The economy is as much about people’s hope in the future as it is about their actual current output. Even though we need to be prepared for some economic decline, which is inevitable, we must not lose our hope for the future and our ability to cope with whatever it brings. This was the mentality of our grandparents, who lived through the war. And we need to learn from it and keep that in mind in these difficult times. After all, look at the silver lining: this is only nature. An external enemy, not another human. And we are quite a resilient and adaptive species when it comes to dealing with nature. And the nations’ response so far has been amazingly humanistic.”

JSK has advised Tilia Impact Ventures and Nation 1 on their investment in Dot Glasses, a provider of a radical new concept for prescription eyeglasses for people in need. The Mavericks law firm advised Dot Glasses on the deal.

Tilia Impact Ventures is the first Czech social impact fund, and Nation 1 is a Czech-based venture capital fund focused on investing in seed-stage start-ups.

DOT Glasses is a startup established to provide corrective eye glasses to those in need in the world’s poorest countries. The convertible loan will enable DOT Glasses to accelerate the building of a partner and distribution network in areas with poor access to eyeglasses, to continue technological development, and to build a team. In this first investment round, DOT Glasses received almost EUR 1 million from investors.

JSK’s team was led by Partner Tomas Dolezil and included Managing Associate Michal Jendzelovsky and Junior Lawyer Sebastian Speta.

The Mavericks team was led by Partner Tomas Ditrych.

Clifford Chance has advised Generali Real Estate on the acquisition of Kotva Department Store, a 28,000 square meter seven-story building in the Prague city center from PSN, which was reportedly advised by Dolecek Advokati.

According to Clifford Chance, “Generali Real Estate plans to return the iconic department store to its former glamour and position it as a high-level shopping destination in the historical centre of Prague, in partnership with Sekyra Group, a leading domestic developer.”

Clifford Chance’s team was led by Partner Emil Holub and Senior Associate Milan Rakosnik and included Associate Tereza Rehorova.