Category: Czech Republic

Kocian Solc Balastik has helped the Czech National Theatre obtain a building permit for the redevelopment of its New Stage and Operations buildings.

According to KSB, “in addition to the necessary repairs to the buildings’ exteriors, the planned redevelopment and modernization will also provide a major upgrade to the interiors by utilizing the latest technologies.”

Back in 2020, KSB successfully represented the Czech National Theatre in a rent dispute before the Czech Supreme Court (as reported by CEE Legal Matters on June 12, 2020).

KSB’s team included Partner Vaclav Rovensky and Lawyer Dana Jackova.

In its recent decision in re Smusta a.s., the Supreme Court ruled on the possibility to avoid a corporate transformation in insolvency proceedings.

In its decision, the Supreme Court held that although the Act on Transformations contains its own rules for the protection of creditors (general protection in Section 35 and in special protection in relation to demergers in Sections 257 and 258), these protections are not exclusive and the institute of avoidance of antecedent transactions under the Insolvency Act can be used in “addition” to them. An avoidance order does not lead to the annulment or invalidation of the transformation, but merely to the “ineffectiveness” of the transformation vis-à-vis the insolvency administrator (and the debtor’s creditors).

Among other things, the nature of a corporate transformation as a voidable transaction was examined in the judgment. Although, as the court noted, a transformation it is not a ‘classical’ bilateral transaction of the sort usually avoided pursuant to the insolvency law rules, the very nature of a transformation does not preclude its voidability.

These views are consistent with Articles 12and 19 of Sixth Council Directive 82/891/EEC, as interpreted by the CJEU judgment C-394/18 of 30 January 2020, I.G.I.Srl v. Maria Grazia Cicenia and Others.

(Judgment of the Supreme Court of 30 September 2022, Case No. 29 ICdo 133/2020)

By Marek Pume, Junior Lawyer, JSK, PONTES

Cytowski & Partners has advised Czech start-up Filuta AI on its USD 2.5 million pre-seed financing with Nation 1, SPM Invest, and Czech Founders VC.

According to Cytowski & Partners, Filuta AI has “built an artificial intelligence for data automation. The company secured its financing after only five months from incorporation and is the largest pre-seed financing in the Czech Republic led by Czech-only venture capital funds.”

Nation 1 – a Prague-based seed and series A stage venture fund – led the round.

The Cytowski & Partners team was led by Partner Tytus Cytowski.

Kocian Solc Balastik has advised the BiQ Group – investment group Intefi Capital’s technology division – on its acquisition of Puxdesign.

Puxdesign is a Brno-headquartered digital agency specializing in web technologies. Its clients include Heineken, Skoda Auto, and Komercni Banka.

The BiQ Group is a Czech technology group with five companies located in twelve branches in the Czech Republic and Slovakia.

The KSB team included Partner Jan Lasak and Lawyers Josef Kriz and Jana Guricova.

KSB did not respond to our inquiry on the matter.

As of 1 January 2023, a significant amendment to the Act on Significant Market Power takes effect.

An entity with significant market power will now be defined as a buyer of agricultural or food products whose annual turnover:

a) exceeds € 2 million and who falls within the defined turnover bands into a higher band than its supplier (e.g. a buyer with an annual turnover exceeding € 2 million vis-à-vis a supplier with an annual turnover under € 2 million, or a buyer with an annual turnover exceeding € 10 million vis-à-vis a supplier with an annual turnover under € 10 million), or

b) generated on the territory of the Czech Republic exceeds CZK 5 billion, provided that the market power of its business partner is not relevant in this case.

If one of these criteria is met by your group (regardless of whether food or agricultural products make up only a small part of your product range), please pay close attention to the following message.

Even in the face of opposition from the professional public, the amendment passed through the legislative process in a much stricter form than required by the European directive it was supposed to implement.

Obligations that previously applied to about eight food retail chains will now apply to a multiply wider range of persons, primarily for the following reasons:

I. the newly introduced threshold of € 2 million is substantially lower than the original threshold of CZK 5 billion,

II. the turnover threshold is now calculated on any turnover (and not on turnover specifically related to food purchases, as was previously the case),

III. the new regulation affects not only food buyers but also buyers of agricultural products (e.g. semi-finished food or ingredients),

IV. the new regulation affects not only the end buyers (level above consumers), as it was in the application practice to date, but also all buyers upstream in the supply and offtake chain.

The turnover of the whole group is relevant for these purposes.

Entities with significant market power are not only restricted under severe penalties, what contractual terms they can agree with a supplier, buyer, processor or distributor, but also in the way they deal with these business partners.

Our law firm has extensive experience with the application of the Significant Market Power Act and the necessary adjustments to supplier-buyer contractual documentation.

By Michal Hrabovsky, Head of Competition, Eversheds Sutherland

For the last couple of months, we have all experienced a shortage of certain pharmaceuticals on the market, especially antibiotics or pharmaceuticals for fever reduction for children. Given that this situation reoccurs almost every flu season, the Ministry of Health of the Czech Republic has newly established a formal working group monitoring the availability of pharmaceuticals on the market. The Ministry of Health is also preparing the amendment to the Act on Pharmaceuticals so that it can, on its own or in cooperation with the State Institute for Drug Control („SUKL“), better respond to urgent drug shortages in case of crisis situations.

In principle, the amendment should introduce rules to better monitor the current amount of pharmaceuticals available on the Czech market, i.e. at pharmacies or held by distributors. Marketing authorisation holders will be required to inform the SUKL of the reasons for the shortage and the corrective measures being taken, together with information on the current stocks of the product. In addition, marketing authorisation holders will also have to ensure the supply of the product for two months after the date of interruption or termination of supply.

Doubtless this measure will help to bridge a short-term lack of pharmaceuticals. But what measure would help bring an end to systematic and long-term drug shortages? The legislation in Poland can partly serve as inspiration. A few years ago, Polish lawmakers introduced the institute of the Chief Pharmaceutical Inspector (“GIF”). Any distributor is in principle obliged to notify its intention to distribute pharmaceuticals listed by the Polish Ministry of Health to a foreign entity. The GIF is entitled to raise an objection against this notification within seven days after receiving it, especially if there is a risk that the pharmaceutical would no longer be available on the domestic market. If no objection is raised within 30 days, the pharmaceutical may be exported.

We can therefore see possible inspiration from the Polish legislation in the list of drugs prohibited for export in the Czech Republic. Nevertheless, while in the Czech Republic this tool was used only in a small number of cases, in Poland the GIF prohibited export in almost 1,000 cases in the first month of its activity alone.

Indeed, this solution comes with many other legal issues as well, such as the elimination of parallel trade of pharmaceuticals or the question of free movement of goods in general. But if we face an exceptional situation with an urgent shortage of critical drugs, this model might at least be worth considering.

By Vladena Svobodova, Associate, JSK, PONTES

A draft of a preventive restructuring act is being discussed in the Czech legal environment to implement the EU directive on restructuring and insolvency (directive (EU) 2019/1023). The aim of the new legal regulation is to introduce an out-of-court restructuring model with shorter times to improve operations and the balance sheets of debtors in financial difficulties. Different forms of out-of-court restructuring are common and frequently used in many foreign jurisdictions, e.g. arrangements in England and Wales. Unlike insolvencies, in preventive restructuring the court is a “mere” supervisor supported by the restructuring trustee in certain situations.

At the outset, I would like to note the draft act may be amended during the legislative process, but the philosophy of the act will remain unaffected.

Advantages for businesses
Currently, businesses can only be restructured in an out-of-court process based on a contract with selected parties, e.g. through a debt-equity swap, delayed or reduced installments, or through equity investment by existing or new parties.

The preventive restructuring mechanism allows the debtor to enforce the restructuring plan for the ‘affected parties’ by majority decision and through a ruling by the restructuring court. Dealing with possible insolvency can also have an advantage for the non-consenting ‘affected parties’ in the form of higher distributions than payments from bankruptcies or in the case of continuity of the debtor’s business.

Unlike in insolvencies, the debtor can select the parties affected by the restructuring, including the creditors. The legal position of the ‘unaffected parties’, including their contractual relationship and claims vis-à-vis the debtor, remain unaffected by the restructuring. The draft act explicitly excludes certain claims from the restructuring, e.g. employment claims, employee retirement insurance claims, personal injury claims, claims resulting from a breach of law, etc. Furthermore, claims subject to a court or arbitration dispute or claims for payment of services (e.g. bank fees) are excluded as well.

Preventive restructuring is an option for the debtor’s business. While a debtor needs to file an insolvency petition in case of insolvency, preventive restructuring is an option as a preventive measure (e.g. in case of the threat of insolvency). However, preventive restructuring is not available to debtors that are insolvent because of illiquidity.

During the preventive restructuring process, the existing directors of the company continue to manage the business and management does not pass on to the insolvency/bankruptcy trustee. The directors can adopt commercial and operative decisions with due care and according to the restructuring plan.

Conditions for preventive restructuring
Preventive restructuring is available only to business entities (excluding banks, savings and credit cooperatives, insurance companies, reinsurers, health insurance companies, etc.) acting in good faith to sustain and to restore the operation of their business with the planned restructuring measures. The draft act provides a list of presumptions that can evidence bad faith among debtors, e.g. incorrect or incomplete information in the restructuring plan, the debtor distributed dividends or other equity to affiliated parties within the past year prior to the commencement of preventive restructuring, etc.

Restructuring is not available to entities subject to liquidation, declared bankrupt, or subject to preventive restructuring in the past five (5) years.

Restructuring plan
The restructuring plan is the fundamental document for the restructuring process and is an outcome of the negotiations between the debtor and the selected / affected parties. The plan provides for measures to prevent financial difficulties and chiefly to restructure the debtors’ assets, liabilities, equity, or to arrange for other changes in the operation of the business. The draft act provides for a list of exemplary restructuring steps for each category of restructuring measures that can be mutually combined or supplemented by other operational, contractual, personal, or balance sheet restructuring steps.

Furthermore, the restructuring plan needs to describe the debtor’s economic situation, the reasons for its financial difficulties, and provide a list of liabilities vis-à-vis the affected and unaffected parties, the situation of the secured creditors, and the reasons to approve the plan. Along with the plan, the debtor needs to provide interim financial statements as to the last day of the month preceding the month when the notification to commence negotiations about the restructuring plan was dispatched to the affected parties, and regular financial statements for the past three (3) financial years.

The restructuring plan is effective once approved by the affected parties. The draft act requires the approval of at least three-quarters of the affected parties of each class, and approval by each of the classes. The plan can be put to a vote at a meeting summoned to the debtor’s registered headquarters or the seat of the restructuring court, or put to a remote vote where the affected parties are invited to vote in a given period. The voting can be replaced by an agreement executed in the form of a notary deed.

In certain situations, there is required confirmation of the restructuring court, e.g. if a claim from an affected party that has not approved the plan is to be restructured; new financing will be provided; or the number of employees is to be reduced by at least one-quarter. The court can also postpone the effective date of the plan.

Conclusions
The proposed preventive restructuring mechanism is not only a suitable instrument to deal with serious operational issues arising from common business activities, but it can also be a business strategy instrument, e.g. new debt or equity investments from private equity firms and (multi-)family offices can be conditional to the completion of preventive restructuring.

By Tomas Vlasak, Attorney, PRK Partners

JSK has advised Genesis Capital and the Avallon MBO Fund on their acquisition of TES Vsetin. CMS reportedly advised ARX Equity Partners on the sale.

The transaction remains contingent on regulatory approval.

According to JSK, “with more than 100 years of history, TES Vsetin, based in Vsetin, the Czech Republic, is an expert in complex engineering and production of its own proprietary electrical machines and related system components.”

Genesis Capital and Avallon MBO are private equity funds. According to JSK, they have teamed up “with the existing management team of TES to acquire 100% of the company from funds managed by ARX Equity Partners.” ARX had initially acquired TES Vsetin back in 2019 (as reported by CEE Legal Matters on October 17, 2019).

“The investment into TES Vsetin is an opportunity to take over the torch from ARX and support a traditional Czech manufacturer on its commenced journey back to the limelight,” commented Genesis Capital Equity Partner Martin Vilis. “CEO Manfred Lerch has gathered an excellent management team with a strong appetite to use TES’ competitive advantage of having a fully vertically integrated production process to turn it into a leading European electric machines and components producer. In addition to an organic way of growth, there seem to be also interesting potential add-on opportunities in the region.”

JSK’s team included Partner Tomas Dolezil, Senior Associate Daniel Pospisil, and Associates Klara Smidova, Hana Cislerova, and Vladena Svobodova.

Editor’s Note: After this article was published, DLA Piper informed CEE Legal Matters it had advised Avallon MBO on the deal as well. The firm’s team included Poland-based Counsel Piotr Miller, Senior Associate Michal Sowinski, and Associate Jakub Niemiec.

The Czech Republic is looking at a promising start to the year, after somewhat of a market slowdown towards the end of 2022, with no dark clouds on the horizon just yet, according to Schoenherr Partner Vladimir Cizek.

“We have seen some levels of uncertainty in the market over the past two or three months,” Cizek begins. “While there still could be some residual doubts that market participants might have, I would not say that things look bleak for the future.” According to Cizek, funds are slowly but surely getting back at it, especially with the financial year starting over: “towards the end of 2022, it appeared that private equity funds were scrambling for targets a little bit – for multiple reasons – which was evident in slow market movement in the back half of November and early December, but things are clearing up.”

According to Cizek, their office was busy as 2022 came to a close as had been usual for any year-end. “Focusing in on our particular segment of the M&A market, we have seen a lot of projects, signings, and closings – so it wasn’t a decline by any measure,” he says. “Still, looking at the rest of the market, there were moments where major deals fell through after multiple months of negotiations – on account of the negotiating parties losing focus of their intentions.” He explains that, with a number of players in the TMT segment seeing their “portfolios take a hit last year, reverberations were felt. However, looking ahead, I would hope that by the start of the second quarter, things will pick up overall.”

Turning his attention to financing deals, Cizek reports there are challenges. “Financing, for example, real estate, has become quite big of a challenge, especially given the high CNB base interest rate. Compared to two to three years ago, the current situation is very tough,” he says. “Even looking at the countries in the region, like Germany, refinancing is tough. Companies are seeking to compensate by leveraging their shareholders, but it is still unclear as to when refinancing will become easily accessible,” he explains.

Ultimately, financing troubles and the overall market uncertainty and situation (such as increasing input costs) spell out difficulties that translate into distressed M&A workstream upticks. Yet, according to Cizek, this is still not the case in the Czech Republic. “Looking at a local level, companies appear sound – it is the parent companies that are facing issues,” he says. “I am aware that, conceptually, it might still seem like there will be a tsunami wave of distressed asset litigation, but it is simply not the case yet – at best, we could characterize the status quo as being one of seeing the market correct itself,” Cizek concludes.

PRK Partners has successfully represented the interests of a client who completed a gender transition process in a matter regarding the issuance of official documents bearing the applicant’s new personal data before the Supreme Administrative Court.

According to PRK Partners, “a decision handed down by a regional court acting as an administrative court was annulled. The judgment of the Supreme Administrative Court dismissed an action seeking protection from the administrative authority’s inaction and its alleged delay.”

As a result, “the original administrative court will therefore finally have to examine whether the administrative authority acted correctly in failing to issue a university diploma to the applicant bearing the applicant’s new personal data after the completion of the gender transition process,” the firm reported, “thereby undoubtedly discriminating against the applicant in principle, specifically by preventing the applicant from applying for a new job corresponding to the applicant’s educational qualifications under their new identity and gender, among other ways.”