Category: Czech Republic

Glatzova & Co. has helped Natland Bonds set up a bond program with the maximum nominal value of issued and outstanding bonds of CZK 1 billion.

Natland Bonds is part of the Natland Group, which specializes in investments in medium-sized companies and real estate projects in the Czech and Slovak markets.

According to Glatzova & Co., “the Czech National Bank approved the prospectus for the bond issue on November 10, 2020, and the decision came into legal force on November 11, 2020.”

The Glatzova & Co. team was led by Partner Libor Nemec.

Kinstellar has helped the Czech Banking Credit Bureau with an audit of its personal data processing activities, which the bureau was carrying out as the data processor of the Client Information Bank Register.

The audit was primarily intended to ascertain whether the CBCB was fulfilling all of its obligations under the GDPR while processing personal data.

According to Kinstellar, “the CIBR provides information on banking clients who have or have had a loan agreement or an unsanctioned overdraft of a bank account with a bank in the Czech Republic, as well as information on loan applications.” According to the firm, “it evidences the creditworthiness or credit history of bank clients and its outputs play an important role in the decisions of banks to approve or deny a loan.” In addition, the firm reported, “in terms of personal data processing, the 24 participating banks act as joint controllers of personal data in connection with the bank register, while its operation is entrusted to the CBCB as the data processor.”

Kinstellar’s team included Counsel Zdenek Kucera and Junior Associate Stepanka Havlikova, among others.

The President of the Czech Republic signed the Act on Foreign Investment (“FDI Act”), which will take effect as of May 1, 2021. The Act follows the EU legislative framework on the examination of selected foreign investments for security reasons given by the Regulation No. (EU) 2019/452. The FDI Act introduces the obligation for foreign investors from countries outside the EU, investing in strategic sectors of the Czech economy, to obtain prior clearance from the Ministry of Industry and Trade (the “Ministry”).

The new FDI legislation will primarily affect foreign investments in the fields of energy, water management, food and agriculture, healthcare, transport, communication and information systems, the financial market and dual-use goods. The Act will relate to both to transactions in which a shareholding in the company is acquired (share deal) as well as where only the company’s assets are transferred (asset deal).

As the FDI Act takes effect on May 1, 2021, investors should now make a preliminary assessment of their settlement transactions planned after May 1 to determine whether they are subject to the new legislation and if so, what effects the planned transaction may have.

In the text below, we have summarized the new legislation and offered practical observations from our experience. In general, the FDI Act provides the state (Ministry) with a relatively wide range of discretion in determining which transactions require the prior consent of the Ministry. In our opinion, FDI Act is a relatively vague, which creates a considerable degree of legal uncertainty for foreign investors as to whether or not their planned investment is going to be subject to prior authorization. On the other hand, it does not differ from similar “traditional” legislative acts such as the CFIUS in the US or the FIRB in Australia.

Which investments are subject to prior authorization by the Ministry of Industry and Trade?

The FDI Act obliges non-EU investors, or persons controlled by these investors (including persons from Switzerland, Liechtenstein or Norway), to obtain prior investment permits, if they plan to make an investment which will give them effective control over a legal entity operating in selected strategic activities in the Czech Republic, or resources through which the selected strategic activities are carried out. For this purpose, it will be necessary to reflect in the transaction documentation a new condition precedent, similar to the approval of the merger of undertakings by the competition authorities.

The following four strategic areas in the Czech Republic are subject to the strictest assessment regime:

• Production, research, development, innovation or control of the life cycle of military material;
• Operation of an element of critical infrastructure (e.g. designated energy providers, mobile operators, pharmaceutical manufacturers, designated banks, etc.);
• Administration of the information or communication system of critical information infrastructure, administration of the information system of a basic service or basic service provider(e.g. designated energy providers and energy infrastructure owners, telecommunications companies, etc.); or
• Development or manufacture of dual-use items.

Acquiring effective control under the FDI Act is a much broader concept than the usual definitions of control for merger control purposes, and means any of the following:

• The ability to exercise at least 10% of the voting rights or exercise adequate influence;
• The ability to exercise ownership rights over the acquired entity;
• The membership of the investor or a closely related person in the supervisory or management body of the target legal entity; or
• Another level of control, which results in the ability to obtain information, systems or technologies important for the security of the Czech Republic or public or internal order.

It is therefore a different concept of control than the one we know from corporate or competition law. The final part of the control test is particularly extensive and in our opinion, it will be very difficult to apply it in practice with certainty. From this point of view, it would be appropriate for the Ministry to issue interpretative guidelines which, for the purpose of greater predictability, would give examples of when the test is completed and when it is not.

Request for permission or consultation?

The FDI Act is kind of a hybrid model for approving foreign investment. In the above-mentioned four strategic areas (i.e. military material, critical infrastructure, etc.), it introduces a strict obligation for a foreign investor to ask the Ministry for prior consent, without which it will not be possible to settle the transaction. For other types of investments, it is up to the foreign investor to assess in advance whether a particular transaction may endanger the security or public or internal order of the state and if so, to initiate the consultation with the Ministry.

If the target company is a license holder for nationwide radio or television broadcasting or a publisher of periodicals with a minimum print run of 100,000 copies per day, the Ministry has to be consulted at all times. On the grounds of an expert consultation, to which other public administration bodies will be invited to participate, it will be decided whether such a foreign investment is subject to prior authorization or not. The Ministry will have the authority to review transactions from the past five years, which are suspected of endangering the security or public or internal order of the state and for which no consultation has been requested.

The FDI Explanatory Memorandum provides examples of which transactions need to consider their implications for national security or public or internal order. They primarily concern investments in various forms of infrastructure in the Czech Republic (energy, transport, water management, medical, aviation, etc.), or in cybernetics, robotics, aeronautical technologies, food, various forms of media and media technologies, and objects important for state defense. The Ministry will evaluate each situation on an individual basis. Although the explanatory memorandum emphasizes that the Ministry is not obliged to prepare a list of typical investments for which prior notification of the Ministry would be mandatory, such a list would be useful for practical reasons and the Ministry should consider the possibility of drafting such guidelines.

Given the extensive power of the Ministry to intervene in various forms of foreign investment, investors have to carefully consider almost every major investment and whether they are affected by this new obligation, or whether it will be at least necessary to at consult the Ministry with the contemplated transaction. As mentioned, this new legislative requirement has to be reflected by the parties in the transaction documentation as well, e.g. as one of the conditions for the effectiveness of the transaction.

Ministry decisions and sanctions for violations of the law

According to the FDI Act, the Ministry is obliged to issue its decision within 90 days from the day of the commencement of the investment verification procedure. In more complex cases, it is possible to extend this period by another 30 days. The Ministry has the authority to prohibit or allow foreign investments under certain conditions. In this respect, the deadlines and powers of the Ministry are similar to those of the Office for the Protection of Competition (ÚOHS). Of course, it will be important to see whether the Ministry will be able to approach the submission and approval process with similar professionalism as the Competition Office, which has issued a number of interpretative guidelines for the approval process and introduced a pre-notification process, and which publishes all its decisions, holds regular conferences around its decision-making practice and is open to informal consultation before and during approval procedures as any other modern public administration.

If an investor fails to submit an application for investment authorization in required cases or to initiate mandatory consultations, or if it breaches conditions set out in the decision, it runs the risk of the Ministry examining the investment in the future and setting further conditions for the investment. The Ministry has the authority to suspend investor’s proprietary or voting rights, or it can even request the resale of the target company.

The violation of legal obligations could result in a possible fine of up to 2% of the total net turnover (for the last completed accounting period) achieved by the foreign investor. Therefore, it is crucial to see whether the Ministry issues interpretative guidelines, as for example the Competition Office does in a great detail, on the concept of turnover and its calculation and to clarify which companies can be fined as business groups and how to ensure that such sanctions are proportionate to the respective circumstances.

Practical impact on international transactions

In practice, many foreign investors already assess their planned investments from the point of view of local rules on the examination of foreign investments, and the new regulation in the Czech Republic is no exception. Since the FDI Act takes effect from May 1, 2021, the new regulation has to be considered in any future transaction settled after that date.

Unfortunately, as it is common with similar foreign regulations, the FDI Act will also have an impact on purely intra-group restructurings.  Unlike merger control laws, the FDI Act does not contain an intra-group exemption and does not take into account the concept of a single economic unit. In our opinion, this will lead to an unnecessary approval processes and to a higher frequency of possible FDI violations in cases that have already been substantively assessed by the Ministry. The question for the Ministry is whether to create a simplified and accelerated approval process for these situations, similar to the one used by the Competition Office in not problematic cases.

Experience form France, Germany or Italy, where similar legislation has a longer tradition, the epidemiological crisis caused by the global spread of COVID-19 resulted in a significant expansion of investment (especially in pharmaceuticals, medical supplies, protective equipment, etc.) for which prior state permission is required. This has to be taken into account in the future.

Foreign legislation

Foreign investment approval has a long tradition in some OECD countries.  The US’ CFIUS has been in effect since 1975, and Australia’s FIRB has been in effect since 1976. Given the EU legislative framework for the screening of selected foreign investment for security reasons under the Regulation No. (EU) 2019/452, effective as of October 2020, the approval regime is now common in the EU. Although these regimes show some similarities, they are not identical and there are significant differences between them, in particular in the approach to defining foreign investors or investments subject to scrutiny or sanctions for breaches of legal obligations. The reason for these different approaches is that the Regulation only provides a framework for cooperation if the EU Member State has put such a system in place. For example, some Member States have introduced a different regime for investors from the EU, the European Economic Area (EEA), the European Free Trade Association (EFTA) or the Organization for Economic Co-operation and Development (OECD) and a different regime for investors from third countries. The above-mentioned Regulation does not oblige Member States to introduce a regime for the examination of foreign investment, but “only” to cooperate in this area with other Member States and the European Commission.

From the Ministry’s point of view, it would be appropriate to evaluate best practices in these foreign regulations so that the new approval procedure in the Czech Republic is as short and fast as possible, given that in most of the cases the transactions are going to be non-problematic.

We will keep you up to date about legislative development in this area. If you have any questions, do not hesitate to contact us.

By Petr Zakoucky, Partner, Adam Prerovsky, Senior Associate, and Petr Mueller, Associate, Dentons

CMS has advised AnaCap Financial Partners on its sale of the Equa Bank to Raiffeisen Bank International, acting through its Czech subsidiary. Havel & Partners and Linklaters advised the buyer on the deal.

Financial details of the transaction were not disclosed.

AnaCap Financial Partners is a London-based privately held investor in the financial services sector. Since its establishment in 2005, AnaCap has raised more than EUR 4.5 billion in Capital.

Equa Bank is a Czech full-service bank that primarily focuses on private individuals and SME businesses.

The CMS team was led by UK Partner Dipesh Santilale and included Partner Paul Edmondson, Senior Associate Jamie Burgess, and Associate Jennifer Ross, and Prague-based Managing Partner Helen Rodwell, Counsel Patrik Przyhoda, Senior Associate Lukas Valusek, and Associate Stepan Havranek.

The Havel & Partners team consisted of Partner Jan Koval and Counsel Petr Dohnal. 

Editor’s Note: After this article was published, PRK Partners informed us that it had advised Equa Bank and its management in connection with the sale. The firm’s team was led by Partner Radan Kubr, working with Attorney at Law Milan Sivy. According to PRK Partners, “the settlement of the transaction is conditional on satisfaction of usual conditions precedent, including obtaining requisite regulatory approvals.”

Subsequently, Havel & Partners informed CEE Legal Matters that on April 13, 2021, the Czech Competition Authority granted its approval for the acquisition. Havel & Partners assisted Raiffeisenbank a.s. with this stage of the transaction as well.

Havel & Partners has advised entrepreneur Jaroslav Rudolf on the sale of Salvator Strechy s.r.o., a specialized roofing material company, to an unidentified construction material company. 

According to Havel & Partners, the transaction included both share and asset aspects.

Havel & Partners’ team included Partner Ondrej Majer and Managing Associate Albert Tatra.

The Supreme Court of the Czech Republic recently issued a judgment under file no. 21 Cdo 4779/2018, in which it dealt with a situation where the employer withdrew from the non-compete clause agreed with its employee due to the fact that “it would not be proportionate or practical to enforce the agreed prohibition of competition against the employee due to the value of information and knowledge of work and technological procedures obtained by the employee in the course of employment with the employer”. The said ground for withdrawal from the non-compete clause had been expressly agreed between the employer and the employee.

Nevertheless, the Supreme Court, unlike the court of first instance and the court of appeal, concluded that the withdrawal of the employer for the reason formulated above was not valid.

The Supreme Court acknowledged that after the conclusion of a non-compete clause, circumstances may arise in which an employee does not obtain information worthy of protection, and when the meaning and purpose of the non-compete clause are not fulfilled, and also acknowledged that these circumstances can be agreed as a reason for withdrawal from the non-compete clause. However, in the Supreme Court’s view, an arrangement that leaves it to the employer’s discretion whether an employee has obtained such information from the employer is invalid because it has the same effect as if the employer was able to withdraw from the non-compete clause without proving a reason or for any reason.

The Supreme Court thus confirmed and extended its conclusions from previous years, namely that:

(i)      an employer may withdraw from a non-compete clause agreed with an employee only for a reason stipulated by law or for a reason agreed between the employer and the employee in advance;

(ii)     the employer’s right to withdraw from a non-compete clause without stating a reason or for any reason cannot be agreed;

(iii)    the specific ground for resignation agreed with the employee must not constitute “abuse of a right to the detriment of the employee”.

As a result of the current judgment of the Supreme Court employers must even stop relying on being able to withdraw from non-compete clauses agreed with employees based on their subjective assessment that the employee in question did not obtain information worthy of protection through a non-compete clause in the course of the employment.

The recent direction of the Supreme Court’s case law on the issue of withdrawal from non-compete clauses thus essentially prevents employers from arranging a simple and efficient reason for withdrawal from a non-compete clause, which will not be difficult to prove in court in the event of a dispute (or, even better, will prevent such disputes). It de facto means that once an employer concludes a non-compete clause with an employee, in the vast majority of cases it will not be possible to withdraw from it unilaterally later.

Thus, before entering into non-compete clauses, employers should carefully consider whether they are indeed dealing with an employee with respect to whom they will wish to maintain the obligations arising from the non-compete clause upon employment termination. In our practice, we very often encounter situations where employers, when terminating employment, are unpleasantly surprised by the fact that a non-compete clause has been concluded with the employee and they are not interested in protecting company information in this form. 

We believe that the direction chosen by the Supreme Court is extremely impractical and disproportionately protects employees at the expense of the employer to the extent that it completely ignores the possible absence of the employer’s need to protect the information acquired by the employee. Who but the employer, whose information is protected by a non-compete clause, should evaluate their value and the need to protect it or lack thereof?

By Tomas Bilek, Partner, Ladislav Smejkal, Partner, and Andrea Hamorska, Counsel,  Dentons

Petr Kasik has been named the new Managing Partner of Kocian Solc Balastik, taking over from former Managing Partner Dagmar Dubecka.

“It will definitely not be easy to fill Dagmar’s shoes as the firm’s managing partner, but I believe that with the help of my colleagues Pavel Dejl and Jiri Horník, who are the other members of KSB’s managing team, we will succeed,” said Kasik.

Dubecka, who had headed the firm since 2012, will continue to focus on her Corporate/M&A practice. “I am convinced that putting Petr and his team in charge of the firm’s management is a good thing,” adds Dagmar. “The guarantee for me is the professional skills and human qualities of Petr and his colleagues.”

Dentons has advised CPI Property on the issuance of EUR 650 million 1.500% senior notes due 27 January 2031 and EUR 400 million 3.750% resettable undated subordinated notes callable in July 2028.

CPI Property Group is a Luxembourg-based owner of office and retail space, hotels, agricultural, industrial, and logistics properties in the Czech Republic and Berlin, among other locations.

According to Dentons, “the new notes, which were issued under CPIPG’s EUR 8 billion Euro Medium Term Note Program, received significant investor interest with approximately EUR 3 billion in demand.” In addition, the firm reported, “the proceeds of the issuance of the new notes will be used for CPIPG’s general corporate purposes, as well as the redemption of approximately EUR 750 million of CPIPG’s outstanding senior unsecured and undated subordinated bonds which mature or are callable in 2022, 2023, and 2024.”

Furthermore, the firm reported that “the new notes were issued in connection with a tender offer announced by CPIPG on  January 18, 2021, targeting its EUR 550 million 4.375% undated subordinated notes callable in 2023 and EUR 825 million 2.125% senior notes due 2024.” According to the firm, “the rationale for the tender offer was to extend CPIPG’s debt maturity profile [and] on January 25, 2021,  more than EUR 213 million of the 2023 hybrids and approximately EUR 129 million of the 2024 notes were accepted for purchase in the tender offer.”

The Dentons team included in London, Partner Nick Hayday, Senior Associate Victoria Wyer, Associates Moeen Qayum and Niharika Khimji, and Trainee Ekaterina Merabishvili, and in Luxembourg, Partner Stephane Hadet, Counsel Olivier Lesage, and Associate Pierre Hever.

Dentons did not reply to an inquiry about the deal.

Let us remind you of the two changes in income tax with an international element, which already have or are soon expected to come into effect (or to the end of the applicable time limit).

1. Controlled foreign company rule – the duty to “additionally” pay taxes in the Czech Republic for certain foreign subsidiaries (both direct and indirect), generally if they do not carry on a substantive economic activity and the respective foreign tax is lower than a half of the Czech tax that would apply if the subsidiary’s tax base were subject to Czech tax and its income generated in the Czech Republic. The rule is applied for the first time to the tax period that is the fiscal year starting after 31 March 2019 and the calendar year of 2020.

2. Obligatory reporting to the tax authority of cross-border structures (potentially) providing a tax advantage – a precise description including the given tax advantage must be provided to the tax authority; this will apply retroactively to structures implemented from 25 June 2018! Depending on the time aspects of the specific structure or its changes, the report must be submitted by 30 January, 28 February or 30 April 2021.

Do not hesitate to contact us regarding this matter. Our experts will examine your particular situation and we will find the best solution/remedy, or assess the risks.

By David Nevesely, Partner, David Krch
, Tax Partner, and Josef Zaloudek, 
Counsel, Havel & Partners

Clifford Chance, working with Latham & Watkins, has advised the steering committee of the credit financiers, including Commerzbank AG, DZ Bank AG, Erste Group Bank AG, Landesbank Baden-Wurttemberg, and Norddeutsche Landesbank, on the restructuring of the Benteler Group. Ashurst and Schoenherr advised Benteler on the deal.

Benteler Group is a family-owned company that employs approximately 28,000 workers in about 100 locations in almost 30 countries. The automotive supplier also manufactures steel products and tubes for industry customers. 

According to Clifford Chance, the restructuring “consisted [of a] full refinancing of the group’s existing fragmented financing arrangements involving in total almost 120 different lenders and financing partners from various jurisdictions, which was transformed into a joint financing structure secured by a uniform pool of collateral shared among all lenders and financing partners.”

Clifford Chance’s team included Partner Milos Felgr, Counsel Tomas Richter, and Assocates Pavel Bogusky and Tereza Rehorova.

Schoenherr’s team was led by Partners Peter Konwitschka, Martin Ebner, and Wolfgang Hoeller.