An Investor's Guide to Acquiring a Company in the Czech Republic

The Czech Republic, a strategic hub in Central Europe, presents a wealth of opportunities for foreign investors. However, acquiring a company here involves navigating a distinct legal system, regulatory hurdles, and complex transactional processes. This guide provides a comprehensive roadmap for your M&A journey, from initial foreign investment screening to post-acquisition integration, giving you the concrete answers needed for a successful transaction.

Need advice on this topic? Contact ARROWS Law Firm at office@arws.cz or +420 245 007 740. Your question will be answered by "JUDr. Jakub Dohnal, Ph.D., LL.M.", an expert on the topic.

The Czech M&A Landscape: Your Strategic Gateway to Central Europe

The Czech Republic’s stable economy, skilled workforce, and strategic location within the European Union make it a prime target for mergers and acquisitions (M&A). For foreign investors, the legal environment offers a reassuring blend of familiarity and specific local character. The system is robust and largely harmonized with EU law, primarily governed by foundational acts like the Civil Code (Act No. 89/2012) and the Business Corporations Act (Act No. 90/2012 Coll.).

This legal framework provides a level of comfort, as Czech law enables foreigners to acquire companies under the same conditions as domestic entrepreneurs. Investors will typically encounter two main corporate structures when targeting a Czech company: the Limited Liability Company (s.r.o.) and the Joint-Stock Company (a.s.). The s.r.o. is the most common form, favored for its flexibility and low minimum capital requirement of just CZK 1, while the a.s. is suited for larger enterprises with its higher minimum capital of CZK 2,000,000.

However, the combination of EU legal alignment and specific Czech statutes can create a "familiarity trap." Investors might assume processes are identical to their home jurisdiction, overlooking crucial local specifics. This is not just a different jurisdiction; it is a unique operational environment where overconfidence can be a significant risk. Expert local counsel is therefore not a luxury, but a necessity from the very beginning of the acquisition process.

While the Czech legal framework is welcoming, its nuances require expert navigation. With a portfolio of over 150 joint-stock companies and 250 s.r.o.s, the ARROWS team possesses an unparalleled understanding of the corporate landscape. We help you choose the right target and anticipate legal hurdles from day one. Need an initial assessment? Contact us at office@arws.cz.

The First Hurdle: Navigating Czech Foreign Direct Investment (FDI) Screening

For non-EU investors, the first critical checkpoint is the Czech Republic's Foreign Direct Investment (FDI) screening mechanism. Governed by Act No. 34/2021 Coll., this regulation is not a barrier to entry but a protective measure for national security that must be addressed before a transaction can proceed.

A "foreign investor" is broadly defined as any person or entity from a non-EU country, or any entity directly or indirectly controlled by a non-EU person or entity. This definition notably includes investors from non-EU EEA countries and Switzerland. A "foreign investment" is any transaction that allows such an investor to gain an "effective degree of control" over a Czech target. The triggers for this are intentionally broad and include :

• Acquiring 10% or more of the voting rights.
• Being appointed to a corporate body of the target.
• Gaining ownership rights over assets used in the target's economic activity.
• Any other means of gaining access to sensitive information, systems, or technologies.

This broad definition means the FDI regime captures not just takeovers but also strategic minority investments. The focus is less on corporate governance and more on the potential for influence over sectors vital to national security. Consequently, a standard corporate due diligence is insufficient; a regulatory and political risk assessment becomes a vital part of the process.

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Mandatory pre-approval from the Ministry of Industry and Trade (MIT) is required if the target operates in high-risk sectors, including military material, dual-use items, critical infrastructure (energy, transport, health), and certain national media outlets. For all other investments, a significant risk remains: the MIT has the power to review any transaction retrospectively for up to five years post-closing and potentially unwind it if security concerns arise.

To mitigate this risk, the law provides a strategic solution: a voluntary consultation. By proactively engaging with the MIT, investors can obtain legal certainty that their investment does not pose a risk, effectively eliminating the threat of a future transaction ban.

The FDI screening process carries a "standstill obligation" – you cannot implement the investment before approval. ARROWS provides crucial strategic advice, preparing the necessary documentation and representing clients before the Ministry of Industry and Trade to secure clearance efficiently. Don't let regulatory hurdles derail your acquisition. For immediate assistance with your FDI filing, write to us at office@arws.cz.

The Acquisition Blueprint: A Phased Approach to Your Czech M&A Transaction

A successful acquisition follows a structured, multi-phased process. Understanding this lifecycle provides a clear roadmap and helps manage expectations for timing and resources. While every deal is unique, a typical transaction follows this blueprint:

• Phase 1: Strategy & Target Identification (1-2 months): Defining investment criteria, identifying and evaluating potential target companies.
• Phase 2: Preliminary Negotiations & LOI (2-4 weeks): Signing a Non-Disclosure Agreement (NDA) to protect confidential information and negotiating a Letter of Intent (LOI) to outline the key commercial terms of the proposed deal.
• Phase 3: Comprehensive Due Diligence (1-3 months): This is often the most time-consuming phase. It involves a deep investigation into the target's legal, financial, tax, and operational health to verify information and uncover potential risks.
• Phase 4: SPA Negotiation & Signing (1-2 months): Drafting and negotiating the definitive Share Purchase Agreement (SPA), the core legal document that governs the entire transaction.
• Phase 5: Regulatory Approvals & Closing (1-6+ months): Securing necessary clearances, such as FDI screening and merger control approval. Once all conditions are met, the transaction is formally executed (Closing).
• Phase 6: Post-Acquisition Integration: The final and ongoing phase of merging operations, cultures, and systems to realize the strategic value of the acquisition.

The critical path of an M&A project is often the regulatory approval process, not the commercial negotiations. A savvy investor, guided by their legal team, should initiate regulatory analysis in parallel with due diligence, not sequentially after it, to manage the timeline effectively.

FAQ – Legal Tips for a Smooth Transaction Start

Is a Letter of Intent (LOI) legally binding in the Czech Republic?
Generally, an LOI is not legally binding regarding the obligation to conclude the final deal, but certain clauses, like confidentiality and exclusivity, are enforceable. It's crucial to draft it carefully to avoid unintended obligations. ARROWS can prepare or review your LOI to ensure your interests are protected from the outset. Need help with preliminary documents? Contact us at office@arws.cz.

How long does a typical M&A deal take in the Czech Republic?
A straightforward mid-market transaction can take 4-6 months from LOI to closing. However, complex deals involving extensive due diligence or regulatory approvals (like FDI or merger control) can extend to 9-12 months or longer.
Our experience helps streamline the process, anticipating delays and managing timelines effectively. Let's discuss your transaction timeline; write to us at office@arws.cz.

Uncovering the Truth: Mastering Due Diligence in the Czech Republic

Due diligence (DD) is the cornerstone of any successful acquisition. It is a meticulous investigation designed to verify the seller's claims, identify hidden liabilities, and gather the necessary information to negotiate a stronger and more protective Share Purchase Agreement (SPA). In the Czech market, while the process is well-established, information disclosure is often heavily driven by the seller, necessitating a proactive and skeptical approach from the buyer's team.

Who to contact for legal advice?

A comprehensive DD investigation should cover multiple facets of the target company:

• Legal & Corporate: Review of articles of association, shareholder agreements, corporate meeting minutes, and all necessary business permits and licenses to ensure the company is in good standing.
• Financial & Tax: Analysis of audited financial statements, debt agreements, tax compliance history, and contingent liabilities. This is particularly critical in a share deal, where the buyer inherits all historical tax risks.
• Commercial & Operational: Examination of key customer and supplier contracts, with a focus on identifying any "change-of-control" clauses that could terminate these agreements upon acquisition.
• Employment: Scrutiny of employment contracts, collective bargaining agreements, and any ongoing or potential labor disputes to ensure compliance with the Czech Labour Code.
• Intellectual Property (IP): Verification of ownership for all critical patents, trademarks, copyrights, and software licenses that form the core value of the target's business.
• Real Estate: Confirmation of title deeds for owned property, review of lease agreements, and assessment of zoning permits and potential environmental liabilities.
• Litigation & Compliance: A thorough search for any ongoing or threatened lawsuits and regulatory investigations that could result in future liabilities.

The findings from due diligence directly inform the risk allocation strategy in the SPA. A thorough DD process is your primary tool for transforming unknown risks into known, manageable issues.

Risk Identified During Due Diligence	Potential Impact for the Investor	How ARROWS Protects You
"Change of Control" clause in a key client contract.	Loss of a major revenue stream immediately after acquisition.	Contract Review & Negotiation: We identify these clauses and can negotiate waivers with third parties before closing. Need a contract review? Write to office@arws.cz.
Undisclosed tax liabilities from previous years.	Unexpected payments to tax authorities, plus penalties, inherited by you after the deal.	Tax Due Diligence & Indemnities: Our tax experts uncover these risks, and we draft specific tax indemnities in the SPA to ensure the seller covers these costs. Protect your investment; contact us at office@arws.cz.
Unclear ownership of critical software IP.	The core asset you're buying may not belong to the target, leading to litigation and loss of value.	IP Audit & Title Verification: We conduct a thorough IP audit to confirm ownership and draft robust IP warranties in the SPA. Secure your assets; email office@arws.cz for an IP analysis.
Pending employment discrimination lawsuit.	Financial liability, reputational damage, and potential for further employee unrest.	Litigation Analysis & Risk Provision: We assess the lawsuit's merits and potential costs, ensuring the SPA includes provisions (e.g., an escrow) to cover potential damages. Get a clear picture of liabilities; connect with us at office@arws.cz.

 

Structuring Your Deal: A Comparative Analysis of Share vs. Asset Purchases

One of the most critical strategic decisions in an acquisition is the deal structure. The choice between a share deal and an asset deal has profound and lasting implications for liability, taxation, and operational complexity.

Share Deal (Share Purchase)

In a share deal, you acquire the shares of the target company. The company itself remains intact as a legal entity, retaining all its assets, contracts, permits, and liabilities—both known and unknown. This structure is often simpler from a transactional perspective and is typically preferred by sellers, as their gains may be tax-exempt under certain conditions. However, the primary risk for the buyer is the inheritance of all historical liabilities, including past tax issues or old lawsuits. Furthermore, the buyer does not receive a "step-up" in the tax basis of the underlying assets, meaning future depreciation is calculated on their old book value.

Asset Deal (Asset Purchase)

In an asset deal, you purchase only specific, identified assets and assume only specific, identified liabilities from the target company, as detailed in the purchase agreement. This allows the buyer to "cherry-pick" desirable assets and leave unwanted liabilities behind, providing a clean start. A key advantage is that the buyer receives a step-up in the tax basis of the acquired assets to their purchase price, allowing for higher tax depreciation in the future. The main drawback is the complexity, as each asset, contract, and permit must be individually transferred, often requiring third-party consents.

A significant market shift occurred with the abolition of the Czech real estate acquisition tax in 2020. Previously, this tax made asset deals involving real estate prohibitively expensive. Its removal has made the asset deal a much more viable and often strategically superior option for real estate investors, allowing them to acquire clean property with a full tax basis step-up, free from the target company's historical baggage.

Choosing between a share and asset deal has profound long-term tax and liability implications. ARROWS provides detailed transaction structuring advice, modeling the financial outcomes of each approach to help you make the most advantageous decision. We ensure the chosen structure aligns perfectly with your investment goals. To discuss the optimal structure for your acquisition, schedule a consultation at office@arws.cz.

Key Risk in Transaction Structure	Potential Impact for the Investor	How ARROWS Mitigates the Risk
Share Deal: Inheriting Hidden Liabilities	Post-closing discovery of environmental contamination or tax fraud leads to massive, unbudgeted costs.	Enhanced Due Diligence & Robust SPA: We conduct deep-dive DD and negotiate comprehensive representations, warranties, and indemnities, often secured by an escrow account. Protect yourself from the past; contact us at office@arws.cz.
Asset Deal: Failure to Transfer Key Contracts	A critical supplier refuses to consent to the contract transfer, crippling the acquired business's operations.	Proactive Third-Party Consent Management: We identify all required consents early and manage the negotiation process to ensure a seamless transfer of all critical business relationships. Ensure business continuity; let's plan your transfer strategy at office@arws.cz.
Share Deal: No Asset Tax Basis Step-Up	Lower future tax deductions from depreciation, resulting in a higher effective tax burden and reduced cash flow.	Strategic Valuation & Negotiation: We help you quantify this "latent capital gains tax" and negotiate a corresponding discount on the purchase price from the seller. Optimize your financial outcome; email us at office@arws.cz.
Asset Deal: Employee Transfer Complications	Uncertainty around which employees transfer under the Czech Labour Code, leading to potential disputes and operational disruption.	Labour Law Expertise: We provide clear guidance on automatic employee transfers and manage the entire process to ensure full compliance and a smooth transition for staff.

 

The Heart of the Transaction: Negotiating the Share Purchase Agreement (SPA)

The Share Purchase Agreement (SPA) is the definitive, legally binding contract that culminates all negotiations and meticulously allocates risk between the buyer and seller. Its key clauses are the primary battlegrounds where the value and security of your investment are forged.

Key clauses include Representations & Warranties (R&W), which are the seller's statements of fact about the target company (e.g., "the company has paid all its taxes"). If these prove untrue, they form the basis for a claim. Critically, a recent Prague High Court decision confirmed that vague, boilerplate R&Ws are unenforceable, underscoring the need for precise, tailored drafting based on thorough due diligence findings.

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For specific, identified risks uncovered during DD, stronger protection is achieved through indemnities. These are promises from the seller to cover specific losses on a dollar-for-dollar basis, such as for a known tax issue or pending lawsuit. The seller's overall exposure is managed through a "limitation package," which typically includes a cap on liability (often 10-30% of the purchase price for general warranties), time limits for bringing claims (1-2 years for general warranties, longer for tax), and thresholds (baskets) to prevent trivial claims.

Finally, the SPA will define the pricing mechanism. A "Closing Accounts" mechanism adjusts the price post-closing based on the company's actual financial state, offering accuracy but potential for disputes. A "Locked Box" mechanism fixes the price based on a historical balance sheet, providing certainty but placing the operational risk between signing and closing on the buyer.

When your transaction involves multiple jurisdictions, coordinating legal protections becomes paramount. Through our ARROWS International network, we ensure your SPA is robust and enforceable not just in the Czech Republic, but across all relevant legal systems. We have been building this network for over a decade, handling cross-border issues daily. For seamless international M&A support, contact us at office@arws.cz.

Expertly navigating SPA negotiations is a cornerstone of our practice. More about this service can be found on our website under Corporate law and M&A.

Gaining Final Approval: Merger Control

In addition to FDI screening, larger transactions may require clearance from the Czech competition authority. The Office for the Protection of Competition (Úřad pro ochranu hospodářské soutěže – ÚOHS) reviews M&A deals to prevent concentrations that could significantly impede effective competition.

A transaction requires mandatory notification to the ÚOHS if it meets one of two alternative turnover-based thresholds:

1. The combined net turnover of all parties in the Czech Republic exceeds CZK 1.5 billion (approx. €60 million), AND at least two of the parties each have a net turnover in the Czech Republic exceeding CZK 250 million (approx. €10 million).
2. The net turnover of the target company (or one of the merging parties) in the Czech Republic exceeds CZK 1.5 billion (approx. €60 million), AND the worldwide net turnover of another party to the transaction exceeds CZK 1.5 billion (approx. €60 million).

If a transaction meets these criteria, a notification must be filed. The review process begins with a Phase I investigation, which typically takes 20-30 days. For more complex cases that raise potential competition concerns, the ÚOHS may initiate an in-depth Phase II review, which can take up to five months.

Crucially, a "standstill obligation" applies. The transaction cannot be implemented or closed until clearance is received from the ÚOHS. Violating this rule ("gun-jumping") can lead to severe fines of up to 10% of the company's annual turnover and, in extreme cases, the forced unwinding of the deal.

Failing to notify a qualifying transaction or implementing it before clearance can result in substantial fines. ARROWS’ competition law experts manage the entire merger control process, from assessing notification requirements to preparing the filing and liaising with the ÚOHS to secure a timely approval. Ensure your transaction is compliant. Contact our team for a merger control assessment at office@arws.cz.

Your Partner for Success: Why Foreign Investors Choose ARROWS

Acquiring a company in the Czech Republic is a complex journey, moving from strategic assessment and regulatory screening through intensive due diligence, intricate deal structuring, and tough negotiations. Executing it successfully requires more than just capital; it requires expert legal counsel with a deep understanding of both the law and the market.

ARROWS is the indispensable partner for this journey. Our deep experience is quantified by our work with a portfolio of over 150 joint-stock companies, 250 s.r.o.s, and 51 municipalities and regions. For cross-border transactions, our ARROWS International network ensures seamless execution. We provide comprehensive services, including preparing all necessary legal documentation, representing clients before courts and authorities, and providing expert legal opinions.

We are more than just lawyers; we are strategic business partners who understand the commercial realities of your investment. We often connect our clients with valuable business or investment opportunities within our network. Let our experience be your advantage.

Ready to take the next step? Contact our M&A team for a confidential consultation at office@arws.cz.

FAQ – The Most Common Legal Questions on Acquiring a Czech Company

What are the requirements for a non-EU citizen to be a director of a Czech company?
A non-EU citizen can serve as a director. The key requirements are being over 18, having legal capacity, and providing a clean criminal record extract from their country of citizenship and any other country where they have resided for an extended period in the last three years. These documents often require an apostille or superlegalization and must be officially translated into Czech. Residence in the Czech Republic is not a prerequisite for appointment, but if the director plans to be physically active in the country, a long-term residence and work permit will be necessary. If you need assistance with the appointment process for foreign directors, contact us at office@arws.cz.

Can I acquire 100% of a Czech company as a foreign entity?
Yes, Czech law permits 100% foreign ownership of both limited liability companies (s.r.o.) and joint-stock companies (a.s.). A key exception is the "anti-chaining" rule, which prevents a company that has only one shareholder from itself being the sole shareholder of another Czech s.r.o.. We can help structure your holding to be fully compliant. For questions on ownership structures, please email us at office@arws.cz.

What are the most common "deal-breakers" found during due diligence in the Czech Republic?
Common issues that can derail a transaction include unresolved ownership of real estate, significant undisclosed tax or social security liabilities, key commercial contracts that terminate upon a change of control, and disputes over the ownership of critical intellectual property rights. Early and thorough due diligence is essential to uncover these issues before they become insurmountable. Our comprehensive due diligence process is designed to identify these critical risks early. If you're considering a target, let us perform an initial risk assessment for you. Contact us at office@arws.cz.

What is the difference between an apostille and superlegalization for foreign documents?
Both are forms of authenticating foreign public documents for use in the Czech Republic. An apostille is a simplified, single-step certification used between countries that are signatories to the Hague Convention. Superlegalization is a more complex, multi-step process for documents from non-Hague Convention countries, involving certification by the foreign ministry of the issuing country and then the Czech embassy in that country. We handle the entire document authentication process for our clients. If you have questions about your documents, write to us at office@arws.cz.

Are there any specific reporting obligations after acquiring a Czech company?
Yes. The change in ownership must be reflected in the Commercial Register. A crucial subsequent step is updating the entry for the ultimate beneficial owner in the Central Register of Beneficial Owners. Additionally, if the foreign investor's interest or related loans exceed CZK 25 million, a reporting obligation to the Czech National Bank may arise. We manage all post-closing compliance and registration requirements. For a full overview of your post-acquisition obligations, contact us at office@arws.cz.

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