The Legal Framework for US Investmentsin the Czech Republic

27 May 2014

Kamil BlažekPartner, Kinstellar Prague

Introduction

About Kinstellar

Kinstellar is a leading independent law firm in Emerging Europe,

Turkey and Central Asia, with offices in Almaty (Kazakhstan),

Belgrade (Serbia)*, Bratislava (Slovakia), Bucharest (Romania),

Budapest (Hungary), Istanbul (Turkey) and Prague (the Czech

Republic).

Operating as a single fully-integrated firm, Kinstellar delivers

consistently high-quality services across all jurisdictions in an

integrated and seamless style. We are particularly well suited to

servicing complex transactions and advisory requirements spanning

several jurisdictions.

We deliver:

market experience and local knowledge across a wide range of

sectors

in-depth understanding of the legal, regulatory and commercial

issues surrounding any type of transaction or project in the region

a dedicated team of local and internationally-qualified lawyers

a responsive, commercial approach and style

value for money.

Emerging Europe and Central Asia’s

Leading Independent Law Firm

Regional experienceKinstellar offices

* Kinstellar advises international and local clients in Serbia in cooperation with Zajednička advokatska kancelarija Marić & Mujezinović.

Established in 1992, our Prague office is a leading law firm in the

Czech Republic. Our work advising multinationals, international

financial institutions, governments, and domestic clients covers many

of the most significant transactions ever completed within New Europe.

The Prague office is comprised of five Partners, four Counsel / Of

Counsel, and close to 30 Associates, qualified in one or more of the

following jurisdictions: Czech Republic, Slovakia, United Kingdom,

Germany, and Canada. The core of our team has been working

together in the Czech Republic for over 16 years and is well balanced

between senior, mid-level and junior lawyers, complemented by

translators, paralegals and support staff. Our diverse language

capabilities, covering Czech, English, Slovak, Armenian, German,

French, Russian, enable us to offer a truly flexible service to our

international clients.

Our market leadership in the Czech Republic has been repeatedly

recognised by independent reviewers and achieved top directory

rankings in the following areas:

Corporate/M&A

Banking & Finance and Capital Markets

Real Estate and Construction, and

TMT

THE AREAS OF PRACTICE OF THE PRAGUE OFFICE INCLUDE:

Foreign Direct Investments

General Industry, Manufacturing and Engineering

Corporate, Mergers and Acquisitions

Banking, Finance & Capital Markets

Competition / State Aid

Compliance, Risk and Sensitive Investigation

Dispute Resolution

Energy

Infrastructure & Projects

Life Sciences & Healthcare

Private Equity

Real Estate

Restructuring & Insolvency

Telecoms, Media and Technology

Kinstellar Prague

What Clients say about our Prague team ...

‘Excellent for corporate and M&A advice’. Legal 500, 2013

Kinstellar ’s ‘friendly and professional’ team ’ [...].

Legal 500, 2013

Kinstellar displays ‘great knowledge and negotiating skills’.

Legal 500, 2013

It has a growing reputation for its ability to field highly

experienced lawyers on cross-border deals.

Chambers Europe, 2013

Kinstellar is ‘good value, with quick turnaround times, and is

very commercially oriented’. Legal 500, 2013

The Legal Framework for US Investments in the Czech Republic

Content

Market overview

Legal System of the Czech Republic

International Treaties

Corporate Establishment

M&A in the Czech Republic

Case Study

Market OverviewAccess to EU markets

EU 28 countries all are part of the European

single market – free movement of goods, capital

and workers.

CEE countries still enjoy significant cost

advantages over EU 15, while at the same time

having full market access and advantages of full

EU membership.

Market OverviewNeed for infrastructure

Much infrastructure is still below EU standard

Massive infrastructure investment will continue in the next decade

Railways

Motorways

Electricity generation

Energy infrastructure

Municipal infrastructure

EU funds will continue to be allocated to improve

Regional quality and local development

Market OverviewDrivers of inward investment in the Czech

Republic and CEE region

Cost efficiencies

Expanding EU market

Excellent platform for access to EU market for

new EU countries

Attractive labour force

Attractive tax regimes

Incentives from local governments

Proximity CIS, CEE, SEE – springboard to New

Europe

Market OverviewDecisive factors for investments in the

Czech Republic

Labour cost and quality

Logistics (transportation networks)

Industrial background

Governmental support and transparency in

procedures

Stability: financial, political, legal

Standard European economy

Friend of the United States

Good opportunity (No. 5 in TOP 20 Emerging

Markets by Bloomberg)

Legal System in the Czech Republic

Civil law system

Very similar (and comparable) to Germany.

Part of the European Union. Fully compliant with EU legislation

Extensive reform of legal system and modernisation after EU accession

Still formalistic: requirements like notarisation and legalisation can be onerous

Stable environment with sufficient protection of rights

Established and efficient court system

In brief: standard European jurisdiction

Important International Czech – US Treaties

Bilateral Investment Treaty

Treaty concerning Encouragement and Reciprocal Protection of Investments, entered into force

on 19 December 1992 (amended on 1 May 2004)

Double Taxation Treaty

The Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with

respect to Taxes on Income and Capital, entered into force on 23 December 1993

Other Treaties

Agreement on Social Security between the Czech Republic and the United States of America,

entered into force on 1 January 2009

Corporate Establishment

First steps

Available corporate structures

Commercial Register

Trade licences

Limited liability company

Joint-stock company

Branch office

First Steps

1. Choosing an appropriate corporate structure

2. Establishing the company, branch or

purchasing a shelf company

3. Applying for trade licences

4. Registering in the Commercial Register

5. Registering for taxes, social security, and

health insurance

Available Corporate Structures

1. Limited Liability Company (in Czech “společnost s ručením omezeným” or “s.r.o.”)

2. Joint-Stock Company (in Czech “akciová společnost” or “a.s.”)

3. General Commercial Partnership (in Czech “veřejná obchodní společnost” or “v.o.s.”)

4. Limited Partnership (in Czech “komanditní společnost” or “k.s.”)

5. Cooperative (in Czech “družstvo”)

6. Branch office (in Czech “organizační složka”)

Trade Licences

Obligatory application

Different requirements in respect of obtaining

different types of trade licences

Types of trade licences

• Licensed trades

• Notifiable trades

– craft trades

– regulated trades

– unregulated trades

Limited Liability Company

• Legal entity

• Created by registration

• Typically used for small to medium-size

enterprises

• Chaining restriction

• Minimum capital CZK 1 (approx. EUR 0.04)

• Executive directors

• General meeting

Joint-Stock Company

• Legal entity

• Created by registration

• Typically used for larger enterprises

• Unlimited number of shareholders

• Minimum capital of CZK 2,000,000 or EUR 80,000)

• Bearer or registered shares in the form of either certificated or book-entred shares

• Board of directors

• Supervisory board

• General meeting

Branch Office

1. Not a legal entity

2. Created by registration

3. Unlimited liability of the founder

4. No share capital

5. Branch manager

Comparison Limited Liability

Company

Joint-Stock Company Branch Office

Liability of the

Founder

Not liable if capital paid

up (with exceptions)

Not liable if capital paid

up (with exceptions)

Founder fully liable

Establishment By notarial deed By notarial deed Notarial deed not

necessary

Minimum Registered

Capital

CZK 1 (approx. EUR

0.04)

CZK 2 million or EUR

80,000

Not applicable

Executive Body Minimum one executive

director

Minimum three

members of board of

directors

One branch manager

Supervisory Board Voluntary Minimum three

members

Not applicable

Timing

(establishment) *

1 month 1 month 1 month

Registration fees Approx. EUR 500 Approx. EUR 500 Approx. EUR 350

* Does not include time necessary for obtaining all documentation from the investor.

M&A in the Czech Republic

All sectors of the Czech economy are opened to foreign investments

No restrictions – foreign and domestic investors treated identically

Incoming investment mainly from the Netherlands, Germany, Austria, the United States, South

Korea, Japan and Switzerland

Active smaller private equity funds (e.g. Genesis)

Trends:

Smaller number of larger transactions

Domestic investors play increasingly important role

Top 10 Deals in the Czech Republic (2013)

Czech Republic and Emerging Europe

Czech Republic: ranked as the best performer in the CEE (overall M&A maturity score of 71%)

Strategic advantage: buyers able to do deals in various currencies

CEE M&A transactions increased by 28% (from 378 in 2012 up to 485 in 2013)

The deal value increased proportionately by 26% year-on-year

Emerging Europe: generally healthier economies than Western Europe

Relatively sound financial sector

Technically advanced economies

Czech Republic and Emerging EuropeE

Europe

Proximity: Similar cultural, historical or

language background. Similar approach to

business.

Atractivity: Turkey, Romania and Poland.

Czech Republic remains competitive.

Success: Investments in the Czech Republic

will be most successful if seen as part of the

Emerging Europe. Build on Czech strategic

advantages.

Why the Czech Republic?

Optimistic mood – more active M&A market expected in 2014. Why?

Strong industrial tradition

Safe destination: Very limited legal and cultural issues. Single market

Growing acquisitions of small- and mid-sized companies

Number of small- and mid-sized enterprises up for sale (with founders being close to retirement and

searching for suitable buyers)

Quickly and safely? Comments on Czech M&A Deals

Preliminary Steps

• Initial commercial discussions

• Structuring and valuation

• Process Letter / Information Memorandum

• Due diligence / Data room

• Confidentiality / Exclusivity / Break fee agreement

• Agreement in principle / heads of terms?

Contract negotiation

• SPA

• Other documents

Signing / Announcement

• Sign SPA

• Satisfy conditions precedent:

• Public / private approvals

• Other conditions

• Prepare for transfer – pre-closing obligations

Closing

• Post completion matters

• Price Adjustment

Purchaser

Due

Diligence

Vendor Due

Diligence

Quickly and safely? Comments on Czech M&A Deals (Cont.)

Stable institutions and rule of law

Faster and more efficient work of courts

Representations and warranties

Ways how to enable financial assistance

New Private Law

The new Civil Code and the new Business

Corporations Act effective from January 2014

Significantly limit the reasons for the invalidity of

contracts

Case Study

Case StudyNET4GAS

The sale of Czech Transmission System Operator Net4Gas was the one of the biggest and the most

complex M&A deal in the Czech Republic in 2013

Type of business: NET4GAS operates more than 3,600 kilometres of pipelines in the Czech

Republic and is responsible for the national transmission of natural gas as well as international gas

transit

Parties involved: RWE (Seller), Borealis Infrastructure Management Inc./Allianz SE (Purchasers),

NET4GAS (Target)

Deal Value: appr. EUR 1.6 billion

External bank financing (syndicated loan with more than 20 banks participating – approximately

EUR 1.2 billion)

NET4GAS Transmission System

Questions?

Contact Information

The main contact

Kamil Blažek is a Partner and firm-wide Head of the Projects & Infrastructure practice at Kinstellar. He has been with the firm

since 2000. Kamil specialises in Commercial Law, M&A, Foreign Direct Investment, Energy, Project Finance and Real Estate &

Construction Law.

Kamil studied law at Charles University in Prague and Regensburg University in Germany. He has worked as professional legal

advisor in the Czech Republic and Central and Eastern Europe for close to 20 years. From 2000, he worked at the global law

firm Linklaters and since 2008 has been as a partner in the Prague office of the international law firm Kinstellar, which

exclusively focuses on the emerging markets in the Central and Eastern Europe and CIS. Kamil has been involved in a number

of complex transactions in the Czech Republic, other Central and Eastern European countries, Russia, and China.

He has advised numerous clients in the automotive sector (for example, Denso, Inteva, Hyundai, Toyota Tsusho and Delphi), in

the real estate sector (ECE, ECM Real Estate Investment, Hochtief Development, Unibail, Czech Property Investments, and

Babcock & Brown), in the banking sector (KBC/ČSOB, Erste/Česká spořitelna, Merill Lynch, ING, and BNP Paribas), and in the

energy sector (RWE, Ruhrgas/E.ON, Electrabel, EnBW, ČEZ, Duke Energy and Statkraft).

Kamil is Chairman of the Association for Foreign Investments (AFI) in the Czech Republic. In co-operation with governmental

agencies and institutions, primarily the Ministry of Industry and Trade of the Czech Republic and CzechInvest, AFI is actively

supporting foreign investors entering the Czech market, the promotion of domestic investments, the enhancement of Czech

companies’ competitiveness, and a favorable business environment in the Czech Republic. AFI also promotes innovation be

encouraging co-operation between the public research/development sector and the private sector.

Kamil speaks Czech, English, German and Russian.

Kamil Blažek

Partner

Kamil Blažek

Partner, Prague

Corporate/Projects

Tel: +420 221 622 160

Mob: +420 725 730 968

Email: kamil blazek@kinstellar.com

Contact Information