Purchase of a Czech Company

Due diligence warning signs often hiding millions in risk

Considering acquiring an established Czech company? This comprehensive guide provides concrete and practical answers to your questions regarding international law and cross-border legal compliance. We will show you what hidden liabilities, regulatory traps, and jurisdictional issues in the Czech environment can devalue your investment by millions and how to effectively protect against them using cross-border legal solutions.

Due Diligence Basics: Protection Against Hidden Liabilities

A successful international acquisition in the Czech Republic requires thorough legal due diligence (DD). This is not just a formality but a fundamental tool for risk management and proper transaction valuation. Without a comprehensive audit, a seemingly advantageous purchase may conceal astronomical fines or lead to the collapse of the entire transaction. Anywhere.legal offers top-tier cross-border legal solutions through our global network of lawyers and rigorous verification of legal experts.

Critical warning signs in corporate and financial stability

During DD, it is necessary to uncover "Red Flags" that could lead to unexpected financial obligations. For international investors, the key areas are:

1. Financial discrepancies and hidden debts.

Buyers must identify unexplained debts and liabilities not evident in formal statements. The greatest risk is undisclosed tax liabilities or ongoing litigation, arbitrations, and executions which may result in hidden obligations amounting to millions after the transaction.

2. Dependency and non-transferability of contracts

Investment is threatened by excessive dependence of the target company on one key customer or supplier, whose loss would be catastrophic. Another critical sign is inadequate contract assignability. If key contracts cannot be transferred without third-party consent, there is a risk of renegotiations on disadvantageous terms, reducing the acquisition’s value. (For example, in a small IT company, critical reliance on a single client led to a 30% reduction in purchase price).

Regulatory and Compliance Pitfalls with Global Sanctions

Compliance risks represent the greatest threat to global investors because local failures in a Czech company can translate into fines calculated on the global turnover of the acquiring corporation.

GDPR and the risk of 4% of global turnover

The introduction of GDPR required a complete reassessment of due diligence processes, particularly regarding data sharing and processing. Any GDPR breach within an M&A transaction leads to liability for a substantial penalty, which can reach up to 4% of the total annual global turnover from the previous financial year, applying the higher amount (up to 20 million EUR). DD must ensure sensitive employee data is not exposed and that all data sharing permissions are secured after transaction completion. These risks have a global impact because a local compliance problem in the Czech jurisdiction can expose the entire acquiring entity to international sanctions.

Cross-border tax threats: Transfer Pricing and Permanent Establishment

Tax Due Diligence mandates reduction of tax risk and transaction optimization. The two most complex areas are:

1. Transfer Pricing (TP): International groups must set transfer prices according to the arm’s length principle. Non-compliance risks additional tax assessment, double taxation, and lengthy mutual agreement procedures. The absence of TP documentation, mandatory in Czech jurisdiction, risks fines and administrative burden.

2. Permanent Establishment (PE): A common problem is the existence of unregistered PEs abroad. This situation, where a Czech company inadvertently creates a PE in another country, leads to tax arrears and international regulatory problems for the new owner.

Specific Hidden Threats in Czech Jurisdiction

Besides global DD standards, legal specifics of the Czech system create unexpected financial liabilities.

Labor law risks: Severance claims

The Czech Labor Code establishes automatic transfer of labor relations rights and duties to the acquiring employer.5 The key hidden risk is stipulated in Section 339a of the Labor Code: If an employee terminates their contract within two months after the transfer due to substantial deterioration of conditions, they may claim severance compensation in court. This unexpected financial obligation and possible loss of key employees is often not factored into the transaction price.

Ownership of IP/IT and real estate risks

In technology transactions, the company’s value lies in intangible assets. The greatest risk is connected with a defective mandate or lack of clear documentation proving that IP (software, know-how) created by employees or external suppliers was duly and fully transferred to the target company. Without this verification, the buyer may find they do not own their key assets.

If the transaction involves real property, DD must verify the Land Registry in the Czech jurisdiction. The two main issues are:

1. Execution: Registered execution prevents transfer of real estate until it is settled.

2. Prohibition of alienation and encumbrance: Typically connected with a bank’s lien. Without written consent of the lienholder, the property cannot be sold or further encumbered (e.g., with a new loan from the buyer).

Integrity and Personal Links: AML/KYC risk

Reputational risk and integrity risk are the hardest in the region to resolve and may lead to immediate contract termination. Integrity DD checks links of key persons, shareholders, and management.12 Failure in Integrity DD would expose the buyer to direct risks of violating international AML regulations and international sanctions. For example, an American company withdrew from a joint venture with a Czech counterpart after DD revealed shareholder links to a complex network of quasi-state companies and connections to a person investigated for alleged ties to organized crime.

Risk table: Overview of key Due Diligence risks and effective solutions with Anywhere.legal

Acquiring a Czech company in a global context requires specialized cross-border legal solutions. Anywhere.legal combines local experts with transparent and efficient tools.

Anywhere.legal: Certainty in Cross-Border Law

Safe management of cross-border M&A transactions in the Czech Republic requires using a verified global network of lawyers that minimizes the risk of unknown local law and guarantees transparency throughout the process.

How Anywhere.legal Facilitates Due Diligence:

• Defining Scope (Scoping) Using AI: Anywhere.legal uses artificial intelligence tools (AI Scoping) to significantly speed up initial case processing. AI analyzes documents, proposes structure, and generates relevant questions. This ensures that defining the scope of the legal mandate is precise and comprehensive.

• Use our tool to define your case scope and select the right lawyer.

• Transparent Price Cap (Capitation): For global B2B clients, cost predictability is key. Anywhere.legal defines a price cap (capitation) for legal services, representing the maximum amount the buyer will pay for a legal mandate. This eliminates the risk of unlimited hourly charges.

• Importance of the Verification Process: Our platform operates through a verified global network of lawyers covering more than 90% of countries. The strict verification process ensures that every lawyer assigned to a Czech jurisdiction transaction has demonstrable regional M&A experience and understands local legislative traps.

Need international legal assistance? Contact us through Anywhere.legal.

Conclusion

A safe purchase of a Czech company requires proactive and precise management of invisible risks – from the threat of global GDPR fines and Transfer Pricing issues to specific local severance claims and defects in the Land Registry. Do not let an apparently advantageous acquisition turn into an expensive lawsuit or regulatory disaster. Anywhere.legal provides tools, expertise, and a transparent structure to secure these cross-border transactions.

Contact us through Anywhere.legal and get tailored legal support.

Frequently Asked Questions – Common Legal Questions on Due Diligence in M&A

1. What financial impact does GDPR compliance failure in a Czech acquisition have on a global buyer?
   
   Failure of GDPR compliance in the target Czech company can lead to fines of up to 4% of the total annual global turnover of the acquiring global corporation. This means a small local problem can have potentially crippling global consequences.
   
   

2. What is Transfer Pricing and why is it a risk when purchasing a Czech company?
   
   Transfer Pricing (TP) is a set of rules for pricing transactions between related companies within an international group. The risk is that if the Czech company lacks proper TP documentation, the Financial Administration may impose additional tax and there is a risk of double taxation.
   
   

3. What does the prohibition of alienation and encumbrance mean in the Land Registry?
   
   It is an entry in the Land Registry preventing transfer (alienation) or further encumbrance (charging) of real property without written consent of the lienholder (typically a bank). Failure to obtain this consent can thwart the real estate transaction.
   
   

4. How does Anywhere.legal ensure transparent pricing for complex Due Diligence?
   We ensure transparency by defining a price cap (capitation) for legal services. This means the buyer pays a maximum agreed amount for the agreed mandate, regardless of unexpected case complexity.
   
   

5. What is the most significant risk associated with employee transfer during acquisition in Czech jurisdiction?
   The most significant risk lies in the provision of Section 339a of the Labor Code. This allows an employee to claim severance compensation in court (at organizational change levels) if they resign within two months after the transfer due to substantial deterioration of working conditions.

   
   

6. What is the importance of shareholder integrity due diligence (Integrity Due Diligence)?
   
   This check is key to protecting the buyer from reputational risk, risk of international sanctions, and violations of anti-money laundering (AML) regulations. Integrity DD reveals links to opaque networks or organized crime, often reasons for contract cancellation.

   
   If you face a similar issue, start your case directly on Anywhere.legal.