The proposed Act on Takeover Bids was approved by the Czech Chamber of Deputies at the beginning of February this year. This is almost two years since the implementation period within which the member states of the European Union (EU) are obliged to implement the Directive 2004/25/ES on takeover bids expired. The fact that only five member states managed to implement the Directive within the implementation period may indicate the complexity of this area of the law.

The Czech Act on Takeover Bids will regulate takeover bids of securities issued by companies that are incorporated in the Czech Republic and that are admitted for trading on the regulated market in the Czech Republic and/or eventually admitted to trade on the regulated market in one or more other member states of the EU, to the extent of allowing control of the target company. The Takeover Act applies to listed securities with and without voting rights. In addition to the Takeover Act, the amended Commercial Code will contain general provisions on takeover bids relating to both listed securities and securities which have not been admitted to trading on the regulated market.

The Takeover Act contains provisions regarding the 'neutrality rule' and the 'breakthrough rule'. These rules have the status of 'opt-out' in the Directive, so they may differ between individual member states.

Under the provisions of the Takeover Act regarding the neutrality rule, the members of the supervisory board and board of directors are not entitled to undertake any frustrating action which may defeat the takeover bid, unless they obtain the respective approval of the target company's general meeting.

For this purpose, the general meeting can be convened at shorter notice (14 days). However, the members of the boards may carry out certain activities without the approval of the general meeting, such as seeking a competing takeover bid.

According to the breakthrough rule, any restrictions regarding the transfer of listed securities or voting rights, which are set in the target's company Articles of Association, or which arise from the settlements made between the shareholders or/and the target company, may be broken within the duration of the takeover bid. The Takeover Act states that these restrictions may only be overridden with the approval of the general meeting.

A takeover offeror shall be obliged to compensate any damage caused by the general meeting's decision in the amount declared in the evaluator's statement. If the general meeting has taken such a resolution, then this shall be clear from the Commercial Register, into which a relevant entry must be registered.

Mandatory takeover bids

According to the Directive, each member state of the EU is entitled to set its own percentage ownership threshold for establishing a mandatory takeover bid. Under Czech law, the acquisition of 30% or more of the voting rights of the target company is decisive, where a person who has acquired the above ownership threshold also controls the target company. Under the Takeover Act, the takeover bid is no longer mandatory when two-thirds or three-quarters of the voting rights are acquired. The approval of the Czech National Bank shall be required for the publication of the mandatory bid.

Additional mandatory bids are also regulated under the new Takeover Act. A person that acquires listed securities representing a 90% quota or more of the voting rights or registered capital under a takeover bid shall make an additional takeover bid within the stipulated date, to allow the minority shareholders to leave the target company (sell-out).

The price

The Takeover Act sets out the rules for establishing the price which shall be offered by the offeror when a mandatory bid is made. In conformity with the Directive, the Takeover Act sets out that the price shall be a premium price. Until now, the price was a fair price set on the basis of an expert opinion; however, under the Takeover Act, the price shall be at least the price for which the offeror had acquired the shares which are subject to the takeover bid within the last 12 months before the mandatory bid occurred. The price may be changed by the Czech National Bank under special circumstances set in the Takeover Act. It is also no longer required for a competing mandatory to offer a 2% higher price.

The Takeover Act also regulates the rules for setting the decisive jurisdiction in situations when listed securities of a company with its registered office in the Czech Republic are admitted for trading on the regulated market in one or more EU member states other than the Czech Republic, and vice versa.

For example, where securities of a company with its office in the Czech Republic have been admitted for trading on the regulated market in Warsaw, then the questions relating to the origin and expiration of the mandatory takeover bid and the duties of the target company's bodies shall by governed by Czech law, and the issues concerning the procedure of the takeover bid and the content of the documentation shall be governed by Polish law.

In light of the above, there will be special circumstances where the Takeover Act regulates the takeover bids of listed shares admitted for trading on the regulated market in the Czech Republic, but issued by a company incorporated in another member state.

The new Takeover Act includes complex takeover regulation and other material provisions, and substantially changes the current legal regulation of takeovers. Although the legislative procedure is not yet complete, it is necessary to prepare for the new Takeover Act now, as it also includes the new regulation of concern groups (i.e. holding groups) or the essentials of annual reports. n

Lucia Zubekova is a corporate lawyer at Lovells in Prague.