IFLR 1000
The Guide to the World's Leading Financial Law Firms

Over the last year Czech practitioners have been busy preparing themselves for the revision of one of the most fundamental laws in the country, the Civil Code. The present code was adopted in 1964 and while amendments in 1991 served to align it with democratic principles, the wording was rooted in the context of the 1960s communist system....

Over the last year Czech practitioners have been busy preparing themselves for the revision of one of the most fundamental laws in the country, the Civil Code. The present code was adopted in 1964 and while amendments in 1991 served to align it with democratic principles, the wording was rooted in the context of the 1960s communist system. The new code was approved by the Chamber of Deputies, the lower House of Parliament, on November 9 2011 and is due to come into force in 2014. It is set to revolutionise private law in the Czech Republic. "It's a completely new civil code; the result of ten years of thought," one partner says. "In the past, we had two codes; the civil and commercial code. Two codes have become one as the existing civil code was enacted in the 1960s, which is more than 40 years old."

This fundamental recodification of the country's legal landscape will surely have a significant impact on the market. In fact, as one may expect, reactions have been varied. "For my generation, the last thing anyone wanted was a new complex code," one partner says. "Good or poor, everyone got used to it." Furthermore, there are concerns that the change might be premature and that, as a consequence, many other changes will be required. "If effective, we face a huge change in the legal market and lots of things need to be rethought," one commentator says. "Today we were asked by big banks to look through standard documentation to have a new set of documents in place. It will be a huge challenge for the legal market and lawyers will have to digest information to give reliable advice." It is clear that such change will generate much work for the legal market and presently client responses, firms report vary from being in "a deep sleep" to holding internal training and document reviews.

All in all, the Czech legal market is maturing and is still undergoing the process of creation. One must bear in mind that the country's economy was aligned to Europe relatively recently and, over the last few years, is going through its first real recession, which is "cyclical in the European context". Nevertheless, looking ahead, the market is presented with huge opportunities. "We didn't have proper institutions in the 90s," one practitioner says. "Just as we developed banking and finance in the 90s, we will develop restructuring and insolvency." In truth, the market for restructuring and insolvency is new and unsettled. On the domestic front, there are many lesser-known players on the market are carving out a place in insolvency work. "The market is more competitive and the smaller law firms provide a basic service to clients," one partner says. "There's a lot of space for small firms and a lot of work. When you look at conflicts, they find work."

CONTEXT AND TRENDS
In the last year, there has been a slight shift in banks' attitudes to lending. "Compared to other banks in Europe, our banks are relatively healthy," one partner says....

CONTEXT AND TRENDS

In the last year, there has been a slight shift in banks' attitudes to lending. "Compared to other banks in Europe, our banks are relatively healthy," one partner says. "They're sitting on significant funds and need to invest but there are no good targets." Many Czech banks are owned by parent entities reluctant to lend; however, domestic banks are in good condition on account of the simple banking model they retained during the earlier rounds of the crisis. "Banks are wealthy and in perfect shape. They're held back a bit by mother companies but there are good opportunities," one partner says.

Predictions made by market players in last year's edition seem to have materialised as 2011 witnessed a revival in real estate financing transactions. "There has been revitalisation in the last six to eight months and a renewal of activity but to say it is booming is too much," one partner says. Furthermore, among classes of finance, refinancing is an enduring trend and as the market picks up, so are acquisition and cross-border financings. "2011 has been a great year. 2012 will be different because there will still be refinancing and acquisition financing but less cross-border financing of pan-European groups as the rest of Europe has problems," one commentator says. Also, what is still active, if not more, is export finance – as the Czech economy is export driven – and asset backed finance such as aviation finance, which had a surprisingly strong year.

One interesting development sees the return of private equity and with it, some new trends in deal financing. For example, funds are unable to secure debt at soaring multiples and as a result are less likely to be in a position to demand exclusivity in transactions or to gain an immediate upper hand in competing with strategic cash buyers. Additionally, Czech investment groups such as Penta, KKCG and EPH are becoming increasingly confident and driving deal flow.

Previously, in project finance, on account of the generous tariff scheme guaranteed by the government, solar financing was by far the dominant activity. However, this "solar boom" quickly landed into difficulties when the government imposed a de facto tax because the subsidies didn't match the start-up investment. Such an experience seems to have had an effect on the renewable energy sector. "Solar financing is simply over. The Czech ministry said that it's considering further restrictions," one partner says. "The state does not support renewables as much as it used to." Nevertheless, there has been some wind financing and added focus in biomass and biogas cogeneration. In fact, traditional energy leads the way. "The last mega-trend is a lot of gas related deals and gas related finance," one partner says. Of course, there are also plans to expand Czech nuclear power generation capacity. Nevertheless, with regard to infrastructure, there is more optimism when it comes to the latency of PPPs (public-private partnerships). "It might be the theme for 2013," one commentator says, adding: "With the D3 highway in Southern Bohemia, it's the first time in history a reasonably sized PPP was approved by parliament. Time is needed for people to understand and get comfortable with the concept. PPPs are far more advanced in Slovakia."

On the legislation front, the amendment to the Commercial Code ended the requirement for valuation by a court-appointed expert in the granting of a guarantee or security for the obligations of a related party. The general requirement that such a guarantee or security must be on arm's length terms in order to be valid has also been abolished and the conditions where a limited liability company can provide financial assistance have been clarified.

MAJOR LATERAL HIRES

Libor Vacek
From: Dvorak & Spol
To: Balcar Polanský Eversheds

Tomás Rychly
From: Clifford Chance
To: Wolf Theiss

MAJOR LEGISLATION CHANGES

Amendment to the Commercial Code
In effect as of January 1 2012

CONTEXT AND TRENDS
Last year, the state of affairs in Greece and Europe contributed to the volatility of the capital markets, which in the Czech Republic are quite narrow anyway and there wasn't too much to write home about as the equity capital markets remained quiet. Not many companies are listed on the stock exchange and the hypothetical prospect of a handful of IPOs would be major news for the market....

CONTEXT AND TRENDS

Last year, the state of affairs in Greece and Europe contributed to the volatility of the capital markets, which in the Czech Republic are quite narrow anyway and there wasn't too much to write home about as the equity capital markets remained quiet. Not many companies are listed on the stock exchange and the hypothetical prospect of a handful of IPOs would be major news for the market. In fact, the last few years saw much excitement over the prospective listing of CSOB on the Prague Stock Exchange (PSE). It is the largest planned IPO ever in the Czech Republic. Its Belgian owner, KBC Bank, who has indicated that it might sell up to 40% of its 100% stake, has been dragging its heels for some time professing its desire for the right market conditions. Reactions to this from market players are varied. "There's no prospect for an IPO on the market. CSOB decided they will not be listed for a while or ever," one partner says. "The deal's been put on ice forever," another partner says, while yet another states that the CSOB listing "was a discussion and not real."

There are, however, some issues that relate to business in the market where the underlying assets are in the Czech Republic. Nevertheless, it's carried out through vehicles incorporated elsewhere and placed elsewhere too. As for Prague, there has been suggestion that some players are seriously considering delisting. One interesting development on the equity side has been, since June 1 2012, the development of a new platform for small and medium-sized companies called START market. It is a special market segment of the Prague Stock Exchange. "It's a platform for start-ups, for smallish IPOs like NewConnect in Poland," one partner says.

On the debt side, there has been much more activity. "The debt side is completely different," one partner says. However, again the market is narrow in terms of key players and there are a limited number of banks involved too. In truth, there are only four major issuers in the Czech Republic and these are: Czech Export Bank, CEZ, Czech Railways and the state itself. "These investment grade issuers are an exclusive club and prove very active on the market," one partner says. In fact in the last 12 months Czech Railways issued its first ever Eurobond.

While we have witnessed some activity in respect to corporate bonds, there have also been initiatives from the government. Recently, the finance ministry issued retail bonds directed at individual buyers. "They were advantageous in terms of yield," one partner says. "The ministry of finance used a loophole in the tax legislation and the proceeds were tax free. Bankers were angry about this." Furthermore, the market has recently dabbled with exotic products such as securitisations. "There were two or three attempts but none realised," one commentator states. "There's much less appetite for risk and its all defensive play."

Elsewhere the amendment on the Act of Bonds ended the Czech National Bank's supervision of bond issuances where the investor is not required to publish a prospectus (a non-public bond issuance). The amendment also eases other restrictions and widens the definition of bonds

MAJOR LATERAL HIRES

Adam Necas
From: Czech National Bank
To: BBH

MAJOR LEGISLATION CHANGES

Amendment to the Act of Bonds
In effect as of August 1 2012

CONTEXT AND TRENDS
There is no doubt that in the last year, as a consequence of the surrounding financial crisis, investor confidence took a blow. "Deals are happening but slowly, as confidence is less because of the market crisis," one partner says....

CONTEXT AND TRENDS

There is no doubt that in the last year, as a consequence of the surrounding financial crisis, investor confidence took a blow. "Deals are happening but slowly, as confidence is less because of the market crisis," one partner says. On account of the uncertainty, transactions are approached with a fair deal of anxiety and a good proportion of these transactions are failing to close. "Still, the percentage of deals that do not close is higher than I call normal," one commentator says. Buyers find it difficult to raise financing and the market witnessed large differences in expectations between sellers and buyers, especially on pricing.

Nevertheless, there have been efforts to reduce deal timetables and remove conditions precedent to prevent parties from walking away if the crisis worsens. Yet, the large buy-outs and recapitalisations have been all too rare. "There have been moments of hope and moments of despair," one partner says. "People treat uncertainty differently. If you're a gambler, you're up for it, but if you're a cautious client, you will hibernate."

In 2011, mid-market M&A was healthy and domestic transactions took a big slice of the action. Many deals were made out of distressed sales involving large real estate assets. For example, the highly publicised €155 million sale of the Czech lottery company Sazka to PPF and KKCG.

Sectors that have been active include the food and beverage sector, which has seen investors look at Czech and home-grown businesses look outside. The TMT sector has stabilised and doesn't generate deals like it did two years ago; however, there is consolidation here. Also, there has even been some movement in the pharmaceutical sector. Nonetheless, the sector that is easily generating the most interest is energy. "If you were to name a sector that's most active it remains energy," one commentator says. "There's less focus on renewable. Czechs like dirty energy, so there's a lot of coal and also nuclear energy is still a topic." In fact, looking ahead, the energy pipeline looks very interesting. For example, in an anticipated €3.5 billion project, CEZ, the largest Czech electricity generator and distributor, is looking for a partner to construct two new units of the Temelin nuclear power plant. This includes an option to construct an additional three units in different locations in Europe. Moreover, the Czech financial group KKCG, Energeticky a Prumyslovy Holding (EPH) and Poland's Gaz-System have shown interest in RWE's gas transmission system operator Net4Gas, valued at around €2 billion. In renewables, there has been some activity following the Czech Republic's recent solar problems. "There's still a flow of deals in solar because quite a lot of people who entered with high hopes because of the tax regime – and then found out what happened – need to divest," one partner says.

Additionally, "succession driven transactions" continue to pique interest as the entrepreneurs of the 1990s, including Wall-mart, Sante, Ticket Pro and Slevomat, are looking to sell their assets. Finally, it seems that private equity houses have enough capital and are looking to invest. Nevertheless, the expectations of the terms and prices tied to transactions vary sharply between the private equity funds and the owners of targeted assets. "Private equity has money to spend partly because it exited and is looking to reinvest," one partner says, while another adds that "it's not that bad for Czech and regionally".

On the legislation front, the amendment to the Act on Transformations of Commercial Companies and Cooperatives and Related Acts facilitates cross-border mergers and other company transformations and harmonises the Czech regulation of such transformations with European law.

MAJOR LATERAL HIRES

Petr Slach
From: Squire Sanders
To: Salans

MAJOR LEGISLATION CHANGES

Amendment to the Act on Transformationsof Commercial Companies and Cooperatives
In effect as of January 1 2012

CONTEXT AND TRENDS
In the last 12 months, very little has changed in the restructuring and insolvency market in the Czech Republic. It is believed that the country's economy is on the path to stabilisation; however, the uncertainty accompanying the financial crisis, austerity measures and new regulations in the financial sector moderate this belief....

CONTEXT AND TRENDS

In the last 12 months, very little has changed in the restructuring and insolvency market in the Czech Republic. It is believed that the country's economy is on the path to stabilisation; however, the uncertainty accompanying the financial crisis, austerity measures and new regulations in the financial sector moderate this belief. Nevertheless, there is still plenty of activity in the sector with large restructuring and insolvency cases involving Czech companies carrying on. For example, the cases, which keep the market busy, involve the bioethanol producer PLP, the lottery company Sazka and the real estate developer ECM. On the smaller end of market however there is a clear upwards trend. "There were 435 insolvency petitions in January 2011; at the end of 2011, there were 670 and now we have 712. It's going up again," one partner says.

The trend towards stabilisation seems to be taking hold and from January 1 2012, a Czech corporation has a duty to file for insolvency without undue delay once it's learned (or should have learnt) that it is over-indebted. In fact, this duty to file for over-indebtedness was originally suspended in reaction to the financial crisis of 2008.

Again, there was an expectation from market players that companies and their creditors would utilise 'rescue-driven' procedures newly available under insolvency laws across the region to save the healthy parts of a business rather than delaying until the whole business fell into an insolvent winding-up. However, such procedures haven't been used as much under local laws as they have been in the laws of countries outside the region.

Furthermore, experimentation with the modernised Czech insolvency law has thrown out matters that will duly need to be ironed out. "Big insolvencies draw attention to problems," one partner says. "There were large insolvencies with practical problems and this has started initiatives that are being debated." This is indeed a symptom of a market that is maturing as is the experience of the Czech courts which now seek stricter requirements on petitions. "We're getting more formal proceedings for creditors so that petitions are more perfectly prepared," one partner says. And while there are no new cases to speak of over the last 12 months, it is increasingly clear that the ongoing insolvency cases moved into new stages. "We act for one of the big banking creditors and it's in insolvency proceedings now. It was restructuring," one commentator says.