The M&A market in 2020 has been significantly affected by the coronavirus pandemic. According to the latest quarterly M&A overview prepared by CzechInvest, the leading agency supporting business and investments in the Czech Republic, “in a very short period of time and on a large scale, many companies have had to close down or limit their operations, dismiss stuff members, and disrupt supply chains.” Although there has been some recovery since May, the situation remains unpredictable. The second and next presumed waves will likely bring even more uncertainty.
Although this is hardly the first time the M&A market has been hit by an economic crisis, and although it has always recovered before (most recently, the post-2008 crisis period proved to be a great time to go shopping for cheap assets), this time the situation seems different. The impact of the pandemic will likely divide the market more than it has before. We will see winners (e-commerce, fintech, etc.) who profit from the various restrictions, and losers (automotive, tourism, etc.) who suffer from them. This ultimately will result in changes to deal terms and new issues with respect to due diligence and how it is conducted, pricing/valuations and other terms of deal financing, and the time required to obtain regulatory and other third-party approvals. Investors will be interested in the economic resilience of potential targets. Others (who are sitting on plenty of cash) will speculate on prices falling and on distressed assets.
Nevertheless, the Czech M&A market has remained relatively active, and according to information from various corporate finance advisors, the pipeline looks healthy. Interestingly, as the lockdown and various restrictions handcuffed advisors trying to make deals by preventing regular face to face meetings, we can see a kind of gap in the pipeline. Similarly, foreign investors, even if they remain acquisitive, find it difficult to travel to the Czech Republic for site-visits and management presentations. Not everything can be done virtually; building trust and verifying the facts on the ground remain important even in these times, and their absence can be an obstacle for some transactions. What remains relatively strong is the Czech mid-market, which is largely driven by the limited succession possibilities of the founders. According to some local private equity players with very good track records, the inflow of opportunities and potential projects is even stronger than before the pandemic.
Major Amendment to the Business Corporations Act
An extensive amendment to the Czech Business Corporations Act will enter into force on January 1, 2021, clarifying a number of unsettled issues and introducing some substantial changes. Besides technical amendments, it will bring changes to the distribution of profits and other capital funds, liberalize classes of shares, significantly modify the monistic management model of joint-stock companies, change per-rollam (by letter) decision-making process in limited liability companies, joint-stock companies, and cooperatives, and amend the liability and method of remuneration of members of statutory bodies. These changes will affect virtually all forms of companies.
In particular, companies should ask themselves whether the changes in the rules regarding the distribution of profits and other capital funds will work for them after January 1, 2021, and what impact that may have on their plans. The criteria for distributions will change to apply jointly to dividends and other equity payments. On the other hand, investors will have more clarity and legal certainty when it comes to structuring various rights by means of classes of shares. For example, it will be possible to issue shares only with economic rights and without voting rights. This is a great opportunity in the current situation.
By Tomas Dolezil, Partner, JSK