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New Notification Obligation for Czech Energy Sector Transactions

New Notification Obligation for Czech Energy Sector Transactions

Czech Republic
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Effective 1 January 2024, the Czech Energy Act (No. 458/2000 Coll.; "EA") mandates notification to the Ministry of Industry and Trade for both direct and indirect acquisitions of elements of energy critical infrastructure. The parties will be under a standstill obligation until the transaction is cleared. Notably, the triggering event is set to 10 % of shares or voting rights or even lower. Let's take a closer look at the new transaction review feature.

What targets?

The EA imposes a notification obligation on transactions relating to elements of critical infrastructure in the energy sector, namely in the area of electricity, natural gas or central distribution of heat. Infrastructure is designated an element of critical infrastructure by the decision of a government authority. In general, it only covers businesses that have a significant impact on Czech energy infrastructure.

What investors?

Here the answer is simple: all investors. Hence, even simple domestic-to-domestic transactions fall within the EA. This is the main conceptual difference between the EA and the Czech FDI screening regime, which will often overlap. Advisors accustomed to working with screening regimes focusing on non-EU entities will have to adapt their mindset and approach.

What level of influence?

The influence of the Czech FDI screening regime is evident here. The triggering event can be either the ability of the investor to dispose of at least 10 % of voting rights or shares or a seat on the board in the company owning the critical infrastructure element. For asset deals, the trigger is simply the ownership rights. Moreover, there is an alternative triggering event of "another type of influence, which results in an ability to gain access to information, systems or technologies relating to the critical infrastructure element, which are relevant for the energy safety or public order of the Czech Republic". While essentially the same trigger is used in the Czech FDI screening regime, it remains an extremely vague criterion.

What process?

A filing must be submitted prior to the implementation of the transaction. During the proceedings, the parties are under a standstill obligation. There is only one phase, and the ministry should decide within 60 days. The EA contains little in the way of procedural guidance, posing potential practical obstacles especially concerning matters like safeguarding business secrets.

What remedies can be imposed?

The palette of remedies is also remarkably narrow. The ministry can either clear or prohibit the transaction. Surprisingly, in the latter case it is the seller who is obliged to offer the shares or assets in question to the Czech state for a standard price. The offer will stand for at least six months. If the seller fails to do so, any later transfer to a third party is invalid.

Moreover, if the investor fails to notify the transaction, every exercise of its voting rights in the target is invalid and any disposal with target's property is null and void.

Impact

The new regime swiftly became effective without any discussion. As such, the notification obligation is little known and may come out of the blue. While it does share much in common with the FDI regime, its applicability to investors of all sorts and nationalities may come as a surprise. The ministry's ability to effectively expropriate assets raises questions about the impartiality and underlying motives of screening decisions. The lack of procedural rules is also disturbing. All these factors are likely to heighten uncertainty, causing investors and potential sellers to think twice before engaging in transactions in the Czech energy sector.

By Jan Kupcik, Attoreny at Law, Schoenherr

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