Transfer of a going concern under the new Czech Civil Code

August 2015 | EXPERT BRIEFING | MERGERS & ACQUISITIONS

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As in other jurisdictions, two basic acquisition mechanisms are in place in the Czech Republic: the asset deal and the share deal. The former, which is the subject of this article, can be structured in two different ways: a transfer of a going concern (TOGC) and a transfer of particular individual assets. The recent recodification of Czech private law, in particular the enactment of Act No. 89/2012 Coll. the Civil Code (Civil Code), has made the distinction between the two even more relevant.

Single asset transfer agreement

Unlike other civil law jurisdictions, under Czech law it is possible to transfer the company’s entire body of assets and any and all rights and obligations pertaining to the assets, including contracts, real estate, IT licences and IP rights, by a single written agreement.

The transferred assets must form a business enterprise, i.e., an organised set of assets and liabilities created for the purposes of conducting business activities. This means that, in general, everything used for the business operation must be subject to the transfer.

The Civil Code provides for two exceptions from this rule. First, it is possible to contractually exclude an individual item from the purchase, provided that the whole does not lose its nature as an enterprise. By way of example, in the case of a sale of a vaccines business, it would likely not be possible to exclude any patents to the transferred vaccines. However, it might be possible to exclude individual company cars or common laboratory equipment.

Second, it is possible to transfer only a part of the business enterprise provided that such part forms an independent organisational unit. Case law suggests separate bookkeeping serves as a litmus test for whether the independent organisational unit test is met.

In practice, whenever a Czech business enterprise transfer is part of an international deal, it is common to execute a local business transfer deed governed by Czech law. The rationale behind the practice is that the agreement, on the basis of which the business is transferred, must be filed with the Collection of Deeds maintained by the Czech Commercial Register, and is made public.

As to the formalities, an agreement on a TOGC must be approved by the general meetings of both transferor and transferee. The signatures on the agreement must be notarised (and apostilled, depending on the country where the agreement was signed) if real estate property is subject to the transfer as well.

Transfer of contracts

One of the main advantages of a TOGC is that, unlike the case of a sale of individual assets, the transferor does not have to obtain consent of third parties with transfer of contracts. All the contracts relevant to the business are transferred by the agreement on the TOGC.

Notably, the Civil Code provides for a special rule regarding the transfer of a lease in the case of a ‘business activity’ transfer when the transfer of the lease is subject to a written prior consent of the landlord. Even though we believe that it would hardly make any sense to be limited in the transfer of a lease when the whole business activity is being sold, there is currently no relevant case law defining ‘business activity’ and, therefore, we cannot rule out a possibility that such provision applies also in the case of a TOGC.

Transfer of debts

Through an agreement on a TOGC, the transferee acquires the debts which it was aware of or must have been aware of, considering the nature of the business enterprise.

Importantly, unless the creditors give their consent to the transferee’s debt acquisition, the transferor remains a statutory guarantor of all debt which had arisen prior to the TOGC.

VAT exemption

The relevance of drawing a line between a TOGC and the sale of individual assets becomes particularly apparent when one considers the Czech tax law rules. A TOGC is a Czech value added tax (VAT) neutral transaction. On the other hand, the transfer of individual assets is subject to the standard VAT rate of 21 percent. VAT is due on the taxable performance date, i.e., the date of a hand-over of the goods (the date when the transferee may dispose of the goods as the owner), or the date when the payment was received, whichever is earlier.

Effectiveness of the TOGC

A TOGC is effective only by the publication of the copy of the agreement on the TOGC in the Collection of Deeds maintained by the Czech Commercial Register. The transfer of assets which form a part of the enterprise and which are registered in a public registry (such as real estate) must be notified to the relevant public register by providing the agreement on the TOGC. The agreement on the TOGC must be submitted in the Czech language or, alternatively, it must to be accompanied by an official translation.

Conclusion

While a TOGC has certain undisputed advantages, such as the simplicity of the transfer process and the VAT exemption, it concurrently imposes considerable responsibility on the contracting parties. The assessment of the transfer’s compliance with TOGC’s requirements is not always clear-cut, in particular when only a part of the business is being transferred. Therefore, close cooperation between a client and a lawyer from the very beginning of structuring the deal is a must to avoid the risk of invalidating the asset transfer.

Jan Kotous is counsel and Anna Diblikova is an associate at Wolf Theiss. Mr Kotous can be contacted on +420 234 765 111 or by email: jan.kotous@wolftheiss.com. Ms Diblikova can be contacted on +420 234 765 111 or by email: anna.diblikova@wolftheiss.com.

Jan Kotous and Anna Diblikova

Wolf Theiss