Pre-contractual liability regarding M & A deals in the Czech Republic
If you are going to start negotiations on mergers and acquisitions of the companies, or you are already such party, you should pay attention to our next material. The new complex pre-contractual obligations of the parties are applied in the Czech Republic.
As we can understand from the title, pre-contractual obligations usually arise from the relations of the parties before the conclusion of the formalized contract. In case of mergers and acquisitions deals, they arise before the conclusion of a contract of sale or other similar contract. Until then, the mutual rights and obligations of the parties are often governed by a simple contract of intentions or an agreement on the non-disclosure of confidential information. As a result, the important aspects of the relationship between the parties before the conclusion of a sales contract or a similar contract may be consequently governed by the applicable legislative provisions on pre-contractual liability. Taking into account the importance of this phase of the preparation of M & A deals, as well as the costs incurred by the parties (for example, for legal and financial audits, negotiations on the transfer of technical documentation, or on obtaining financing) before signing the agreement, it is important the parties to understand the potential consequences of legislation on the pre-contractual liability and, if possible, limited and / or excluded its use.
Therefore, the Czech law defines the following types of the pre-contractual liability:
4 types of liability
1. Conducting negotiations without intention to make a contract
2. Termination of negotiations without good reasons
3. Obligation to disclose information
4. Protection of confidential information
Let’s consider each point in more details.
1. Conducting negotiations without intention to make a contract.
This type of pre-contractual liability refers to the situations when the party begins or continues to negotiate without a real intention to conclude subsequently a contract. This applies to the cases when one of the parties intends to obtain certain information that is confidential, or intends to disrupt the negotiation with the third party. At the same time, we note that such claims are rare, since the legislation of the Czech Republic requires the aggrieved party to prove the intentions of its opponent. In most cases this is not possible.
2. Termination of negotiations without good reasons.
The second type of pre-contractual liability protects the parties in the event when the second party breaks the negotiations without a good reason (for example, because it receives a more favorable offer from the third party). However, this applies only in those cases when the negotiations have reached a sufficiently advanced stage to make one of the parties believe (in good faith) that the relevant contract will be concluded. However, the latest practice shows that the seller can try to exclude or limit his pre-contractual liability even at advanced stages, reserving the right to do so at the initial stage of the negotiations, for example, by informing the potential buyers at the auctions (auctioneers) that he reserves the right to refuse all bets or terminate the negotiations at any time.
3. Obligation to disclose information.
The Contracting Parties are obliged to notify each other of factual and legal circumstances that they are aware of or must know in order each party could make sure in the possibility of conclusion of the agreement which has full legal force and that the other party’s interest in the conclusion of the agreement is justified. After determination of the information known to the buyer and seller that must be disclosed by the last ones for the purpose to conclude a merger and acquisition agreement, the parties must carefully consider legally established rules of information disclosure in order to make sure that such rules will not contradict the obligations on information disclosure.
4. Protection of confidential information.
The legislation of the Czech Republic requires each party that the confidential information obtained during negotiations not to be used for negative purposes and disclosed. Although, this rule is a simplified legislative version of non-disclosure agreements that have become a generally accepted standard, the Czech legislation also grants the parties the right to keep records of confidential information and messages exchanged during the negotiation process. This situation in many cases goes against the intentions of the parties (in particular, the sellers).
In conclusion, it should be noted that the parties of mergers and acquisitions deals, in particular, those ones in which mutual pre-contractual obligations are based on simplified agreements of intent or other limited agreements, should carefully consider the potential impact of normative regulations that regulate the pre-contractual relations of the parties and weigh the negative consequences, which they may cause. New requirements of czech legislation to relations of parties before conclusion of m&a contracts
Pre-contractual liability regarding M & A deals in the Czech Republic
If you are going to start negotiations on mergers and acquisitions of the companies, or you are already such party, you should pay attention to our next material. The new complex pre-contractual obligations of the parties are applied in the Czech Republic.
As we can understand from the title, pre-contractual obligations usually arise from the relations of the parties before the conclusion of the formalized contract. In case of mergers and acquisitions deals, they arise before the conclusion of a contract of sale or other similar contract. Until then, the mutual rights and obligations of the parties are often governed by a simple contract of intentions or an agreement on the non-disclosure of confidential information. As a result, the important aspects of the relationship between the parties before the conclusion of a sales contract or a similar contract may be consequently governed by the applicable legislative provisions on pre-contractual liability. Taking into account the importance of this phase of the preparation of M & A deals, as well as the costs incurred by the parties (for example, for legal and financial audits, negotiations on the transfer of technical documentation, or on obtaining financing) before signing the agreement, it is important the parties to understand the potential consequences of legislation on the pre-contractual liability and, if possible, limited and / or excluded its use.
Therefore, the Czech law defines the following types of the pre-contractual liability:
4 types of liability
1. Conducting negotiations without intention to make a contract
2. Termination of negotiations without good reasons
3. Obligation to disclose information
4. Protection of confidential information
Let’s consider each point in more details.
1. Conducting negotiations without intention to make a contract.
This type of pre-contractual liability refers to the situations when the party begins or continues to negotiate without a real intention to conclude subsequently a contract. This applies to the cases when one of the parties intends to obtain certain information that is confidential, or intends to disrupt the negotiation with the third party. At the same time, we note that such claims are rare, since the legislation of the Czech Republic requires the aggrieved party to prove the intentions of its opponent. In most cases this is not possible.
2. Termination of negotiations without good reasons.
The second type of pre-contractual liability protects the parties in the event when the second party breaks the negotiations without a good reason (for example, because it receives a more favorable offer from the third party). However, this applies only in those cases when the negotiations have reached a sufficiently advanced stage to make one of the parties believe (in good faith) that the relevant contract will be concluded. However, the latest practice shows that the seller can try to exclude or limit his pre-contractual liability even at advanced stages, reserving the right to do so at the initial stage of the negotiations, for example, by informing the potential buyers at the auctions (auctioneers) that he reserves the right to refuse all bets or terminate the negotiations at any time.
3. Obligation to disclose information.
The Contracting Parties are obliged to notify each other of factual and legal circumstances that they are aware of or must know in order each party could make sure in the possibility of conclusion of the agreement which has full legal force and that the other party’s interest in the conclusion of the agreement is justified. After determination of the information known to the buyer and seller that must be disclosed by the last ones for the purpose to conclude a merger and acquisition agreement, the parties must carefully consider legally established rules of information disclosure in order to make sure that such rules will not contradict the obligations on information disclosure.
4. Protection of confidential information.
The legislation of the Czech Republic requires each party that the confidential information obtained during negotiations not to be used for negative purposes and disclosed. Although, this rule is a simplified legislative version of non-disclosure agreements that have become a generally accepted standard, the Czech legislation also grants the parties the right to keep records of confidential information and messages exchanged during the negotiation process. This situation in many cases goes against the intentions of the parties (in particular, the sellers).
In conclusion, it should be noted that the parties of mergers and acquisitions deals, in particular, those ones in which mutual pre-contractual obligations are based on simplified agreements of intent or other limited agreements, should carefully consider the potential impact of normative regulations that regulate the pre-contractual relations of the parties and weigh the negative consequences, which they may cause.