Change of Control: Co se stane s vašimi smlouvami, když obchodní partner změní majitele?

What exactly does "change of control" mean and why should every manager care?

This clause gives you the right to react. It allows you to reassess, renegotiate, or even terminate the relationship if the partner's new owner does not meet your expectations. It could be your direct competitor, a financially unstable entity, or a company with a questionable reputation. The clause protects you from being forced to continue a cooperation you did not choose.

Many managers view these clauses as standard boilerplate legal text and pay no attention to them. However, this is a strategic mistake. Underestimating these provisions can have a fatal impact on your business. Correctly setting up change of control clauses is not just a defense, but also a tool that directly affects the value of your company during a future sale. Poorly drafted clauses can deter a potential investor or significantly reduce the purchase price.

How is change of control defined under Czech legislation?

While contracts use the term "change of control", the Czech legal system works with the concept of "control" (ovládání). The key definition is in Section 74 of Act No. 90/2012 Coll., on Business Corporations (ZOK). This stipulates that the controlling person is the one who can directly or indirectly exert a "decisive influence" in a business corporation.

This "decisive influence" is not tied solely to holding a majority stake. It is about the actual ability to enforce one's will. This can also be achieved by holding a smaller stake if the ownership structure is fragmented, or through other instruments, such as the right to appoint a majority of the members of the governing body.

This is precisely where one of the greatest risks arises: a mismatch between the contractual and legal definitions. Your contract may define change of control narrowly (e.g., the sale of more than 50% of shares), but in practice, control can be acquired in another way that the contract does not cover. The Czech legal team at ARROWS specializes in drafting contracts that reflect these risks and provide you with real protection.

Where can you encounter a change of control clause?

Change of control clauses are by no means limited to M&A transactions. They are a common part of a wide range of key commercial contracts, where they protect the parties from unpredictable changes. You should actively check for their presence, especially in the following documents:

• Loan and financial agreements: Banks use them as protection against increased credit risk. A change in the debtor's owner can lead to the immediate acceleration of the entire loan.

• Key supplier and customer contracts: They ensure that you will not be forced to cooperate with a competitor or an unreliable partner.

• License agreements (software, IP): They protect the licensor from having its technology fall into the hands of an unwanted third party.

• Subsidy conditions: The subsidy provider ensures that the supported entity remains under the control of the persons for whom the support was approved.

• Bond terms and conditions: They protect investors from a change in the issuer's risk profile.

Your contractual relationships form an interconnected network. A change of control in one area can trigger a cascade of consequences across the entire company. For example, the acquisition of your company could activate a clause in a loan agreement while simultaneously giving a key supplier the right to terminate cooperation. ARROWS provides comprehensive reviews of contract portfolios to uncover such hidden risks before they cause a problem.

How do I recognize a well-defined CoC clause?

It should be absolutely unambiguous. It must clearly define what constitutes a "change of control" (e.g., percentage of transferred shares, change of majority in the board of directors) and specify the exact consequences – notification obligation, consent requirement, or the right to terminate the contract. Vague definitions are a red flag that we at ARROWS can help you identify and renegotiate.

What if the CoC clause is completely missing from the contract? Is that good or bad?

It depends on your position. If it is likely that someone will buy your company, the absence of the clause can be an advantage. However, if you rely on the stability of your partner, its absence is a significant risk because you have no contractual right to react to a change in their ownership. ARROWS conducts reviews of contract portfolios to identify precisely these kinds of strategic risks. Get in touch with us.

Can a change in management, and not just in ownership, also be a trigger?

Yes, and that is a key detail. Some sophisticated clauses, as international practice shows, can also be linked to a change in the majority of the members of the governing body. Precise contract drafting by our lawyers ensures that the clause protects exactly those interests that are crucial to your business.

What are the greatest risks if you underestimate the change of control clause?

Ignoring or poorly setting up change of control clauses is not just a theoretical problem. In practice, it can lead to immediate and very serious financial and operational impacts that can threaten the very existence of your company.

The most common negative consequences include:

• Immediate acceleration of loans: The financing bank may, based on the clause, demand immediate repayment of the entire loan, exposing your company to an acute lack of liquidity.

• Loss of key contracts: Your strategic supplier may terminate the contract, paralyzing your production. Likewise, a key customer may leave, causing a drop in revenue.

• High contractual penalties: Merely failing to notify the change of control in time can lead to penalties in the range of millions of Czech korunas.

• Jeopardy to M&A transactions: During due diligence, a buyer may uncover disadvantageous CoC clauses in your contracts. This can lead to a reduction in the purchase price or even ruin the entire sale of your company.

• Costly legal disputes: A vaguely worded clause is a frequent source of disputes over whether a change of control has actually occurred and what its consequences are.

Can a change in your partner's owner also threaten your international expansion?

Yes, and in international trade, the risks are even higher. Change of control clauses are a global standard in corporate finance and M&A transactions. The problem is that the definition of "control" can differ across various jurisdictions. What is considered control under the Czech Business Corporations Act (ZOK) may not be the same under German law or EU merger rules.

If you have contracts with partners from different countries, each may be governed by a different law. This extremely complicates assessing the impacts of any transaction. A change of control of your Czech company can trigger not only contractual mechanisms but also regulatory processes, such as foreign direct investment screening..

This complex issue requires a legal team that has not only local expertise but also an international reach. That is why ARROWS has a specialized ARROWS International team ready to guide you through the pitfalls of cross-border transactions and protect your interests in the global market.

How will ARROWS help you effectively manage the risks associated with a change of control?

At ARROWS, we approach the issue of change of control as a strategic business discipline, not just a legal formality. Our goal is to turn potential risks into your advantage and ensure that your contracts support your business objectives. We help clients throughout the entire lifecycle of both contracts and transactions.

• Drafting and review of contracts: We prepare contractual documentation with precisely drafted CoC clauses tailored to your situation that protect your interests.

• Legal Due Diligence in M&A: As part of transactions, we carefully analyze the target company's contracts, identify all risks associated with a change of control, and quantify their impact.

• Representation in negotiations: We actively negotiate with your business partners and banks to obtain consents (so-called waivers) for a change of control so that your transactions proceed smoothly.

• Dispute resolution and court representation: If a dispute arises regarding the interpretation or validity of a clause, our experienced team of litigators will effectively defend your rights.

• Compliance and training: We will help you set up internal processes for contract management and train your employees to prevent costly mistakes.

Our specialists will also be happy to prepare comprehensive legal opinions and analyses that evaluate in detail the impacts of a potential change of control on your entire contract portfolio.

Our company is undergoing a restructuring within a holding group. Can this be considered a "change of control"?

Yes, it can. Even intra-group transfers can technically meet the definition of CoC in some contracts, especially loan agreements. It is essential to check the definitions in all relevant contracts, as banks and other partners often reserve the right to approve even these internal changes. ARROWS specializes in corporate law and restructuring and can assess your situation.

Our partner claims that the clause in our contract is invalid. Are they right?

That depends on its wording and context. A clause can indeed be invalid if, for example, it is too vague, indefinite, or contrary to good morals. However, without a professional analysis of the specific text and the circumstances of the contract's conclusion, an unambiguous answer cannot be given. Our team is ready to analyze your contract and provide you with a clear legal opinion. Contact us.

How far in advance do I have to notify a change of control?

The deadline is always specified in the specific contract. It can range from an obligation to notify the change "without undue delay after" its effectiveness to an obligation to inform the partner 30 or 60 days "before" the planned change. Missing this deadline is considered a material breach of contract and can trigger penalties. ARROWS will help you set up a system for monitoring contractual deadlines.

What is an "indirect change of control" and why is it important?

This refers to a change of control at the level of your contracting party's parent company. Even if the direct owner of your partner does not change, the entity controlling the entire group does. Well-drafted clauses anticipate this situation, which is crucial when doing business with companies that are part of large international holdings. ARROWS International has extensive experience with these structures.

Is there any case law of the Supreme Court of the Czech Republic that would help me?

Although there is no single "landmark" ruling defining all aspects of CoC clauses, the courts address this issue in various contexts. This shows that courts take the obligations arising from these clauses seriously. However, relying on general case law is risky; a precise contract is key. We will be happy to help you with its preparation.