How to address counterparty investment screening in a contract

When screening applies to the purchase of a Czech company

A foreign investment is defined as an asset value provided by a foreign investor for the purpose of carrying out an economic activity in the Czech Republic, which enables the investor to exercise an effective degree of control over this activity (Section 3 of the Act on the Screening of Foreign Investments). Therefore, the purchase of a share itself does not trigger the regime automatically. What matters is whether the buyer gains control, and to what extent.

The threshold of 10% of voting rights is just one of four ways in which an effective degree of control arises. The law considers it to be the ability to dispose of at least a ten percent share of voting rights or to exert a corresponding influence, whereby shares of persons under unified management and persons acting in concert are also included (Section 5 of the Act). However, on its own, the membership of the investor or a person close to them in a body of the target company, the ability to dispose of ownership rights to property through which the activity is carried out, or access to information, systems, or technologies important from a security perspective is also sufficient.

For a buyer from China or Japan, it is crucial that a foreign investor is defined as anyone who is not a citizen of the Czech Republic or another EU member state, does not have their registered office in the Czech Republic or another EU member state, or is directly or indirectly controlled by such a person (Section 2, Paragraph 1). A European subsidiary of a Chinese or Japanese group is therefore usually considered an investor because it is controlled by a person from a third country. Thus, it is not enough to look only at the registered office of the buying company.

The procedure applies similarly if the person controlling the investor changes after the investment is made, but only if this change allows direct or indirect control by a person outside the EU, i.e., a person without citizenship or a registered office in the EU (Section 4). Not every reorganization of the buyer thus establishes an obligation, but the contract must address future changes in its structure. In addition, the EU framework is set to change: according to available information, the new EU regulation on investment screening will apply from 2028. A broader overview is provided in the article on foreign investment screening in the EU.

When authorization is mandatory and when consultation is sufficient

Without authorization, a foreign investment may not be made in a company that carries out the production, research, development, or life-cycle support of military equipment, in a critical infrastructure entity, in a provider of a regulated service under a high-obligation regime, or in a company that develops or manufactures dual-use goods under Annex IV of the EU Regulation (Section 7 of the Act). However, not all dual-use goods fall under Section 7: mandatory authorization is linked only to Annex IV, while other dual-use technologies may be significant in assessments under Section 8.

For other companies, consultation is usually voluntary, with the exception of large media outlets. If the target company holds a license for nationwide radio or television broadcasting or is a publisher of periodical press with an average printed circulation of at least 100,000 copies per day, the investor must submit a proposal for consultation before completing the investment (Section 10, Paragraph 1). For other investments outside Section 7 that may threaten security or public order, the Ministry may initiate ex officio proceedings based on a consultation, or within 5 years of the completion of the investment if no consultation was proposed (Section 8).

Consultation is therefore a tool of certainty for both the buyer and the seller. If none of the consulted authorities or the Ministry finds a reason to initiate proceedings, the investment is deemed not to pose a threat, and proceedings cannot be conducted in the future, subject to false or incomplete information (Section 10 of the Act). For a company in a more sensitive sector, this is often the cheapest way to a clean closing, as it eliminates the five-year risk of subsequent screening.

For the transaction team, the first task is to determine whether the target company falls under Section 7 or under mandatory consultation, and if not, whether it is reasonable to submit a consultation. Both depend on the company's activities, its customers, and technologies, which is why this is examined in the early stage of due diligence. The course of the entire transaction from intent to closing is discussed in the text on how a company is sold from LOI to post-closing.

Timeline: how much time screening consumes

If the matter does not go to the Government, the Ministry must issue a decision within 90 days of the initiation of the proceedings, and in particularly complex cases, up to 30 days may be added to this period (Section 14 of the Act). However, the period does not run from the signing of the contract, but from the initiation of the proceedings, i.e., from the submission of the application. A buyer who submits a late or incomplete application extends the closing by a period that no one accounted for in the contract.

Requesting supporting documents extends the time. From the day the Ministry requests additional documents until they are submitted, the deadlines for consultation do not run, and the screening proceedings may be suspended (Section 9, Paragraph 3). The investor must provide an extensive set of information in the application, including the ownership structure up to the ultimate beneficial owner, sources of financing, and data about the target company (Section 9, Paragraph 1), and insufficient or misleading information may be grounds for denying authorization (Section 9, Paragraph 5).

If the matter goes to the Government, the timeline is extended: the Ministry must submit it within 90 days of the initiation of the proceedings, or within 120 days in particularly complex cases, and the Government will adopt a resolution within 45 days of submission (Section 13). The statutory framework thus amounts to 135 or 165 days, respectively, to which suspensions during negotiations on conditions and requests for documents are added; the Ministry then issues a decision without undue delay. For consultations, the Ministry announces the result within 45 days of the proposal (Section 10). The realistic timeframe is therefore several months.

This leads to a rule for the timeline: a buffer for submitting the application, supplementing documents, and potential government review must be included before closing. It is advisable to set the deadline for fulfilling the condition precedent at the upper limit of the statutory periods, with an additional buffer, as requests for documents and suspensions of proceedings extend the time. A short deadline means that the contract may become impossible to fulfill solely due to administrative reasons.

What to include in the contract: a playbook for the transaction team

The foundation is a condition precedent: closing does not occur until authorization or a decision on the admissibility of the investment is issued, or until the consultation ends with a notification that there is no reason to initiate proceedings. For companies under Section 7, this is a necessity because the investment cannot be made without authorization. For other companies, the condition applies to the outcome of the consultation, if the parties choose to use it or if it is mandatory.

The second element is the allocation of obligations. The buyer undertakes to submit the application or proposal for consultation within a specified period and to provide complete information under Section 9, while the seller and the target company undertake to cooperate, as the Ministry may also request information from them. The contract should determine who bears the costs, who communicates with the Ministry, and how findings are shared to avoid discrepancies in submissions.

The third element is determining what happens if authorization is not received in time. The contract sets a longstop date after which either party may withdraw or negotiate an extension, and determines whether a contractual penalty or a break fee applies. In transactions where the risk is high, a deposit or escrow that is returned upon failure is sometimes reflected in the price. This structure is a contractual choice, not a legal requirement.

The fourth element is conditional authorization. Based on a government resolution, the Ministry may issue a conditional authorization containing conditions agreed with the investor during negotiations on conditions (Section 12 and Section 15, Paragraph 3); therefore, the contract must state whether the buyer will accept the conditions, what their limits are, and who bears their costs. Without this provision, one of the parties may reject conditions that the other considers obvious, and a dispute will arise just before closing. It is recommended to determine in advance which conditions are acceptable.

What happens if screening fails or is ignored

A decision to deny authorization or to ban the investment is issued by the Ministry if the Government decides that it is necessary for the protection of security or public order (Section 15 of the Act). No appeal (remonstrance) can be filed against a decision conditioned by a government resolution, nor can it be reviewed in review proceedings, and a lawsuit cannot be granted suspensive effect (Section 15, Paragraph 7). A buyer who receives such a decision thus has no easy remedy.

A different situation arises when an investor does not submit an application for authorization at all for a company under Section 7. The Ministry will then initiate ex officio screening proceedings (Section 8, Paragraph 4, Letter a), and making an investment without an application is an administrative offense for which a fine of up to 1% of the investor's total net turnover can be imposed (Section 25). The same offense is risked if the investor fails to submit a mandatory consultation for large media outlets. Other measures are decided only based on the outcome of the proceedings.

The harshest consequence is a ban on the continuation of the investment. If conditions were breached or the investment was made in violation of a decision and security may be threatened, the Ministry may decide to ban the continuation of the investment, including banning or restricting the exercise of voting rights or ordering the sale of the target entity or share within a deadline for completing the sale (Section 15, Paragraphs 4 and 5). If the sale does not occur within the deadline, the Ministry may arrange for the sale in a public auction or otherwise, with the costs covered by the proceeds (Section 15, Paragraph 6).

For the seller, this implies a fundamental point: a contract in which the buyer gains control without authorization where required can lead to proceedings, a fine, and, in extreme cases, a forced sale under conditions that no one negotiated. Therefore, the contract must include an explicit prohibition on completing the transaction before the condition is met and the seller's right to withdraw if the buyer breaches its obligations to the Ministry. The seller bears the consequences even when not formally responsible for them.

In the case of false or misleading information, consequences are risked already during the proceedings: they can be grounds for initiating proceedings, denying authorization, or banning the investment (Section 9, Paragraph 5). Therefore, it is advisable for both the seller and the target company to provide only verified information to the Ministry, and the contract should determine who is responsible to the other party for its accuracy.

Chinese and Japanese buyers: what the law does not address and needs to be verified

The Czech regulation determines what a buyer from a third country must comply with in the Czech Republic. However, it does not address what authorizations the buyer may need in their home country, for example, regarding capital outflow, technology transfer, or compliance with their own control regimes. This section is therefore not an interpretation of Chinese or Japanese law, but merely a warning about areas that must be verified. The general context of foreign investments in Czech companies is summarized in the text on how foreign investments in companies in the Czech Republic work.

A buyer from China or Japan usually has their own team and advisors, but the seller should not rely on them. If a step depending on a decision of a foreign authority is included in the timeline, it should be explicitly named in the contract as a condition precedent on the buyer's side, along with a deadline and the buyer's obligation to prove its fulfillment. Otherwise, the seller is left relying on assurances that everything is in order.

There are two practical recommendations. First, ask the buyer to submit, before signing, an overview of the authorizations and notifications they need in their country and elsewhere, and have them confirmed by their legal representative. Second, include a warranty in the contract that the buyer is aware of and will fulfill such obligations, and that no delay will occur for these reasons. The content of these steps must be verified with local advisors depending on the specific transaction.

Six steps from target company screening to closing

The first step is the classification of the target company: does it fall under Section 7 or under mandatory consultation, or not? The team reviews the company's activities, its customers, technologies, and licenses, and lists which of them may establish an obligation for authorization. The result is reflected in the contract structure and timeline, and determines whether the condition precedent will be mandatory or voluntary.

The second step is to screen the buyer. Who is the ultimate beneficial owner, who controls them, where does the money come from, and what are their connections, as these are precisely the details the investor must state in the application (Section 9, Paragraph 1). A buyer who is unwilling to disclose them is a risk during screening, and the seller should know this before signing. The third step is the decision on consultation or application for authorization.

The fourth step is a timeline with a buffer: preparation of documents, submission, supplementing, potential government review, and fulfillment of conditions. The fifth step is the contract with a condition precedent, a longstop date, cooperation obligations, and rules for conditions. The sixth step is communication with the Ministry and monitoring deadlines, including suspensions when documents are requested.

During these steps, it is beneficial to have a single coordinator on the seller's side who monitors the status, communicates with the buyer, and secures documents from the target company. Screening is often delayed not due to the authority's decision, but because of missing information that no one provided in time. Good organization saves weeks and reduces the risk of the contract reaching its longstop date.

Four mistakes that threaten closing

The first mistake is relying on the assumption that the company is "exempt." The seller assumes that screening only concerns arms manufacturers and discovers that the target company is a provider of a regulated service or manufactures dual-use goods under Annex IV. The investment cannot be made without authorization, and closing is delayed or fails. Prevention lies in early-stage classification.

The second mistake is a short deadline for fulfilling the condition. The contract allows for three months, but the proceedings take longer or are halted by requests for documents. The parties then deal with withdrawal or extension under unfavorable conditions. It helps to set a longstop date with a buffer and an extension mechanism that is triggered without the need for a new agreement.

The third mistake is an incomplete or inaccurate submission. The investor fails to state the ultimate beneficial owner or the source of financing, and the Ministry requests supplementation or denies authorization. The fourth mistake is underestimating the consequences: an investment without an application leads to proceedings and a fine, and an investment made in violation of a decision can end in a ban on continuation and a forced sale. Therefore, the Prague-based legal team at ARROWS law firm starts with company classification and buyer screening before proposing the contract structure.

Risks of counterparty screening during closing

Final summary

Screening a buyer from a third country is a risk for closing in a Czech transaction that can be contractually managed. The article showed that authorization is mandatory for selected companies and consultation for large media outlets, that proceedings take several months or longer if the matter goes to the Government, and that an investment without authorization leads to proceedings and a fine, or even a ban and forced sale if made in violation of a decision.

For the transaction team, this implies a clear procedure: first classify the target company and screen the buyer, then set a condition precedent with a buffer in the timeline, and only then negotiate the price. The reverse order leads to closing reaching its longstop date without authorization, leaving the parties to negotiate withdrawal.

The Czech legal team at ARROWS law firm leads transactions with investors from third countries, screens target companies and buyers, prepares conditions precedent, and communicates with the Ministry. Write to us at consultation@arws.cz or explore our service for company sales and transaction advisory.