How to Buy Out a Share in a Company

Are you planning to sell shares? What you need to know before you start

A key step that many sellers underestimate is the preparatory due diligence on the seller's side, known as Vendor Due Diligence. Thorough preparation and "cleaning up" of corporate documentation, contracts, and liabilities before approaching potential buyers dramatically increases the company's value and speeds up the entire process. A company without "skeletons in the closet" is more attractive and less risky for investors.

In this initial phase, our experience plays a key role. Thanks to our long-term cooperation with a portfolio of more than 150 joint-stock companies and 250 LLCs (s.r.o.), our Czech legal team knows exactly which areas to focus on to optimally prepare your company for sale. We will help you identify and resolve potential issues before the buyer discovers them. Contact us for an initial consultation on preparing your company for sale.

What is the exact procedure for transferring shares in the Czech Republic?

Although the legal ground (title) for transferring shares is always a contract, the actual method (modus) of transfer differs fundamentally depending on whether the shares are certificated (paper-based) or book-entry (dematerialized). Understanding these differences is essential to ensure the validity and effectiveness of the entire transaction.

Transfer of certificated registered shares: A three-step process

The transfer of physical, certificated registered shares is a formalized process consisting of three consecutive steps. Omitting any of them can lead to the invalidity of the transfer.

Step 1: Share Transfer Agreement

The agreement is the cornerstone of the transaction. It can be for consideration (purchase agreement) or free of charge (donation agreement). It must contain key elements, such as the precise identification of the contracting parties, unambiguous determination of the transferred shares (including their numerical designation), and, in the case of a sale, the purchase price or the method of its determination.

Step 2: Endorsement (Indorsement)

A registered share is an order instrument (security to order) and is therefore transferred by endorsement. The endorsement must be written directly on the back of the share certificate or on an attached slip, a so-called allonge. Under Section 269 of the Business Corporations Act (ZOK), the endorsement must contain unambiguous identification of the transferee and the signature of the transferor.

Step 3: Delivery of the Share (Tradition)

Ownership of a certificated share is transferred to the transferee only at the moment of its physical delivery. The mere signing of the agreement and endorsement without the delivery of the share is not sufficient to transfer ownership.

It must be emphasized that, vis-à-vis the joint-stock company itself, the transfer is effective only at the moment when the change of shareholder is notified to it and the share with the relevant endorsement is presented to it. Only on this basis will the company register the new owner in the list of shareholders, which is crucial for the exercise of shareholder rights.

Transfer of book-entry shares: The role of the central registry

Book-entry shares have no physical form; they exist only as an electronic record in the Central Securities Depository (CDCP). Their transfer is therefore completely different and takes place exclusively in a digital environment. Ownership is transferred by registration in the asset accounts maintained with the CDCP.

A key role in this process is played by a securities trader (a bank or investment company) that is a member of the CDCP. A shareholder cannot issue a transfer instruction directly to the depository. They must do so through their trader, with whom they have established an asset account. Both parties to the transaction, the seller and the buyer, issue transfer instructions to their traders, which must match for the CDCP to settle the transaction.

ARROWS can help you not only with the preparation of contractual documentation but also with coordinating the entire process with securities traders to ensure a smooth and secure transfer. Do you need assistance with transferring book-entry shares? Contact our Prague-based office.

Minority shareholder perspective: How to protect your rights and maximize value?

The position of a minority shareholder is often full of challenges. Among the greatest are the low liquidity of the share (it is difficult to find a buyer), the risk of being "stuck" in a company with a majority owner you disagree with, and the threat of a forced sale under unfavorable conditions. However, the law offers strong protection tools.

Contractual protection: Tag-along rights

One of the most effective protection tools is the so-called tag-along right (the right to "join in"), which is negotiated in a shareholders' agreement. This provision gives the minority shareholder the right to sell their shares under the same conditions and for the same price as the majority shareholder if the latter sells their stake to a third party. This right is often a more effective protection than a statutory pre-emptive right, as the minority shareholder usually lacks the capital to buy out the majority owner's stake. Instead, tag-along ensures access to liquidity and a fair price negotiated by the stronger partner.

At ARROWS, we specialize in drafting shareholders' agreements that effectively protect the rights of minority shareholders. Do you want to secure a strong position for the future? Get in touch with us today.

Statutory protection: Sell-out rights

Czech law also remembers the protection of minority shareholders directly in the legislation. Under Czech legislation, the sell-out mechanism under Section 395 of the ZOK gives a minority shareholder, under certain circumstances (for example, after a change of control over the company), the right to demand that the majority shareholder purchase their shares for a reasonable price. This is a legally provided "escape route" from a position that has become disadvantageous for the minority owner.

Risks for minority shareholders and their solutions

Majority shareholder perspective: How to effectively sell the entire company?

For a majority shareholder, the main goal during a sale is to deliver 100% of the shares to the buyer. Most strategic investors have no interest in entering a company where minority shareholders remain, as they could block or complicate the transaction. Both contractual and statutory tools are used to achieve this goal.

Contractual tool: Drag-along rights

The drag-along right is the mirror image of the tag-along right. It is a contractual arrangement that gives the majority shareholder the right to "force" (literally "drag along") minority shareholders to sell their stakes to the same buyer under identical conditions. This right gives the majority shareholder the certainty that they can negotiate the sale of the entire company, which significantly increases its attractiveness and potential sale price. It is a key tool for planning a successful exit.

Drafting contractual documentation with a drag-along clause is a standard part of our services for founders and majority owners. Are you planning a future sale? Secure control over the process with our experts.

Statutory tool: Squeeze-out of shareholders

If no contractual arrangement exists, the law offers a process for the forced transfer of participating securities, known as a squeeze-out. Under Czech legislation, this mechanism can be initiated by a shareholder who owns at least 90% of the shares and holds at least 90% of the voting rights. The process involves a request to the board of directors, preparation of an expert opinion on the adequacy of the consideration, convening a general meeting, registration in the commercial register, and payment of the consideration to the minority shareholders.

Although a squeeze-out is a powerful tool, it is extremely sensitive to procedural errors. Any mistake in the expert opinion, in the invitation to the general meeting, or suspicion of purposeful acquisition of shares can lead to the invalidity of the entire process and costly litigation.

Procedural risks in Squeeze-outs and how ARROWS prevents them

The key to a secure transaction: Due Diligence and Representations in the contract

Before signing the share transfer agreement, the buyer conducts a thorough due diligence of the company to uncover all legal, tax, and financial risks. This process includes a detailed analysis of contracts, licenses, litigation, employment relationships, intellectual property, and other key areas of the company's operations.

Liability for defects in the share – legal uncertainty

Unlike physical goods, the legal concept of a "defect" in a company share is highly complex. Is a hidden tax underpayment in the company a defect of the share itself? Czech case law is not entirely clear on this, and relying solely on statutory liability for defects is a huge risk for the buyer.

Solution: Representations & Warranties

Modern acquisition agreements therefore solve this problem through so-called Representations & Warranties. This is a contractual tool by which the seller guarantees a certain factual and legal state of the company to the buyer as of the sale date. For example, they represent that the company has no hidden debts, all taxes are properly paid, and there is no ongoing litigation. If any of these representations prove to be untrue, the buyer is entitled to financial compensation without having to laboriously prove a "defect" in the share.

Negotiating the scope of Representations & Warranties is one of the most important phases of the entire transaction. The ARROWS team has extensive experience in drafting and negotiating acquisition agreements that protect our clients from unpleasant surprises. Get in touch with us to obtain a tailored legal solution.

Common transaction risks and their contractual mitigation

Tax obligations: When do you have to pay tax on the sale of shares?

Taxation of income from the sale of shares differs for individuals and legal entities. Correct assessment of tax implications is crucial for the final profit from the transaction.

Individuals

Income from the sale of shares is exempt from income tax for individuals if at least one of the following two conditions is met:

1. Time test: The period between the acquisition and sale of the shares exceeded 3 years.

2. Value test: The total income (not profit!) from the sale of all securities in the given calendar year did not exceed CZK 100,000.

Important legislative change as of January 1, 2025: Even if the three-year time test is met, only income up to CZK 40,000,000 per tax period will be exempt. Income above this limit will be subject to taxation, even if the shares were held for longer than three years.

Legal entities

Completely different rules apply to legal entities. Income from the sale of a share is exempt from corporate income tax if the selling company held at least a 10% share in the registered capital of the target company for a continuous period of at least 12 months. If these conditions are not met, the profit from the sale is included in the general tax base.

Sale to a foreign investor: International aspects of the transaction

Transactions with an international element bring specific legal and tax challenges. ARROWS addresses these issues practically every day thanks to the ARROWS International network built over ten years. We thus provide our clients with legal and tax advisory not only in the Czech Republic but also in the buyer's jurisdiction.

Double taxation treaties play a key role, determining in which country the income from the sale will be taxed and preventing the same income from being taxed twice. Proper structuring of the transaction is therefore essential. Furthermore, the risk of the so-called exit tax (tax on the transfer of assets abroad) must be kept in mind. If the sale of shares is related to the relocation of assets or the company's registered office abroad, it may trigger a specific tax liability in the Czech Republic.

Selling abroad requires an experienced partner who understands both legal systems. We are ready to guide you through the entire process safely and effectively.

Conclusion: Your successful exit begins with the right partner

Selling a stake in a joint-stock company is one of the most significant transactions in the life of an entrepreneur and a company. As our guide shows, the process is complex and requires not only knowledge of the law but also strategic thinking and negotiation experience. Every step – from preparing the company and structuring the agreement to addressing tax and international aspects – has a fundamental impact on the final outcome.

At ARROWS, we specialize in these transactions. Our experience from the long-term management of a portfolio of hundreds of business companies and daily practice in international transactions allows us to provide services at the highest level. We are not only lawyers but also business advisors who understand your goals. We are happy to connect our clients when we see interesting business or investment opportunities.

Do not leave the result of your life's work to chance. Turn to us and secure a partner who will guide you safely through the entire process and help you maximize the value of your transaction.