10 Legal Clauses Every Company Owner in the Czech Republic Should Have in Their Shareholder Agreement

Operating a business in the Czech Republic offers immense potential, but without a robust legal framework, shareholder disputes can paralyze your company. As a leading Czech law firm based in Prague, European Union, ARROWS provides the security you need to navigate local corporate law. This article outlines the ten essential clauses to protect your investment.

Need advice on this topic? Contact the ARROWS law firm by email office@arws.cz or phone +420 245 007 740. Your question will be answered by "JUDr. Jakub Dohnal, Ph.D., LL.M.", an expert on the subject.

Why the Standard Articles of Association Are Not Enough

Many foreign investors assume that the standard Memorandum of Association (Articles of Association) required for company incorporation is sufficient. It is not. In the Czech legal environment, the Memorandum is a public document available in the Commercial Register. A Shareholder Agreement (SHA) is a private, confidential contract that truly governs the relationship between owners.

While setting up a company might seem administratively simple, the relationships between business partners are complex. Without a tailored SHA, you are subject to the default provisions of the Czech Corporations Act, which may not favor your specific commercial interests.

ARROWS, an international law firm operating from Prague, European Union, handles these agreements daily. We support over 150 joint-stock companies and 250 limited liability companies, ensuring their internal relations are secure.

1. Deadlock Clauses (The "Russian Roulette" or "Texas Shootout")

If you own a company 50/50 with a partner, you face the risk of a "deadlock"—a situation where neither party can agree, effectively freezing company operations. In the Czech Republic, a paralyzed company can be legally dissolved by a court.

To prevent this, you need a mechanism to break the tie. Common legal solutions include "Russian Roulette" or "Texas Shootout" clauses, which provide a structured method for one partner to buy out the other. Implementing a clear deadlock mechanism is cheaper and faster than corporate liquidation. Need to structure a buyout mechanism? Contact us at office@arws.cz.

2. Drag-Along Rights

For majority shareholders or investors looking for an eventual exit (sale of the company), the Drag-Along right is non-negotiable. This clause forces minority shareholders to sell their shares if the majority finds a buyer for the whole company.

Without this, a minority shareholder owning just 10% could block a multi-million Euro acquisition. Drafting this requires precision to ensure it is enforceable under Czech law, specifically regarding price fairness.

3. Tag-Along Rights

Conversely, if you are a minority shareholder, you need protection. A Tag-Along clause ensures that if the majority shareholder sells their stake, they must secure the same terms and price for you. This prevents you from being left behind with a new, unknown business partner. Are you a minority investor needing protection? Email us at office@arws.cz.

FAQ – Legal Tips about Control Clauses

• Can I use a template from the UK or US for a Czech company?
  No. Czech corporate law operates on civil law principles, not common law. Using a foreign template can render critical clauses void or unenforceable in local courts. For a review of your current drafts, contact office@arws.cz.
• Is the Shareholder Agreement filed with the government?
  Generally, no. Unlike the Articles of Association, the SHA remains a private contract, keeping your sensitive business arrangements out of the public eye. For help drafting confidential agreements, write to office@arws.cz.

4. Good Leaver / Bad Leaver Provisions

What happens if a key founder quits the company to join a competitor after one year? If their equity is fully vested, they walk away with a significant ownership stake despite damaging the business.

"Bad Leaver" clauses significantly reduce the price at which a departing shareholder's shares are bought back if they leave under negative circumstances (e.g., breach of contract, criminal activity). Distinguishing between a Good and Bad Leaver can save the remaining partners millions in equity value.

5. Non-Compete Clauses (Zákaz konkurence)

Czech law includes statutory non-compete obligations for executives (Jednatel), but these often do not extend far enough for shareholders who are not directors.

A robust SHA must include a contractual non-compete clause that prevents a partner from starting a rival business or poaching clients. However, under Czech law, these clauses must be reasonable in geography and duration to be valid. An overly broad non-compete clause is legally worthless and will be struck down by a judge. Don't risk your intellectual property. Contact our team at office@arws.cz.

Operational & Ownership Risks

Risks and penalties	How ARROWS helps (office@arws.cz)
Shareholder Deadlock: Partners cannot agree on the budget, banks freeze accounts, and the company stagnates.	Dispute Resolution Mechanisms: We draft precise deadlock breakers to ensure business continuity.
Blocked Exit: A minority shareholder refuses to sell, causing a strategic buyer to walk away from the deal.	Drag-Along Drafting: We ensure you can sell 100% of the company without being held hostage.
Competitor Creation: A partner leaves with your know-how and immediately starts a similar firm nearby.	Non-Compete Agreements: We create enforceable restrictions protecting your market share.
Dilution of Shares: The majority votes to increase capital, shrinking the minority's percentage unfairly.	Anti-Dilution Clauses: We structure protective measures for minority investors.

6. Pre-emption Rights (Right of First Refusal)

Before a shareholder can sell their stake to a third party, they should be required to offer it to existing shareholders first. While this seems standard, the procedural details regarding notification periods and valuation methods are where disputes arise.

ARROWS acts as a safe European harbour for your investments. We ensure these procedures are compliant with recent Czech Supreme Court rulings to prevent transfers from being challenged years later.

7. Valuation Methodology

When a buyout occurs, how is the price determined? Is it book value, EBITDA multiple, or fair market value determined by an expert? Leaving this undefined leads to expensive litigation.

Pre-agreeing on a valuation formula in the SHA saves significant legal costs and time during a partner's exit.

8. Dividend Policy

In the Czech Republic, the General Meeting decides on profit distribution. Without a specific clause in the SHA, a majority shareholder can decide to reinvest all profits indefinitely, starving minority shareholders of dividends.

We recommend including a mandatory dividend distribution policy (e.g., "30% of net profit must be distributed unless debt exceeds X") to ensure financial returns for passive investors.

FAQ – Legal Tips about Financial Clauses

• Can we force a shareholder to invest more money later?
  Generally, no, unless specifically agreed upon. You need "Additional Capital Contribution" clauses to govern future funding rounds and penalties for non-participation. For structuring investment rounds, contact office@arws.cz.
• What if the valuation expert is biased?
  The SHA should nominate a specific independent audit firm or a mechanism to select one impartially. ARROWS can help select reputable experts. Email us at office@arws.cz.

9. Management and Board Nomination Rights

Who gets to appoint the CEO or the CFO? Ownership percentage does not automatically grant the right to appoint specific managers unless stated in the SHA.

For foreign investors, maintaining control over the financial management of the Czech subsidiary is vital. We can draft clauses that give you veto power over key personnel appointments regardless of your exact shareholding percentage.

10. Dispute Resolution: Arbitration vs. Court

Litigation in Czech courts can be lengthy and public. We often recommend including an arbitration clause (e.g., Arbitration Court attached to the Czech Chamber of Commerce). Arbitration is generally faster, private, and the decisions are final.

As an international law firm operating from Prague, European Union, ARROWS serves clients in 90 countries. We understand that foreign entities prefer neutral, efficient dispute resolution.

Financial & Strategic Risks

Risks and penalties	How ARROWS helps (office@arws.cz)
Trapped Profits: Majority owners refuse to pay dividends for years, trapping your capital.	Dividend Policy Drafting: We create mandatory distribution rules.
Uncontrolled Spending: Local management signs expensive contracts without your approval.	Veto Rights & Limits: We implement financial thresholds requiring shareholder approval.
Inheritance Issues: A partner dies, and their inexperienced heirs enter the business.	Inheritance & Transfer Clauses: We structure rules to buy out heirs immediately.
Breach of Confidentiality: Sensitive trade secrets are leaked by a disgruntled shareholder.	NDA & Penalty Clauses: We draft severe contractual penalties for leaks.

The Hidden Complexity of Simple Agreements

It is tempting to view a Shareholder Agreement as a formality. However, Czech law is full of nuances. A clause that looks reasonable in English might be interpreted differently under the Czech Civil Code's concept of "good morals" or specific corporate statutory requirements.

Even simple-looking steps often contain legal traps and hidden risks for laypeople. An invalidly drafted Good Leaver clause, for example, can be considered punitive and voided by a court, leaving you without protection.

ARROWS handles this agenda daily. Our team combines deep knowledge of local markets with international standards. We are insured for damages up to CZK 500 million, offering you peace of mind that your legal matters are handled with the highest level of professional responsibility. Do not leave your business partnership to chance.

FAQ – Most common legal questions about Shareholder Agreements

1. When is the best time to sign a Shareholder Agreement?
The best time is before the company is formed or before a new investor enters. However, it can be signed at any time. Signing it when relations are good is far easier than trying to negotiate one when a dispute has already started. Ready to draft your agreement? Contact us at office@arws.cz.

2. Can a Shareholder Agreement override the Czech Corporations Act?
It can derogate from the law where the law allows (dispositive provisions), but it cannot violate mandatory provisions (cogent provisions). Knowing the difference is why you need expert legal counsel. Ensure your contract is valid – email office@arws.cz.

3. What happens if a shareholder breaches the agreement?
The SHA typically includes contractual penalties (fines) and call options (forcing the breacher to sell their shares at a discount). Without these specific penalties defined in the contract, enforcing compliance is very difficult. Need robust enforcement clauses? Write to office@arws.cz.

4. Can ARROWS help if we are already in a dispute?
Yes. We represent clients in shareholder litigation and negotiation. However, prevention is always cheaper than litigation. Our goal is to resolve conflicts swiftly to protect the company's value. For immediate assistance with a dispute, contact office@arws.cz.

5. How much does a Shareholder Agreement cost?
The cost depends on the complexity of the ownership structure and the specific needs of the shareholders. However, the cost of drafting an SHA is a fraction of the cost of a single shareholder lawsuit. Get a quote for your company by writing to office@arws.cz.