Company split in practice: when it makes sense and when you should rather step back

1. Why companies split: strategic reasons that make sense

Many business owners view a company split as a last resort in a crisis. In practice, the opposite is often true. A split is frequently a well-considered strategic step that can bring new momentum, efficiency, and protection against risk. Companies choose transformations for a number of strategic, economic, and legislative reasons.

In Czech corporate practice, transformations are not only about mergers. They also include various forms of splitting. Understanding these drivers is key: a split is not necessarily a sign of failure, but often a proactive optimisation reflecting a mature company’s need for agility and specialisation in a dynamic market.

Optimisation and risk management: when less means more

Imagine your company is growing—but with growth comes complexity. One division performs strongly while another generates losses or carries disproportionate risk. A split allows you to separate the less profitable or high-risk part of the business and focus on what works. This typically improves operational efficiency and reduces exposure. If one part of the business runs into trouble, the remaining parts can stay protected thanks to the separation.

By separating business lines, you can also minimise operational risk. If one segment becomes threatened, the others may remain intact. This is often a response to internal inefficiency or external market pressure, aimed at improving focus, reducing risk exposure, and potentially increasing profitability in the remaining or newly established entities.

A path to growth and efficiency: holding structures and specialisation

A split is not only about downsizing. It can also be a route to expansion and structuring. Companies often split to build holding structures that enable more effective management of different business activities. For example, you can separate R&D from manufacturing, or create dedicated entities for specific market segments. This may lead to economies of scale, better risk allocation, and greater flexibility—such as transferring part of the assets to another company in exchange for shares (so-called “spin-off” / vyčlenění).

Transformations are also used for cost savings, restructuring, risk management, and corporate structuring. Another frequent driver is a change of legal form or the creation of a holding model for clearer governance. The lawyers at ARROWS deal with these scenarios regularly and help clients implement such solutions in a legally robust manner.

2. Types of company splits in the Czech Republic: legal framework and practical forms

Czech law provides several forms of splitting business corporations, each with different legal and practical consequences. Understanding these differences is essential for choosing the right strategy. The process is primarily governed by the Czech Act on Transformations of Commercial Companies and Cooperatives (Zákon o přeměnách obchodních společností a družstev) and the Czech Business Corporations Act (Zákon o obchodních korporacích).

For reference, the applicable Czech legislation can be found here: Zákon o přeměnách (ZoPř) and Zákon o obchodních korporacích (ZOK).

Our specialists

Mgr. Jakub Oliva, LL.M., MSc.

associate, partner

• oliva@arws.cz

JUDr. Ondřej Stehlík, LL.M., MBA

associate, partner

• stehlik@arws.cz

Splitting and demerger: core pillars of corporate transformations

A split can take the form of a “splitting” (rozštěpení), where the original company ceases to exist and its assets and liabilities transfer to several successor companies, or a “demerger” (odštěpení), where the original company continues to exist and only part of its assets and liabilities is transferred.

Splitting (rozštěpení): In this form, the original company is dissolved without liquidation. All assets and liabilities are divided and transferred to two or more successor companies (newly established and/or existing). The original company therefore ceases to exist. This form is typically used if you want to fully separate different business lines into independent entities.

As a general rule, the dissolving, divided, and successor entities must have the same legal form unless the law provides otherwise.

Demerger (odštěpení): Unlike splitting, the original company continues to exist and remains active. Only a part of its assets and liabilities is carved out and transferred to another company, either newly formed or already existing. This is commonly used to separate a distinct division or operation without affecting the core business of the original entity.

A recent legislative update: “spin-off” (vyčlenění) as a flexible tool

A significant update effective from July 2024 is the introduction of “vyčlenění” (often translated as a “spin-off”). This reflects modern market needs and adds flexibility. In a spin-off, the original company does not cease to exist. It transfers part of its assets and liabilities to a new or existing company, and the key difference is that the original company receives a shareholding in the successor company in return.

This makes it easier to establish and control subsidiaries and to build holding structures. The amendment to the Czech transformations legislation (Act No. 62/2024 Coll.) opens additional options for corporate structuring and strategic investments. As the legal landscape becomes more sophisticated, specialised legal advice becomes even more important.

3. When to step back: hidden risks and common mistakes

A company split is never risk-free. Even if it seems strategically beneficial, underestimating key aspects may lead to serious financial, legal, and reputational consequences. A failed transformation can threaten the company’s very existence. It is therefore essential to understand the most common pitfalls and avoid them through careful preparation and expert support.

Financial pitfalls and the “cash trap”: watch out for hidden issues

One of the biggest risks is underestimating the financial impact. This may include overpaying due to flawed valuations or overestimating future profits and cost savings. Special attention should be paid to the “cash trap” phenomenon—revaluation of assets to fair value may create goodwill that increases equity on paper, but can reduce reported profit and restrict the ability to distribute dividends.

This can result in a situation where the company appears profitable but lacks sufficient liquidity to pay dividends or service liabilities, potentially leading to insolvency. Financing a split via debt or external funding is often a mistake; dividend distributions should be based on genuinely earned cash, not at the expense of future survival. Czech tax authorities also closely assess transaction substance—if the primary goal is only tax benefit without a solid business rationale, additional assessments and penalties may follow.

Legal and regulatory risks: fines and irrevocability

Incorrect implementation or failure to comply with legal requirements can have severe legal consequences. You may face disputes, tax reassessments, and significant penalties, which in competition-law contexts may reach up to 15% of the company’s annual turnover. Importantly, once the transformation is registered in the Czech Commercial Register, its invalidity can no longer be declared; the transaction becomes legally irreversible, and shareholders may only pursue monetary compensation after registration.

The legal framework also strengthens creditor protection. Creditors must typically assert their claims with the court within three months from the publication of the transformation project, including future or conditional claims. Another key limitation is that certain transformations require the same legal form for participating and successor entities. The team at ARROWS can help ensure that all legal requirements are met and the structure is compliant.

Personal liability of statutory bodies: what risks do directors face?

If you are a director or a member of the statutory body, you carry significant responsibility. Breach of the duty of due managerial care may trigger civil liability for damages. In serious cases—such as fraud, embezzlement, or misrepresentation of accounts—criminal liability may also arise, including substantial fines and imprisonment.

If profit distribution is approved in breach of statutory tests (for example, the insolvency test), recipients may have to return the funds and the statutory body members may face liability for damages, including potential liability for causing insolvency. Czech corporate law also provides for rules on disgorgement of benefits from office and obligations to cover deficits, in certain cases enforceable by an insolvency administrator.

The lawyers at ARROWS provide comprehensive guidance to help you mitigate these risks.

The human factor and emotional dynamics: don’t forget the people

A split is not only a legal and financial transaction; it is a major change affecting employees and management. Underestimating the human factor can lead to integration issues, lower productivity, and higher staff turnover. In family businesses, which represent a significant part of the Czech market, business rationality may collide with emotions.

If family and business dynamics are not properly separated, conflicts may arise and undermine the process. Transparent communication, clearly defined roles, and fair treatment are critical. Negative emotions can reduce performance and create a toxic environment. How managers handle these dynamics often determines whether the change is implemented smoothly and whether the organisation’s culture remains stable.

4. How to ensure a smooth process and minimise risks: the role of legal counsel

A split is a complex process requiring strategic thinking and, above all, precise legal and administrative execution. In most cases, expert legal support is indispensable.

A reliable legal partner helps minimise risk and ensures the transformation is executed smoothly and in compliance with Czech law. In complex B2B transformations, the value of legal counsel goes beyond compliance—it includes strategic partnership, risk reduction, and operational efficiency through proactive involvement and clear communication.

Thorough preparation and due diligence: the foundation of success

The foundation of every successful transformation is careful preparation. As part of the process, the lawyers at ARROWS conduct due diligence to identify legal, financial, and operational risks and propose mitigation strategies. Early involvement of legal experts helps prevent costly issues and ensures regulatory compliance before any key step is taken.

Based on the findings, ARROWS can also structure the transaction and prepare the split project to match your objectives and risk profile.

Protecting creditors and shareholders: building trust and stability

Czech law places strong emphasis on protecting all parties involved. Creditors may assert their claims within the statutory deadline (typically three months from publication of the transformation project), including future or conditional claims.

Shareholders are also protected through mechanisms such as cash compensation, exchange ratios, damages, or buy-outs in certain cases. The lawyers at ARROWS ensure these requirements are properly addressed, supporting transparency and trust throughout the process.

Why ARROWS is a reliable partner for your corporate transformation

Corporate transformations involve a large number of legal and administrative steps. Handling them without expert support often leads to unnecessary stress, mistakes, and potential sanctions. The lawyers at ARROWS can save you time and effort by managing the process end-to-end and ensuring a predictable outcome.

We focus on providing advice that is not only legally accurate, but also practical and understandable. We communicate in business language, avoid unnecessary legal jargon, and prioritise what matters to owners and management. This approach supports better decision-making and long-term trust.

5. Conclusion: your decision, our support

A company split is one of the most important strategic decisions you can make for your business. Whether your goal is growth, optimisation, or risk reduction, it is crucial to proceed with caution and a full understanding of the legal and practical implications.

Do not underestimate the potential pitfalls, but do not fear them either. With professional legal support, you can avoid costly mistakes and protect both value and continuity.

This article covered the core aspects of splitting a company—from strategic reasons and legal forms to hidden risks. The key takeaway is that success depends on careful planning and expert execution.

The combination of risk awareness and reliable legal support creates confidence and predictability. The team at ARROWS is ready to be your partner throughout this process.