How to Defend Against Undervalued Shareholder Squeeze-Outs in Czechia

Owning shares entails not only the right to a share of the profits but also the risk of losing your stake against your will. The process of squeezing out minority shareholders, known as a squeeze-out, is a reality in the Czech business environment that often ends in litigation due to unfair pricing. This article explains how to defend yourself against undervalued consideration, which deadlines you must monitor, and why it is crucial to have a strong partner by your side. ARROWS, a law firm in Prague, has extensive experience in these matters.

ARROWS: Dispute resolution lawyers.

Article Content

Procedural steps and the role of the general meeting
Valuation methods: How the "fair" price is determined
Substantial value vs. market price
Costs of proceedings and success in the matter

Quick summary for managers

The right to settlement is inalienable: If the price set by the majority shareholder is lower than the fair market value, every squeezed-out shareholder has the right to request a supplementary payment (settlement) in Czech courts.
Expert review of valuation is key: Disputes over share prices are essentially a battle of expert opinions, where nuances in methods such as DCF or substantial value are decisive under Czech law.
Deadlines are uncompromising: Strict preclusive periods apply for filing a settlement claim, linked to the maturity of the consideration and the entry in the Czech Commercial Register.
Management's liability is personal: Statutory bodies implementing the squeeze-out process bear the risk of liability for damages if they do not approve fair terms.

Legal framework for shareholder squeeze-outs in the Czech Republic

The squeeze-out of shareholders, legally defined as the forced transfer of participating securities, is a process that allows a dominant owner to gain 100% control of a joint-stock company. The legal regulation of this instrument is contained in Sections 375 to 395 of the Czech Business Corporations Act (BCA). Although it is a legal tool, its implementation must respect the constitutionally guaranteed right to property protection, which in practice means the obligation to pay shareholders adequate consideration.

A majority shareholder who can initiate a squeeze-out is defined as a person owning shares whose total nominal value amounts to at least 90% of the registered capital and which carry at least 90% of the voting rights. However, the reality is more complex, as shares held by persons acting in concert are also included in this limit, requiring a thorough analysis of the shareholder structure. Our attorneys in Prague routinely handle these matters and can identify situations where these limits are being intentionally bypassed. In this area, ARROWS provides comprehensive services within corporate law, holdings, and structures.

Procedural steps and the role of the general meeting

The process begins with the majority shareholder's request to the Board of Directors to convene a general meeting. This request must include either an expert valuation report on the amount of consideration (for non-listed companies) or a justification of the consideration amount with the prior consent of the Czech National Bank (for listed companies). The general meeting then decides on the transfer of shares, with the approval of 90% of the votes of all owners of participating securities required to adopt the resolution.

Ownership rights to the shares of minority shareholders do not transfer immediately, but upon the expiry of one month from the publication of the registration of the general meeting's resolution in the Czech Commercial Register. From this moment, squeezed-out shareholders gain the right to payment of consideration, which must be carried out without undue delay through an authorized person, usually a bank or a securities dealer. Our Czech legal team emphasizes that precise adherence to this schedule is essential to prevent challenges to the validity of the entire process. You can learn more about the responsibility for correctly setting up internal processes in the article practical duties of directors and experiences of corporate lawyers.

Specifics for listed and non-listed companies

For companies whose shares are admitted to trading on a regulated market, the Czech National Bank (CNB) plays a crucial role. It assesses whether the proposer has properly justified the amount of consideration, often based on the weighted average of stock exchange prices over the last 6 months. For non-listed companies, the situation is different – Czech law requires an expert valuation report that must not be older than 3 months on the day the request is delivered.

If the squeeze-out involves international elements or concerns subsidiaries outside the Czech Republic, ARROWS handles cases with international components through the ARROWS International network, which provides legal and tax services in 90 countries worldwide. Knowledge of local markets and specific valuation methodologies abroad is a key advantage in these cases. Details on the risks of selling stakes across borders can be found in the article cross-border share deals and their tax and legal traps.

Valuation methods: How the "fair" price is determined

Determining adequate consideration is at the heart of most disputes. The Czech Business Corporations Act does not define a fixed formula but requires the price to be adequate to the value of the shares at the time of the ownership transfer. In professional practice, several valuation approaches are used, each of which can lead to diametrically different results. Our experts in Czech tax law can assist you in assessing the impacts of the chosen valuation method. When representing clients, our Prague-based law firm performs reviews of contracts and valuation guidelines to ensure maximum prices.

Income Method (Discounted Cash Flow – DCF)

The Discounted Cash Flow (DCF) method is considered the "gold standard" for valuing operating businesses (the going concern principle) in the Czech Republic. Its essence lies in estimating future free cash flows that the company will generate and subsequently converting them to present value using a discount rate. This method best reflects the economic potential of a company for an investor.

However, this is where subjectivity comes into play. An expert must predict future revenues, costs, and investments, which is always burdened by a certain degree of uncertainty. A small change in the estimated growth rate or the setting of the discount rate can mean a difference of tens of percent in the resulting price per share. ARROWS law firm in Prague has extensive experience in representing clients in proceedings for the review of the adequacy of consideration, where these nuances play a key role.

Valuation Method	Typical Application	Advantages and Disadvantages
DCF (Income-based)	Profitable companies with a clear history and business plan.	Reflects future potential but is highly subjective.
Substantial Value (Asset-based)	Companies in decline, holdings, or real estate companies.	Based on real assets, but ignores know-how and profitability.
Market Comparison	Companies comparable to publicly traded competitors.	Fast method, but difficult to find identical "twins" on the market.
Liquidation Value	Companies facing dissolution or in serious distress.	Defines the minimum possible price if assets were sold off.

Substantial Value vs. Market Price

Substantial value represents the valuation of net business assets (assets minus liabilities). For managers, it is important to know that this method is often used as a "safety net". If the income value of the company is lower than the value of its net assets (e.g., for companies with large real estate holdings that are currently in loss), the consideration should be set at the level of the substantial value instead.

The reality is more complex in that the case law of the Supreme Court of the Czech Republic emphasizes that the chosen method must correspond to the nature of the business. The attorneys at ARROWS law firm in Prague regularly handle these matters and cooperate with leading expert institutes to ensure that valuation assignments comply with current judicial decision-making trends in Czech courts.

Questions on Valuation Basics:

What is a discount rate? It is a percentage rate that expresses the investor's expected return and the risk associated with the given business. The higher the risk, the higher the discount rate and the lower the present value of the shares.
Why is a "minority discount" not used in squeeze-outs? In a standard sale of a small block of shares, the price is lower because the shareholder lacks control over the company. However, in a forced squeeze-out, Czech law requires a fair distribution of the total value of the company; therefore, a minority discount must not be applied.
Can the price be determined by a stock exchange average? For liquid shares, yes, but if trades on the exchange are sporadic or the price does not reflect the real situation (e.g., due to a low free float), an expert valuation must be used under Czech legislation.

Lawsuit for Settlement Supplement: Procedural Strategy

If a squeezed-out shareholder disagrees with the price, they have the right to file a lawsuit for a settlement supplement under Section 390 of the Czech Business Corporations Act (ZOK). This proceeding is not directed against the company, but directly against the majority shareholder who implemented the squeeze-out. The goal is not to cancel the squeeze-out (which is irreversible at this stage) but to obtain a top-up to a fair amount.

Our Prague-based attorneys represent both squeezed-out shareholders and majority shareholders facing lawsuits in these disputes. Experience from both sides of the aisle allows us to anticipate the counterparty's steps and minimize risk for our clients. It is important to note that ARROWS law firm is insured up to CZK 400,000,000, providing a safe harbor for clients even in the most financially demanding share disputes.

Deadlines You Must Not Miss

The deadline for exercising the right to a supplement is preclusive – if the shareholder misses it, their right expires and the court will not take it into account. The right to a supplement can be exercised from the moment the consideration becomes due. In practice, it is recommended to claim the entitlement from the majority shareholder in writing and subsequently file a lawsuit in a Czech court.

A court decision granting the right to a supplement is binding in principle for the majority shareholder against all squeezed-out persons. This means that if one active shareholder wins a higher price in court, the majority shareholder must pay the difference to all others, even those who did not participate in the litigation. This represents a huge financial risk for majority shareholders, which our Czech legal team helps mitigate through precise preparation of out-of-court settlement agreements.

Costs of Proceedings and Success in the Matter

Supplement proceedings have one major procedural advantage for minority shareholders: according to established Czech legal theory, they have the right to reimbursement of reasonably incurred costs of proceedings even if they are unsuccessful in the case. This is an exception to the general principle of civil procedure, intended to ensure that shareholders are not afraid to defend their rights against an economically stronger majority shareholder.

Risks for Management and Statutory Bodies

The squeeze-out of shareholders is not merely a technical process of transferring securities, but also a test of responsibility for members of the Board of Directors and the Supervisory Board. Statutory bodies have a duty to act with due managerial care under Czech law. This includes the obligation to ensure that the squeeze-out process is conducted in compliance with Czech legislation and that the proposed consideration is truly supported by relevant data. If management approves a squeeze-out at a price that is evidently undervalued, they risk damage claims from the squeezed-out shareholders. Our attorneys in Prague at ARROWS provide specialized certified training for corporate leadership, explaining how to minimize the personal risks of statutory body members.

Table of Risks and Impacts

Risks and Sanctions	How ARROWS (office@arws.cz) Assists
Action for supplementary payment: The obligation to pay the price difference to all shareholders plus statutory late payment interest under the Czech Civil Code.	Representation in Czech courts: Effective procedural strategies aimed at minimizing the duration and costs of disputes regarding supplementary payments.
Invalidity of the squeeze-out: Declaration of the entire process as invalid due to formal or material errors (e.g., circumvention of the law).	Precise preparation of documentation: Ensuring that all documents, notarial deeds, and invitations comply with the Czech Business Corporations Act.
Management liability: Personal liability of statutory body members for damages caused by a breach of due managerial care.	Legal consultations and audits: Review of procedures and management training to minimize the personal risks of board members.
Regulator intervention (CNB): Rejection of the application for consent to the squeeze-out for listed companies by the Czech National Bank, blocking the transaction.	Negotiations with regulators: Representation before the Czech National Bank in licensing proceedings and during the approval of squeeze-out documentation.

Squeeze-out Risks in Practice

Can a squeeze-out be overturned after a year? Yes, if a Czech court finds serious procedural defects (e.g., invalidity of the general meeting convocation) or circumvention of the law, it can declare the general meeting resolution invalid even retroactively.
What interest applies to supplementary payments? In addition to the share price difference itself, plaintiffs are entitled to statutory late payment interest, calculated from the moment the original consideration was due.
Is Directors and Officers (D&O) insurance sufficient? Insurance is important, but in cases of gross negligence or intentional misconduct, the insurer may refuse coverage. Therefore, prevention and consultation with our Czech legal team at ARROWS is essential.

Why handle squeeze-outs with ARROWS law firm in Prague

The squeeze-out agenda requires a combination of precise Czech corporate law, deep knowledge of the financial market, and the ability to lead complex litigation. Our Prague-based attorneys regularly handle these matters and can reduce the time required to complete the transaction while mitigating the risk of errors. The reality is complex, as every case has specific implications for taxes, accounting, and regulatory requirements in the Czech Republic.

Thanks to our international reach, we can support clients even in cases where the majority shareholder or the target company is in a different jurisdiction. ARROWS law firm offers a comprehensive service including:

Representation in disputes and audits before administrative authorities.
Preparation of documentation for general meetings and negotiations with Czech notaries.
Auditing of suspicious transactions and identifying conflicts of interest.
Negotiation and preparation of out-of-court settlements to save on litigation costs.

Securing a fair price for shares is not just a matter of luck, but the result of precise legal and economic preparation. The squeeze-out process is a powerful tool for ownership consolidation, but its misuse or unprofessional execution can have fatal consequences for both majority shareholders and management. For minority shareholders, an action for supplementary payment is often the only way to protect the value of their investment.

Keep in mind that in practice, there are numerous exceptions and procedural details that can decide the outcome of the entire dispute. It is therefore safer to entrust the entire agenda to experts with years of experience in these cases. ARROWS law firm is ready to guide you through the entire process, from the initial risk audit to the final settlement in court or at the negotiating table.

FAQ – Most frequent legal questions on how to litigate a fair share price: From the practice of ARROWS

What is the first step when I receive a squeeze-out notice? The most important step is to immediately contact an expert in Czech corporate law. It is necessary to verify the legality of the general meeting's convocation and, above all, to have the proposed consideration amount reviewed by an independent expert.
Do I, as a minority shareholder, have to agree to the squeeze-out? Your individual dissent at the general meeting will not prevent the squeeze-out if the majority shareholder holds 90% of the voting rights. Your primary defense mechanism under the Czech Business Corporations Act is a subsequent petition for judicial review of the price and a settlement payment (top-up).
How long does it take to receive payment for my shares? You must receive the original consideration (as determined by the majority shareholder) without undue delay after the registration in the Czech Commercial Register, usually within a matter of weeks. However, any potential settlement payment awarded through litigation in Czech courts may take several years.
What happens to my shares if I do not physically surrender them? Even if you do not surrender physical share certificates, your ownership rights to them will expire one month after the resolution is recorded in the Commercial Register. The company will subsequently declare these shares invalid and issue new ones to the majority shareholder.
Is it possible to exercise the right to a settlement payment out of court? Yes, and this is often the most efficient solution for both parties. ARROWS law firm in Prague regularly prepares out-of-court settlement agreements that resolve disputes before they escalate into costly litigation in the Czech Republic.
Can ARROWS assist me if I am a minority shareholder in a foreign company? Yes, through the ARROWS International network, we handle squeeze-out cases worldwide. We ensure compliance with the local laws of the respective country and will represent you in international arbitrations or before local courts.

Disclaimer: The information contained in this article is for general informative purposes only and serves as a basic guide to the issue. Although we strive for maximum accuracy, legal regulations and their interpretation evolve over time. To verify the current wording of Czech legislation and its application to your specific situation, it is essential to contact ARROWS law firm directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailor-made solution; therefore, do not hesitate to contact our Czech legal team.

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