Why Legal Support Is Essential in M&A Transactions: Key Risks and Phases
Transactions and mergers or acquisitions (M&A) are complex and financially demanding processes. A single mistake in legal assessment, historical analysis, or contractual terms can result in significant costs or the blockage of the entire transaction. The attorneys at ARROWS, a Prague-based law firm, systematically focus on transactions and M&A, reduce risks, and ensure professional legal support throughout. In this article, we will explore why legal support is essential and what specific risks it helps eliminate.
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Without an in-depth legal analysis (due diligence), you risk uncovering hidden liabilities, disputes, or legal defects that can significantly increase the cost of the transaction or completely change its purpose. Poorly set contractual terms, warranties, and claims for defective performance may also create legal or financial burdens for you in the future.
That is why the attorneys at ARROWS, a Prague-based law firm, provide comprehensive legal protection. They cover the entire process—from preparing the business model, through reviewing the counterparty, to closing the transaction and post-closing administration. Their services also include structuring the deal, contract negotiations, communication with regulators, and legal support in the event of disputes.
Why are transactions and M&A legally risky?
A transaction is not just signing a piece of paper. It is a set of legal, tax, financial, and operational decisions that affect one another. The common risk starts as early as the review of the transaction target and the counterparty (so-called due diligence). Buyers often think they know the company or asset they want to acquire. In reality, however, things are often more complex—for example due to historical contracts or unresolved disputes.
Hidden court proceedings, unpaid tax or social security arrears, mortgages, or liens—any of these can later become your problem. The attorneys at ARROWS, a Prague-based law firm, identify these risks in advance during the review phase, before you commit to the transaction.
The second significant risk is the structuring of the transaction itself. To set an appropriate structure (asset deal vs. share deal, merger, etc.), company sales and transaction advisory is often used in practice as well, so that the impacts on liability and taxes are predictable. A simple share sale, asset sale, merger, or acquisition—each form has different tax implications, a different scope of the seller’s liability, and different legal consequences.
Choosing the structure is not a matter of intuition, but of thorough legal and tax analysis. Incorrect structuring can burden you with high tax liabilities or leave you in a position where you have unintentionally assumed liability for past breaches of law.
The third layer involves contractual terms and warranties. Sellers and buyers naturally have different interests: the seller wants to minimize future liabilities, while the buyer seeks the broadest possible right to compensation.
If it later turns out that matters were not presented correctly, negotiating terms without an expert often puts you at a disadvantage. Mistakes such as an improperly set warranty, a short period for notifying defects, or a low liability cap are difficult to fix later. The practical links between warranties, liability, and the setup of contractual relationships within a group are also discussed in the recent article Dispute prevention in a holding: Setting contractual relationships between related companies.
The fourth factor is the legal status and the asset itself. Does the seller have the right to sell what they promise? Are there easements that should be settled, or legal obstacles preventing the transfer?
In the Czech Republic and in cross-border transactions, surprises often appear in the Real Estate Cadastre, commercial registers, or with supervisory authorities. The attorneys at ARROWS, a Prague-based law firm, systematically verify these matters and communicate with the relevant authorities, thereby eliminating potential risks.
Related questions on specific risks
1. What happens if, after the sale, I discover that the property is encumbered by an easement that was not mentioned?
An easement remains attached to the property permanently and cannot be removed without the consent of the entitled person, unless otherwise agreed contractually or provided by law. If the seller intentionally concealed it and warranted that the asset was unencumbered, you may have a claim for compensation—but only if this warranty was properly incorporated into the contract.
Otherwise, you will have to rely on the general provisions of the Czech Civil Code on liability for defects, which may be time-limited and require specific conditions to be met. Without proper contractual protection, you may only pursue the seller through court proceedings, which can take years and the outcome is not guaranteed. If a dispute nevertheless arises, it is advisable to have a procedural strategy thought through in advance and contact the team for commercial and litigation disputes.
2. What if the seller’s tax debt is discovered later?
When purchasing an ownership interest (shares), the buyer assumes, together with the corporation, its historical liabilities, including tax debts. The company remains the tax debtor. In the case of a sale of an enterprise (a going concern), the buyer becomes, by law, a guarantor for tax arrears arising before the transfer. The tax aspects of reorganizations and transfers (including the conditions for tax neutrality) are also summarized in the article Tax impacts of mergers and demergers: How to comply with the rules for tax neutrality when reorganizing corporate structures. This liability is specified in the Czech Tax Code. For the buyer’s protection to be effective, the seller’s liability must be clearly defined in the contract and secured, for example, by escrow of part of the purchase price or a retention guaranteeing compensation. Without such security, the tax authority may call on you to pay, and you then rely on claims against the seller, who in reality may not have sufficient funds.
How does ARROWS, a Prague-based law firm, protect investors and buyers?
Phase 1: Review and analysis
The attorneys at ARROWS, a Prague-based law firm, work with a set of questions and templates (a data room) to ensure they review:
- Ownership and legal title
- History of court proceedings and their status
- Existence of contracts and their terms
- Tax and regulatory obligations
- Employment-law matters and obligations towards employees
- Insurance coverage and insurance risks
- Compliance with legal regulations (compliance)
This review is referred to as due diligence and is a key element of protection. We are attorneys at ARROWS, a Prague-based law firm registered with the Czech Bar Association and insured for damages up to CZK 400,000,000—this enables us to undertake and handle even complex, high-value transactions.
Phase 2: Structuring and legal advice
After completing the review, we will propose and discuss with you a tax- and legally optimal structure. For example:
- Whether it is more appropriate to purchase individual assets or the entire company (ownership interests/shares)
- What tax implications the chosen route has
- How to minimize the buyer’s liability for historical debts
At this stage, the attorneys from ARROWS, a Prague-based law firm, often work with tax advisors to ensure that the structure is set up in the most advantageous way possible for you.
Phase 3: Contract negotiations and closing
Contract negotiations are both an art and a science. You need to know what you can negotiate hard on and where compromise is necessary. The attorneys at ARROWS, a Prague-based law firm, will ensure that:
- Representations and warranties are clearly defined and relate to real risks.
- Defect notification periods and deadlines are realistic.
- Liability caps are contractually set.
- Escrow or custody arrangements are properly set up in an account that then serves to cover any potential claims.
Without these elements, you are in a position where you cannot exert sufficient pressure on the seller to honor their warranties.
Phase 4: Post-closing management
Even after the transaction is closed, disputes may arise. The buyer may suddenly discover that performance is not as promised, or that a hidden debt has emerged.
At that moment, it is crucial to have properly prepared documentation, contractual wording, and evidence. The attorneys from ARROWS, a Prague-based law firm, will represent you at this time in negotiations with the seller and, if necessary, in court in the Czech Republic.
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Potential issues |
How ARROWS helps (office@arws.cz) |
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Hidden easements, mortgages or liens that were not removed/settled |
In-depth review of the Czech Land Registry, public registers, and legal status. Communication with the relevant authorities and ensuring the asset is cleared. |
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Unknown litigation, penalties or the seller’s tax debts |
Comprehensive legal due diligence; identification of risks before signing. |
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Poorly set contractual liability and warranties |
Expert legal contract advice; negotiation of terms that genuinely protect the buyer. Arranging escrow or custody. |
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Tax surprises after closing |
Tax and legal analysis of the structure; coordination with tax advisors. Proper technical execution of transactions in accordance with applicable legal regulations. |
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Dispute with the seller regarding breach of warranties and compensation claims |
Representation in negotiations and court proceedings; enforcement of claims from the escrow account. Legal representation in arbitration. |
When exactly do you need legal support from ARROWS?
The answer is simple: from the very beginning. Sometimes we meet clients who think they only need a lawyer in the final stage, when the contract is almost ready. However, that is a fundamental mistake.
A lawyer should be part of the team already when planning the transaction, during initial negotiations, and certainly when conducting due diligence on the counterparty. If you are already at an advanced stage and do not have a lawyer, we recommend contacting ARROWS, a Prague-based law firm, without delay. The second-best time is now.
Final summary
Transactions and M&A are not merely a business matter – above all, they are a legal and financial operation with lasting consequences. Without qualified legal support, you risk:
- Hidden legal defects and debts that may burden you for months or years after closing
- Tax surprises and unexpected liabilities
- Contractually insufficiently secured compensation claims if it later turns out that things are not in order
- Lengthy and financially costly court disputes over enforcement of rights
The attorneys from ARROWS, a Prague-based law firm, will ensure that every phase of the transaction is properly covered from a legal perspective, that risks are identified in advance, and that your investment and your rights are protected.
If you are planning a transaction and want to know how ARROWS, a Prague-based law firm, can help in your specific situation, contact us at office@arws.cz or ask the important questions you have. We are here to ensure your investment is safe.
FAQ - Most common questions on transactions and M&A
1. What is due diligence and why is it essential?
Due diligence is an in-depth review of the legal, financial, and operational status of the seller or the transaction target. The aim is to identify hidden risks, liabilities, or legal defects that could affect the price or the course of the transaction. Without it, you risk having to deal with unexpectedly discovered risks in the months and years that follow. The attorneys from ARROWS, a Prague-based law firm, use a proven due diligence methodology. Contact us at office@arws.cz.
2. What is the difference between buying shares and buying assets?
Buying shares (or ownership interests) means you are buying the company as a whole – all of its assets and debts, including those you may not know about. Buying assets means you select specific items, and the seller retains the debts and historical liabilities. An asset deal is usually safer in terms of assuming liabilities, but it requires more administration. The right choice of structure depends on tax and legal factors under Czech law.
3. How long do legal contract negotiations take?
Usually 2–6 weeks, but it can be longer depending on the complexity and the extent of disagreements between the parties. Faster negotiations are ensured by an experienced legal team that knows where the buyer can concede and where it is necessary to be firm.
4. What is escrow and why is it used?
Escrow is a service in which a third independent party (usually a bank or an attorney) holds part of the purchase price for a certain period. If it is later found that the seller breached a warranty, compensation is paid out of the escrow. Without an escrow account, you would have to rely only on the seller’s ability and willingness to pay you compensation, which is often not advantageous.
5. Can I buy a foreign company without legal support?
Theoretically yes, but in practice it is very risky and strongly not recommended. Cross-border transactions have far-reaching tax and legal implications that differ by country. Without a local legal team, you may not recognize hidden risks. Through the ARROWS International network, we can also arrange legal support abroad – email us at office@arws.cz.
6. How can a buyer defend themselves if the seller breaches warranties after closing?
The buyer can defend themselves only if the warranties were properly incorporated into the contract, with clearly defined conditions, deadlines, and limits. Then the buyer has the right to notify defects, claim compensation, and, if necessary, initiate court proceedings. Without proper contractual protection, defense is very difficult. The attorneys from ARROWS, a Prague-based law firm, represent you in these situations – office@arws.cz.
Notice: The information contained in this article is of a general informational nature only and is intended to provide basic guidance on the topic based on the legal framework as of 2026. Although we strive for maximum accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for the maximum protection of our clients we maintain professional liability insurance with a limit of CZK 400,000,000. To verify the current wording of the regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.
Read also:
- Expansion via Share Deals in the Czech Republic: Legal Checklist for Safe Growth
- Share Deal vs Asset Deal in the Czech Republic: Key Tax Implications for 2026
- Tax Implications of Mergers and Demergers in the Czech Republic
- How to Structure Intercompany Agreements in a Holding to Avoid Disputes and Tax Risk
- Do Your Board Minutes Pass the Test? How Courts Treat Corporate Resolutions in the Czech Republic