Slovakia’s M&A Landscape Changes due to Commercial Code Amendments

On November 8, 2017, the Slovak Parliament enacted a series of amendments to the Slovak Commercial Code, the majority of which came into effect on January 1, 2018 with the final provisions taking effect as of September 1, 2018 (the “Amendments”). The Amendments, which greatly affect the rules governing M&A transactions in Slovakia generally, have the potential to have a particularly significant effect on transactions in the technology or IP sectors. This article discusses some of the more important Amendments. 

Enhanced Creditor Protections and Personal Liability of Company Directors and Shareholders 

Under the Amendments, directors and shareholders conducting or deciding to carry out M&A transactions in Slovakia must carefully consider the pre- and post-transaction financial status of the companies involved in such M&A activity to avoid personal liability. 

In particular, if an M&A transaction results in a participating company’s indebtedness, liquidation, bankruptcy or restructuring proceedings or court dissolution proceedings and at the conclusion of such proceedings creditor claims remain unpaid, the directors and shareholders may be personally liable for the unpaid amounts. Personal liability can also extend to individuals who exercise the powers of a director, even without being formally appointed to such office. 

While the above is not uncommon in other jurisdictions, Slovak law now also expressly recognizes potential controlling shareholder liability based on the exercise of their shareholder powers. In particular, controlling shareholders could be held personally liable for the amount of unsettled creditor claims following the conclusion of bankruptcy proceedings if their actions, including approving M&A activity, caused the bankruptcy of the controlled company. 

New Transaction Requirements 

New compliance requirements will have to be factored into M&A transactions involving Slovak entities to comply with the Amendments. 

For example, an “audit statement” confirming a positive debt/asset ratio of the successor company must now be prepared and filed with the Slovak commercial register. The audit statement must be prepared by a qualified auditor, appointed under the transaction documentation. Duly filing the audit statement is required for the M&A transaction to be registered with the commercial register and thus fully effective. 

One of the more surprising Amendments, purportedly introduced to prevent tax fraud, is an obligation to notify the Slovak tax authority in advance of carrying out certain M&A activities. In the case of mergers and de-mergers, for example, the tax authority must be duly notified 60 days before the shareholders approve the transaction. Consequences for failing to provide the advance notice are unclear to date. This advance notification obligation does not apply to simple acquisitions.

Broad Implementation of the EU Trade Secrets Directive may have a Particular Impact on Technology Sector Transactions 

Slovakia has broadly implemented the EU Trade Secrets Directive through the Amendments. Consequently, interim measures (i.e. a court action under Slovak law loosely akin to the concept of equitable relief) are now available to owners of trade secrets whose rights are infringed or even under the threat of infringement. In such cases, the trade secret holder may, for example, request the Slovak courts to enjoin the party infringing or threatening to infringe the trade secret holder’s trade secret from using the trade secret or to seize any infringing goods. 

Special care should thus be exercised when buying or selling companies with important trade secrets. In particular, prospective buyers should thoroughly assess whether the target has undertaken appropriate measures to preserve and protect its trade secrets (including implementing employee invention assignment arrangements). Prospective sellers should conduct the target’s activities so as not to infringe or threaten to infringe third party trade secrets. Utilizing proper care in conducting trade secret due diligence is key for acquirors to obtain greater comfort that they will receive the value they bargained for in the transaction. Likewise, the seller’s ability to operate the target without (potentially) infringing third party trade secrets would reduce the risk that purchasers pursue interim measures or monetary damages, and thereby also reduce the related risk of derailing the potential transaction.

© 2018. Published in the American Bar Association Section of International Law, International M&A and Joint Ventures Committee Newsletter, Issue 1/2018, on April 12, 2018. Reproduced with permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder. 

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