The Czech Republic is ‘on top of the economy cycle,’ according to one law firm partner when I recently visited Prague. The unemployment rate is currently the lowest in Europe and the lowest in 22 years; the financial conditions appear to be the best ever and, together with low interest rates, are driving a healthy rate of transactional activity in the market. In comparison to the rest of the region, the Czech Republic’s M&A market is highly desirable and attracting considerable interest from investors. The real estate and technology sectors continue to thrive, and firms have noted a sharp increase in demands from clients in relation to data privacy and cybersecurity matters both prior to and following the implementation of the General Data Protection Regulation (GDPR) in May 2018.
Looking closely at the mid-market though – which is the primary focus of many firms – institutional funds had limited investment opportunities, with international private equity (PE) funds mostly exiting from existing investments during 2017. There were very few big-ticket transactions involving the prime PE players in the region, such as CVC Capital Partners, Mid Europa Partners or Avent, and the majority of the M&A transactions were financed by domestic funds, which are increasingly visible in the local and regional investment markets. With this in mind, several observers have reported that a new trend has emerged, with high-net-worth individuals and holders of considerable private capital, increasingly active in the M&A market.
Also of note, is the fact that there has been a noticeable drive by practitioners, both from international and local firms, to improve the reputation of domestic arbitration, which has suffered considerable damage over the past few years. The Czech Ministry of Justice has published a legislative proposal aiming to introduce, for the first time, a general class action regime. The proposal to introduce class actions into Czech law and significant reforms to the civil procedure generally have caused anxiety among some clients, and could result in an increased litigation risk for financial institutions.
An amendment to the VAT Act, which came into force on 1 July 2018, accelerates the process of terminating VAT group registrations, and there are also changes with regard to the tax exemption of employee benefits with new deductible items. Other major developments include the approval by the Ministry of Labour and Social Affairs to further increase the minimum wage, which came into effect as of 1 January 2018. Looking ahead, taxpayers can expect major changes in 2019: the concept of taxation of individuals is to change fundamentally, while corporate entities will be subject to the EU Anti-Tax Avoidance Directive, and a general anti-abuse rule will be introduced in the tax procedure rules. With such a raft of changes and with Czech businesses already wrestling with EU Directives, such as GDPR, there is an expectation that the considerable demand for tax advisory services and data protection expertise will continue.
But what of the domestic legal market? The Czech Republic features a balanced mix of local and international, full-service and boutique firms. In recent years, it is notable that many lawyers have left established international players to establish their own independent outfits, including Badokh, Rutland & Partners, Novalia, and UEPA advokáti s.r.o.
This is partly because the current M&A market is centred around medium to smaller transactions, which are neither profitable enough nor of major interest to international firms. As a result, the lawyers who previously worked for those behemoths have decided to leave for pastures new. During my meetings with lawyers in the Czech capital, it was also suggested that working for either a local firm or establishing a new firm is preferable for many practitioners from a personal development perspective. Sometimes the grass is greener on the other side of the fence.
This is further highlighted by the number of international firms that have left the market, such as Norton Rose Fulbright and Hogan Lovells, and according to some, ‘there will be others which will close their office in years to come’.