Declarations and assurances are used in all important acquisition transactions whether the assets being transferred are specific premises, real estate, technical equipment, enterprises or shares or interests in target companies. In all these acquisitions, declarations and assurances form the most crucial and far-reaching part of the transaction documentation. All other parts of these agreements may be understood as technical and less important with the exception of those provisions stipulating the various rules for calculating the price when this is not a fixed amount.
Declarations and assurances are the tools used by sellers and buyers in M&A transactions. As such, they are typical provisions in the common law world, where they are known as "representations and warranties", or in more recent transaction documents, simply as "warranties". In terms of wording, it is relatively unimportant whether the Czech expression used is "Prohlášení a ujištění " [Declarations and Assurances], "Prohlášení a záruky" [Declarations and Warranties], only "Prohlášení " [Declarations] or, as is sometimes the case, "Ujištění " [Assurances] often with a separate "Záruky" [Warranties] section. For consistency, the expression "declarations and assurances" is quite apt since it best reflects the wording of Act No. 89/2012 Coll., the Civil Code, as amended (the "CC"). Under Art. 1916 of the CC, a debtor is in breach if it wrongly assures a creditor that the consideration it is providing is defect-free. Under Art. 2103, if a seller expressly assures a buyer that an item is defect-free, or it knowingly disguises a defect, then it will be liable even if the defect is one that the buyer should have discovered as a matter of due diligence when concluding the contract. The CC, thus, makes clear use of the term "assurance" and its derivatives. The "Declarations and Assurances" section should stipulate the characteristics (quality) of the item being transferred. From a Czech law perspective, the "Warranties" section should focus on maintaining a particular state of affairs (i.e. certain features of a specific quality). As such, it should regulate the future, particularly with a view to Art. 2113 of the CC.
The nature of declarations and assurances is not defined by Czech law or unanimously agreed on. Declarations and assurances are unilateral statements (undertakings) made by a given contractual party (typically the seller) for another contractual party (the buyer) in acquisition agreements. They are unilateral statements of fact that focus particularly on the "agreed (stipulated) characteristics" of the transferred asset (the subject of the transfer). Higher court decisions, thus, use the expressions "stipulated quality" and "agreed characteristics". Since these statements concern the agreed (stipulated) characteristics – and in particular, the required qualities or agreed features of both the transferred asset and, indirectly, the target company’s business – they are important for the conclusion of the acquisition agreement itself. The buyer relies on the truthfulness of these statements and acts on them in entering into the agreement. In other words, if these statements about the agreed (stipulated) characteristics were not true, the buyer would not conclude the acquisition agreement.
The Czech Supreme Court case law provides some basic guidelines about how higher courts should assess declarations and assurances.
Among the main legal questions about declarations and assurances which have already been settled are the matters of (a) whether declarations and assurances create legal duties; (b) whether declarations and assurances about transferred interests or shares incorporate assurances about the target company (or a business of that company); (c) whether a breach of a declaration or assurance leads to liability for defects; and (d) whether any regulation applies in the case of a breach of a declaration or assurance.
On the first question, there has been some debate historically over whether or not declarations and assurances create a legal duty (formerly an "obligation") and, in particular, whether a breach of a declaration and assurance is a breach of legal duty. This discussion has emerged in the context of questions about whether declarations and assurances can be guaranteed (or, in the old terminology, "reinforced") by a contractual penalty. In its decision no. 33 Cdo 2648/2016 of June 23, 2016, the Supreme Court found that in cases of this kind, there is a breach of legal duty and this duty should be understood broadly, i.e. as a legal duty to hand over the subject of the sale and "provide the consideration with the agreed characteristics" even if this requirement was not directly verbally expressed and can only be implied. The Court found that the seller committed to "handing over the subject matter of the sale of the stipulated quality" and, further, that the contractual language chosen by the parties suggested that they intended to guarantee (reinforce) "satisfaction of the obligation" (duty).
As for the potential (indirect, i.e. inferred) incorporation of the features of the target company (business) among those of the shares or interests, the Supreme Court suggested that this was also possible. As a matter of logic, shares and interests are not generally purchased based on their independent merits but because of the particular qualities of the target company and its business. In its decision No. 29 Cdo 938/2012 dated March 26, 2014, the Supreme Court held that in order to include the features of the target company’s business among the agreed (stipulated) features of the shares (interests), the parties’ absolute agreement was required. The Court put it: "If the seller transfers a share including all requirements by law (and potentially by company bylaws) and free of any legal defects, the consideration must be understood as duly delivered, unless the parties have agreed otherwise. In this way, they may agree, for example, on the features of the shares as well as on particular features of the business of the company (as the issuer of the shares); if we are to view these features of the business among the agreed (stipulated) features of the shares, there must be specific agreement between the parties." Similar conclusions can be found in Supreme Court decision No. 29 Cdo 5452/2008 of October 26, 2010, which was published in Soudní judikatura legal journal (2012 (2): 20). In another decision dated March 26, 2014 (No. 29 Cdo 938/2012), the Court went so far to say that the characteristics of the shares (interests) may also cover the bylaws of the target company if those characteristics (i.e. particular wording of the bylaws) were explicitly agreed on (stipulated) in the acquisition contract. In such a case, a change to the bylaws of a limited limited company might mean a defect in the transferred shares (interests).
Concerning liability for defects, the Supreme Court has now found repeatedly that this liability will apply if particular characteristics of the shares or interests were stipulated. This is supported by the Court’s long-time view that when it comes to ownership interests especially, we cannot deduce any requirements about the general quality of the assets based on the purpose for which they are being used. This usage is too individual (in other words, there is no clear average quality of shares or interests). Art. 2095 of the CC is not relevant to a transfer of shares or interests since it states that where there is no agreement about quality and design, the seller may meet its obligation by providing an item of a quality and design suited to the obvious purpose of the contract or to the standard purpose of a contract of this type. Shares and interests are so specific to each target company that it is impossible to discern a standard purpose or quality and design based on the purpose of a contract. It is precisely for this reason that the declarations and assurances in acquisition agreements are so vital.