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Principle of Privatization in the Czech Republic

In order to understand the phenomenon of “squeeze out Czech style”, we need to review the recent history. The Czech Republic (actually the Czechoslovak Socialist Republic at that time) used to be one of the formerly “communist” states of the so-called Eastern Block. By the end of 1989, after more than 40 years of totalitarian rule, an agreement was reached there about transfer of power. The exact nature of this agreement is a question for historians but one thing is certain: it was forced by external influences (disintegration of military and economic systems of the former Eastern Block states), rather than by transformation of the Czech society from the inside. New political parties whose members where recruited even from the former Communist Party, where created only hastily. The transfer of power was so smooth that it is called the “Velvet Revolution”. The new parties took power after democratic elections.
In the first half of the 90s, so-called coupon privatization took place as a transition from socialist to market economy. The coupon privatization was the result of a decision to distribute the ownership of majority of large state enterprises among the population through a distribution of shares. Politicians promised citizens a participation in the expected economic development; thanks to that, almost all citizens of legal age became, for a small symbolic price, shareholders in enterprises that constituted the most important part of the Czech economy. Shares of privatized enterprises then started to be freely traded on the stock exchange where they were bought by domestic and international portfolio investors.
From the very beginning, the period following the coupon privatization was marred by unfair business practices. For instance, after the end of the coupon privatization, the Czech state did nothing to protect citizens property stored in shares, and quietly tolerated so-called tunneling. Tunneling is a Czech expression depicting ever so gently the robbing of privatized companies and investment funds by their directors and majority owners. Tunneling in the Czech Republic was common especially at the beginning, as it was described not only in the local press (MF Dnes - in Czech,  Právo – in Czech), but also in international media (The Economist, The Financial Times) and in professional publications (in Czech). The involvement of political representation in these abuses was undeniable. In spite of political promises about Czech citizens’ participation in the economic development of the Czech Republic, the result of coupon privatization was a rapid accumulation of capital in the hands of a small number of majority shareholders, which a few years later gave rise to a large group of citizens with often worthless shares in tunneled out companies and investment funds, and on the other hand to a small number of super rich post-communist magnates. However, many privatized companies survived the initial tunneling, and so did minority shareholders who could enjoy “their” investments because “their” enterprises were prosperous.
About 10 years after the coupon privatization, Vladimir Dolezal, an ODS representative, introduced in the Czech Republic Parliament a proposal that the minority shareholders be deprived of their property in shares again. He demanded that the majority shareholders with a share at least 90% of the base capital of a traded company (principal shareholders) should be given the right to acquire shares of minority shareholders without their approval. The legislative proposal pertained to both quoted and unquoted shares (to public and private companies), and it was justified by a notion that it was an adaptation of a Czech law to a Community Law. In a parliament debate, representative Dolezal said: “I only want to point out that this is a Commercial Law modification based on the 13th directive of the European Union, and that is one of the things we will have to deal with sooner or later, therefore, it is to our advantage to start working on it immediately”. This is not true (in Czech).
Representative Dolezal’s proposal gained support to a various degree in all political parties, and it passed with a great majority of votes. The acquisition bill was signed even by the republic’s president Vaclav Klaus, formerly known as the architect of the coupon privatization, who as a finance minister in the first half of the 90s was promoting distribution of the state property among the population. Thus a legal regulation (CLC Section 183i to Section 183n) was created in the Czech Republic, that gives principal shareholders with at least 90% of the base capital the right to acquire shares of the remaining shareholders for a price justified by an expert valuation by an expert whom they themselves choose and pay (price acceptance by minority shareholders is not required).
In the case of companies where by 07/01/2005 when the bill became law, there was a principal shareholder who had acquired his stake before, the right to “squeeze out Czech style” was limited to three months after 07/01/2005. Therefore, in the first three months the law was in force, mass buyouts of minority shareholders took place almost simultaneously in more than two hundred companies, for prices that were not approved by the minority shareholders or any independent agency. In companies where there was no principal shareholder by the time the law became active, the right to “squeeze out Czech style” was limited to three months since 90% share was acquired. That time limit was later repealed – see the latest news from 07/01/2008.
As soon as the law “squeeze out Czech style” was in force, some Czech citizens submitted to the European Union Commission complaints against the Czech Republic for a violation of the Community Law. Based on these complaints, the Commission commenced proceedings with the Czech Republic (in Czech).
Due to the law “squeeze out Czech style”, hundreds of thousands of Czech and foreign portfolio investors in the Czech Republic where cheated out of sums in the magnitude of tens of billions of Czech crowns (billions of dollars). So far, shareholders of 300 Czech companies lost their property. This does not include shareholders who lost their property earlier due to the right of the principal shareholder to carry out so-called pseudo squeeze out – transfer of property to the principal shareholder pursuant to the CLC Section 220p that was introduced in the Czech Republic as early as 2001 and is of similar “quality” as the CLC Section 183i to 183n. Through actual or pseudo “squeeze out Czech style” and tunneling practices used earlier, property was unethically taken away from millions of minority shareholders in the Czech Republic – from almost all “coupon shareholders” and also from many local and foreign portfolio investors who in good faith bought shares on the stock exchange.
We can summarize that thanks to coupon privatization, almost all adult citizens of Czech Republic became shareholders because they were promised participation in the development of the Czech Republic. Then, the shares were taken away from them in favor of post-communist magnates. The post-communist “property redistribution” was first done through tunneling, tolerated by the Czech state, and later with the help of the law “squeeze out Czech style” that even foreign corporations happily used. It was at the expense not only of the citizens misled by the Czech State – coupon shareholders – but also of portfolio investors who bought shares on the stock market where these were traded freely before “squeeze out Czech style” became law.
When the devastating effects of the law “squeeze out Czech style” became apparent, all political parties expressed regrets over it publicly. For instance, representatives of all political parties were crying crocodile tears in a discussion aired on the TV station CT 1 on 09/03/2006. Political leaders (including the current Czech Republic Prime Minister Miroslav Topolanek) of the parliament party ODS1, member of which is Vladimir Dolezal, the initiator of the law in question, apologized in other media as well, for instance in the journal Tyden. Despite these public declarations, representatives of all parties did not do anything to remedy the scandalous legal conditions they were responsible for; on the contrary: their next collective step was to make robbing the property of minority shareholders even easier, and on top of that, they made it impossible for the robbed shareholders to defend against it through court action where correctness of the price paid for shares should be reviewed (see the latest news from 07/01/2008). The Supreme Court is admittedly trying to rectify this lapse of lawmakers by its interpretation but that does not absolve the lawmakers from responsibility. This fact and other indications that will be described later mean that the law “squeeze out Czech style” is not a legislative mistake of “representatives of the people”, as they publicly claimed but rather an officially undeclared intention to strip thousands of minority shareholders of their property!
Almost 20 years after the fall of the totalitarian regime, courts in the Czech Republic still did not ascertain their independence and free themselves from political influence. Following the Czecho-Slovak “velvet revolution”, the general judicial system underwent only small personnel changes, so that other old habits of judges, namely tendency towards exaggerated formalism and little willingness to defend private property, outlasted the system change. Especially informative in this sense is this contribution:
All these are reasons why we should see the “squeeze out Czech style” phenomenon as a collective conduct of the Czech State power that behaves, against all standards, as a willing promoter of the interests of post-communist magnates and asset rich foreign corporations.
Several members of the Czech Republic Senate complained about the implementation of the “squeeze out Czech style”, and used their right to submit to the Constitutional Court a proposal to repeal the law. The Constitutional Court’s ruling was not forthcoming for an unreasonable length of time, almost two and a half years. During that time, more cases of “squeeze out Czech style” happened. The Constitutional Court rejected the senators’ proposal on 03/27/2008. According to some expert commentators, the Supreme Court ruling is a sign of an immature legislative culture because “squeeze out Czech style” is a serious legislative excess and a manifestation of lawmaker’s arrogance. According to some media responses, the Supreme Court violated rights (in Czech) with its ruling.
Constitutional judges and their aides did not take into account many of petitioners’ arguments while not being able to dispute these arguments convincingly. The court’s approach can be likened to “picking raisings from a cake”. Out of a wide range of former decisions, legal literature and expert opinions, the ruling refers only to those that support rejection of the proposal. Unfortunately, such an approach of courts is so frequent in the Czech Republic that it is described in detail in professional literature (in Czech).
Among other things, the Constitutional Court asserts in its decision that property in the form of shares cannot have the same level of protection as other forms of property. However, property protection cannot be limited only to owners of houses and fields. In a modern society, most assets (things) are owned through shares or business participation, and the Constitutional Court’s opinion summarily excludes most of these assets from standard protection. That certainly could not have been the intention of the creators of the Czech Republic Constitution and the Charter of Basic Human Rights and Freedoms. The right to enjoy one’s property peacefully is a fundamental human right that is instrumental in effective fulfillment of other fundamental rights. If this right is violated, violation of other rights is encouraged because without financial means, rights holders are unable to defend themselves effectively against violations of other rights.
Ownership of assets, including shares, widens the range of personal freedom. Over 6 million Czech Republic citizens believed the promises of Czech politicians that shares acquired in the coupon privatization, or profit from them, will widen the range of their personal freedom. This did not happen because through the House of Representatives and Senate decisions and the signature of the Republic’s President, property of the original holders of investment coupons was left opened to robbery against which there is almost no defense.
1   The Czech acronym ODS means “Civic Democratic Party”