okforum.eu
cz   en  

SQUEEZE OUT V ČR

Supervision by the Czech National Bank

The Czech National Bank is the supervisory authority that should protect equity interests of squeezed out shareholders. To be fair, we must note that the CNB (Czech National Bank) checked expert valuations only for the period from 09/29/2005 till 03/31/2008; protection of shareholders was not part of the law before that, and in respect of unquoted shares, it was not again after the date of 04/01/2008 - see News of the date – see the latest news from 07/01/2008. The CNB was refusing its approval obligation from the beginning and was saying that it would not be able to carry out the supervision. It argued that it had no human resources or time for a thorough examination of expert valuations (read the excerpt (in Czech) “Udalosti (Events)”of a TV program at CT 1  from 07/01/2005).
 
From the legal point, it is not even clear what specifically Czech National Bank officials should examine before approving an expert valuation. There are no regulations on the valuation of shares in the Czech Republic, and the meaning of the legal term "adequate compensation" is not clear either. How could the CNB examine whether the valuation of shares corresponds to an "adequate compensation" when it is not clear what that " adequate compensation" is anyway? This is really a difficult task. That explains why the CNB does only a formal examination of expert valuations. The CNB mostly does not interfere, and when it does then unpredictably, with the determination of the value of input parameters of a valuation (the financial plan, the amount of the discount rates and valuation of non-productive assets), that are provided by an expert selected and paid by a principal shareholder and that are pivotal for the appraised amount.
 
It is inexcusable that the Czech National Bank did not support efforts to remedy the scandalous status quo, even though it has been brought to its attention. The correspondence between OSMA and the CNB is attached.  Even if the CNB did not prevent the mistakes described in the section "Shady Practices of Czech Court Experts” (in most cases it could not because it did not monitor them), it could at least help to correct them afterwards. For instance, if it had provided guidance to courts on how to eliminate errors in review procedures, made by so-called experts. The CNB excels, however, only in its passivity; it is trying to defend the scandalous status quo. Therefore, it appears that this state authority has the will to protect more the "state interest" than the property rights of minority shareholders, while both are, unfortunately, in pronounced contradiction in the Czech Republic.
 
It would not be difficult to correct errors in the existing methodology for determining the cost of capital (discount rate) used by Czech so-called experts. OSMA provided guidance to the CNB. With respect to the incorrect financial plans, the CNB could, for expert valuations in its possession, officially count and publish the value of the average earnings growth of companies, as estimated by experts in valuations that principal shareholders use to support the reported adequacy of the compensation, and compare these figures with later situation. That way, it would be possible to quantify to what extent the biased experts on average cheat. Squeezed out shareholders could use this figure as supporting evidence in review proceedings. Officials of the Czech National Bank, however, did nothing of that; instead they pretend that everything is in order. It certainly means less work for them, among other things.