Reform of Luxembourg Corporate Law: What is in it for you?
Capital V #8 | by Pierre Beissel and Sébastien Binard, Partners in the Private Equity & Real Estate practice, Arendt & Medernach
While the proposed reform has been long in the making, it represents a major step in the development of the Luxembourg company legal framework, which will allow the country to consolidate its reputation as providing a flexible, business-friendly and secure corporate environment.
The present note aims to summarise the main questions triggered by this reform.
Who should read on?
Entrepreneurs, asset managers, investors, shareholders, directors and generally all persons involved with Luxembourg companies and partnerships.
What is the reform about and why should we care?
The main aim of the reform is to refresh and modernise Luxembourg company law in an extensive manner. This reworking not only brings a pragmatic response to the expectations of asset managers and investors that were not catered for previously within Luxembourg law, but also creates several innovative tools which should prove useful to a large number of market players.
The reform is expected to considerably and positively impact the practices of entrepreneurs, asset managers and investors on a variety of subjects as far as Luxembourg companies are concerned. For instance, it may be beneficial to amend existing articles of association and joint venture agreements in some respects as a result of the reform, and parties negotiating the governing documents of newly-formed companies would be advised to take the terms of the reform into consideration when drafting such documents.
When does the reform come into force?
The reform was published on 19 August 2016 and has entered into force after three clear days (jours francs) following publication of the new law in Luxembourg’s official journal (Mémorial A), i.e. on 23 August 2016.
The new law does, however, contain a grandfathering provision for companies incorporated prior to its entry into force, which will have 24 months to comply with its mandatory provisions through an amendment of their articles of association.
During the 24-month grandfathering period, the former law will continue to apply to companies set up prior to the date that the law comes into effect.
What are the reform’s main features?
The governing principles of the reform are twofold. First, the reform aims to increase the contractual flexibility already afforded to the main types of company available in Luxembourg in a bid to ensure that the parties’ intent may be reflected as closely as possible in such companies’ governing documents, without any undue constraints.
Second, it brings a new level of legal certainty and predictability to constructions widely used in PE and VC structures, making Luxembourg corporate law even more secure.
To what extent is Luxembourg corporate law more flexible now?
There are many ways in which the legislator has brought additional flexibility to Luxembourg corporate law.
Further to the reform, all types of company are now entitled to issue bonds to the public. The process of issuing convertible debt instruments and the conversion of shareholders’ debt into equity is equally facilitated.
The legal regime of the S.àr.l. (société à responsabilité limitée) has been enhanced. A S.àr.l. may, for instance from now on issue beneficiary shares (parts bénéficiaires), which were previously reserved for the S.A. and S.C.A., and which provide additional flexibility given that, contrary to regular shares, they are not subject to capital protection rules. The S.àr.l. may also issue shares via mere board action, provided that an authorised share capital has been created, and the threshold required for the approval of a transfer of shares to third parties may now be reduced to 50% of the share capital.
There is further flexibility and certainty to be found in relation to the exercise and suspension of voting rights and on the issuance of non-voting shares. In addition, the new law provides for a more pragmatic procedure allowing a company to transform into a company of another type, as well as a new simplified dissolution process without liquidation.
On the subject of governance, S.A.s may now create an executive committee to which broad responsibilities, including the authority to bind the company, may be delegated.
Finally, a new form of company, the SAS (société par actions simplifiée) is being introduced, which will in general be subject to the rules applicable to the SA (société anonyme), albeit with almost complete contractual freedom as regards the company’s governance.
What additional legal certainty does the reform bring?
The reform introduces several measures which create additional security for all parties involved through the sanctioning into positive law of certain principles which thus far stemmed from case law and established practices only. The foreseeability of the outcome of court cases on the relevant matters is a result expected to be improved.
The main subjects which gain from this additional predictability are (i) voting agreements, the conditions, voidance and enforceability of which are now expressly provided for, (ii) share transfer restrictions and transfer-related provisions, e.g. drag/tag-along rights, pre-emption rights, prior approval rights, and (iii) bonus shares and tracking shares, which now each have their dedicated regime.
The general threshold for exercising minority shareholders’ rights is also being unified and, as a consequence, the shareholders holding only 10% of the voting rights may now seek to engage the liability of board members.
What are the main take-away messages?
Regarding existing companies, while these will benefit from a 24-month transitional period as mentioned above, asset managers and investors would be best advised to have an assessment of their companies’ governing documents performed in order to determine which provisions may need to be re-negotiated among shareholders or with investors, and generally, what additional flexibility and other benefits they may build into such documents.
1. Bill of law N°5730 modernising the amended law of 10 August 1915 on commercial companies and amending the Civil code and the amended law of 19 December 2002 on the trade and companies’ register and the accounting and annual accounts of commercial companies.
“The reform is expected to considerably and positively impact the practices of entrepreneurs, asset managers and investors.”
“The corporate law reform opens a new chapter of flexibility and legal certainty for companies and investors.”