General overview

What legislation governs M&A activity in Luxembourg?

No specific legal framework exists for Luxembourg M&A. The applicable legislation depends on whether the deal involves a privately-owned or a public target, and whether the transaction is structured as a share deal or an asset deal.

The main legislations that potentially apply are:

• The Luxembourg civil code, which contains all the basic provisions applying to pre-contractual, contractual, liability, implied warranties aspects as well as the fundamental corporate law principles.
• The law of August 10 1915 on commercial companies, as amended (the Company Law).
• The law of March 22 2004 on securitisation.
• The law of November 5 2006 on supervision of financial conglomerates.
• The law of August 5 2005 on financial collaterals, which governs some of the specific standard securities (pledges).
• The law of May 19 2006 on takeover bids.
• The Labour Law Code, which contains the principles governing the transfer of undertakings and its impact on the employment agreements.
• The tax legislation.
• Circular letters and codes of conduct of the banking supervisory authority (CSSF) and the insurance supervisory authority (Commissariat des Assurances).

What impact have recent legislative changes had on the nature and amount of M&A activity?

Changes made in 2007 to the Company Law modified the provisions applicable to mergers/demergers and cross-border transactions by introducing the concepts of transfer of assets, branch or activity transfer, and all assets and liability transfer, as well as transfer of professional assets. These changes simplified the legal aspects of partial splits-off transactions in taxation legislation definition, and enhanced the attractiveness of Luxembourg in the field of cross-border transactions.

The reduction of the capital duty to 0.5% with effect as at January 1 2008, before its complete abrogation scheduled on January 1 2009, also contains a strong message for international investors. Reference must also be made to the 2007 amendments to the IP rights taxation regime according to which 80% of the royalties are now exempted.

What have been the most significant M&A transactions in Luxembourg over the past year?

2007 was still under the shock of the Mittal-Arcelor merger, which had important follow-up effects. It motivated Luxembourg to strengthen and update its legislation framework. M&A activity has been active in 2007, mainly through transactions conducted by private equity firms. The real estate market was also dynamic, both in terms of volume of transactions and in terms of geographical scope (notable increases were in Middle and Eastern Europe acquisition deals through Luxembourg SPVs).

How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated or restricted?

More than any other jurisdiction, Luxembourg is the template of an open market and business-friendly country. In this respect, there are no particular restrictions to foreign involvement or investment in M&A transactions, other than the standard European anti-money laundering regulations.

Luxembourg is particularly flexible in taking foreign requirements into account.For instance, it is possible to express the share capital of the Luxembourg companies in foreign currencies and to have articles of association, as well as all other corporate/contractual documentation, directly drawn up in English.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

Although there is no legal requirement to proceed to a formal due diligence in an M&A transaction, it is usual for the purchaser to collect as much information as has been agreed on with the target company.

The Company Law enables the management bodies of the merging companies to draw up draft terms of merger in writing, specifying the form, corporate denomination, registered office of the merging companies, share exchange ratio, the amount of cash payment and the terms for the delivery of the shares in the acquiring company. For each of the merging companies, draft terms of the merger shall be published in the national gazette of each member state concerned. Specific disclosure requirements are required with respect to public takeovers (see details below).

To what extent do the current disclosure requirements achieve market transparency?

The disclosure requirements relating to takeovers have been specifically enacted in order to ensure market transparency and integrity for the securities of the offeree company. Other disclosure requirements in the case of mergers also achieve market transparency by providing for the public disclosure of the terms of merger.

The Transparency Law of January 11 2008 provides for the disclosure of periodic and continuing information about issuers whose securities are already admitted to trading on a regulated market situated or operating within a member state.

How has the growth in private equity buying in the past few years affected due diligence?

Typical M&A transactions using a top-structure SPV usually imply no substantial due diligence issues, given that the target and the banking financing aspects are not in direct relation to Luxembourg.

Luxembourg's issues relate to the tax and legal structuring in terms of financing acquisition and exit. In this respect, the growth in private equity in the past 10 years, and the increasing complexity of the deal structures require the legal expertise from Luxembourg counsels.

Has the issue of material adverse change clauses become more important with the recent failure of some large M&A deals around the world?

The recent market tensions (higher competition between bidders, scarcer and more expensive target opportunities, liquidity restrictions in the wake of the subprime crisis) have had an impact in terms of deal-breaker situations and related contractual provisions (adverse change clauses, default events). They require from legal counsels, in a more and more complex legal framework, demanding in-depth legal scrutiny and high-level legal expertise in order to mitigate and anticipate the negative potential effects of crisis situations.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction? How do they compare to other international regulators?

Takeovers are mainly regulated by (i) the law of May 19 2006 on takeover bids (the Takeover Law) and (ii) the law of January 11 2008 relating to the transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (the Transparency Law).

The Takeover Law is a close transposition of the directive 2004/25/EC (the Takeover Directive). Given that, so far, Luxembourg had no takeover bid legislation, the Takeover Law was hectically drafted and implemented during the turmoil of the takeover bid launched by Mittal over Arcelor in early 2006. It must be remembered that Arcelor was then regarded in Luxembourg as the jewel in the crown. After a brief hesitation, the Luxembourg authorities decided not to use the Luxembourg Takeover Law as an anti-Mittal instrument, and opted for a free market approach in line with Luxembourg's business-friendly tradition.

The Transparency Law is a close transposition of the directive 2004/109/EC of December 15 2004.

The Commission de surveillance du secteur financier (CSSF) is the supervisory authority in charge of ensuring that firms comply with both laws. The CSSF is a public establishment similar to the French AMF and the Belgian CBFA. Acting impartially and independently in the sole interest of public welfare, the CSSF is vested with legal power and is financially independent. Interestingly, the CSSF is quite liberal with respect to the languages to be used in documentation. Given the multi-language Luxembourg tradition, documents can be drafted in English, German or French.

In addition to the specific powers of information, approval, investigation and sanction conferred on it by these laws, the CSSF periodically issues circular letters, which, except regarding the CSSF itself, are not legally binding, yet aim to provide helpful interpretations of the law to investors and professionals.

What are the various methods by which a takeover can be achieved?

The Takeover Law envisages mandatory and voluntary takeover bids. A takeover bid is mandatory where it follows the acquisition of control of the offeree company. A takeover bid is voluntary where the offeror has as objective the acquisition of control of the offeree company.

A takeover bid is mandatory when a natural or legal person, as a result of its own acquisition or the acquisition by persons acting in concert with it, holds securities of a company governed by the laws of a member state, where all or some of the securities of that company are admitted to trading on a regulated market in one or more member states to a sufficient extent to give this person control of the company. Pursuant to the Takeover Directive, which leaves to each member state where the offeree company has its registered office the determination of the percentage of voting rights conferring control, the Takeover Law stipulates that 33.33% of the voting rights trigger the mandatory takeover bid mechanisms. This threshold percentage is in line with one of the major principles set forth by the Takeover Directive – that is, the protection and the right to equality of treatment to the minority shareholders.

Mandatory bids' mechanisms are not applicable where the control was acquired pursuant to a voluntary bid to all the holders of securities for all their holdings. However, the Takeover Law principles and rules apply irrespectively to mandatory and voluntary takeover bids.

How differently are hostile and voluntary takeover bids treated?

The Takeover Law does not make express reference to hostile takeover bids. This abstention conforms with the general philosophy of the Takeover Law, which views takeovers bids as useful instruments favouring competitiveness in a European open market environment.

The Takeover Law grants all flexibility to the general meeting of shareholders of the offeree company to facilitate or adversely draw up barriers against unfavoured bidders.

In this respect, Luxembourg implemented the opt-in/opt-out option allowed to member states by the takeover Directive. The offeree companies which have their registered office within the Luxembourg territory are indeed granted a reversible option to submit or not to (i) the obligation for the board to obtain prior authorisation of the general meeting of shareholders before taking any action, other than seeking alternative bids, which may result in the frustration of the bid, and/or (ii) to suspend any restrictions on the transfer of securities of the offeree company or restrictions on voting rights (breakthrough).

To favour a fight on equal terms and reciprocity, the Takeover Law exempts the offeree companies applying the two (or one of the two) aforementioned policies from applying any of them if they are subject to an offer launched by a company (or by a company indirectly or directly controlled by such a company) which does not apply the same policies.

The Takeover Law introduces two new mechanisms into Luxembourg law, that is, the squeeze-out and the sell-out rights. Firstly, if the bidder obtains 95% of the voting rights in the offeree company, it is entitled to require the holders of the remaining securities to sell it those securities at a fair price (squeeze out). Secondly, when the bidder acquires more than 90% of the voting rights in the offeree company, the holders of the remaining securities may force the bidder to purchase their securities at a fair price. By using differentiated thresholds for squeeze-out and sell-out mechanisms, the Luxembourg legislator intended to grant a specific protection to the minority shareholders.

What penalties are imposed for parties who violate takeover regulations (or equivalent)?

In the case of a breach to the general principles set forth by the Takeover Law, the CSSF can impose a fine upon the parties to the bid of €125 to €12,500. Such decisions imposing fines are subject to a full judicial proceeding.

Shall be subject to a jail term of eight days to five years and/or a fine of €251 to €125,000: (i) any person who fails to inform the CSSF of a bid; (ii) any person who refuses to give to the CSSF the required information or who gives knowingly incorrect or incomplete information; (iii) any person who fails to give the offer document to the employees' representatives (or to the employees themselves where there are no such representatives) of the offeree company. Judicial courts are competent to order these penalties.

What are the thresholds for disclosing bids and offers?

In case the conditions for a voluntary or mandatory bid are met (see threshold's rules detailed on page 10, various methods by which a takeover can be achieved), the bid must be publicly disclosed and the CSSF must be informed of the bid before it is made public. As soon as the bid has been made public, the boards of the offeree company and the offeror must inform the representatives of their respective employees or the employees themselves where there are no such representatives.

The offeror is required to draw up and make public an offer document containing the information necessary to enable the holders of securities of the offeree company to reach a properly informed decision on the bid. The offer document is first submitted to the CSSF for approbation. The CSSF verifies that the disclosure ensures market transparency and that the offer document does not contain false or misleading information.

How do you think M&A will develop next year? Do you think there will be more industry takeovers or purchases from emerging economies such as China and the Middle East?

After the sensation generated by the successful Mittal takeover bid over Arcelor in 2006, Luxembourg has been sailing on much quieter waters. In a general way, a major distinction must be drawn up between the local operational market and the international investments using on a large scale Luxembourg as a top-structuring platform.

Due to the small size of the country, M&A activity within the local operational companies cannot be compared with that of bigger jurisdictions. Potential targets are not numerous, most of them being privately owned. With respect to Luxembourg acting as a major player in international M&A transactions, 2007 was an excellent vintage year, in particular in private equity and real estate. But the second semester of 2007 was increasingly affected by the subprime crisis. The beginning of 2008 is also somewhat jeopardised by this worldwide strain, although Luxembourg, thanks to its tireless efforts to attract investors (for example, favourable IP income regime; abolition of the capital duty in 2009) keeps on increasing its attractiveness.

Competition and antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

The Luxembourg competition legislation was substantially amended by the law of May 17 2004 relating to competition (the Competition Law), which sets forth the general legal framework in competition matters. It can be said in a general way that the competition law is a new issue in Luxembourg law.

The Competition Law covers three substantial issues: (i) freedom to determine prices, (ii) prohibition of certain agreements between undertakings, and (iii) prohibition of the abuses of dominant positions.

With respect to prohibition of certain agreements between undertakings and prohibition of the abuses of dominant positions, the Competition Law is a mere copy and paste of Articles 81 and 82 of the EU treaty.

Notably, Luxembourg law has no specific legislation on the control of concentrations. As a result, the applicable provisions are those of the European legislation, in particular the EC regulation 139/2004 of January 20 2004.

How are the competition/antitrust regulations enforced in Luxembourg?

The Competition Law is enforced pursuant to the dual competence of the Inspection de la concurrence and the Conseil de la concurrence. The Inspection de la concurrence is a service of the ministry of economic affairs and trade and is in charge of investigating the competition cases, whereas the power to order decisions, recommendations or penalties is attributed to the Conseil de la concurrence, acting as a public establishment independent from the public authorities.

The decisions taken by the Conseil de la concurrence are subject to a full legal proceeding before the administrative court.

This dual system, which is uncommon in EU (only France and Denmark apply the same doctrine), has been challenged as being costly, complex and burdensome. However, a pending draft bill 5816 aims to allocate the whole procedure to the Conseil de la concurrence.

How do legislation and regulation approach the issue of "abuse of dominant position"?

The Conseil de la concurrence, implemented only in 2004, has not been in a position yet to set forth a firm doctrine with respect to the issue of abuse of dominant position. Its first decision (interim measures) was taken in early 2008 only. The decision was based on general principles such as the refusal to sell or to supply services, the application of discriminatory prices towards different clients, priority delivery granted to specific clients only, the delivery of goods or the supply of services subject to the sale of other goods or services, abuse of IP rights, or the limitation/prohibition access to competitors of fundamental commodities (raw materials, cable networks, railway/airport hubs).

In the light of the above and given the specificity of the Luxembourg M&A market which, mainly, does not affect operational local companies, it is unlikely that M&A transactions in Luxembourg will be substantially affected in the forthcoming years by the Luxembourg competition regulations.

To what extent are parties to an M&A transaction subject to prior notification requirements?

Under the current Luxembourg legislation and according to the doctrine of the Conseil de la concurrence, no prior notification to the Luxembourg authorities is required for takeover situations, takeover bids or mergers.

Author biographies

Daniel Boone Kleyr Collarini Grasso Daniel Boone joined the transactional department of Kleyr Collarini Grasso in December 2007 as a senior associate. Admitted at the Luxembourg bar in 2001, Boone immediately specialised in international M&A transactions by acting as counsel in corporate, contractual and banking and finance matters for major worldwide private equity houses, with a focus on the booming Asia-Pacific market. Boone gained experience that allowed him to successfully drive complex international transactions. His technical and team-leader skills have been highly regarded by both clients and professionals. In addition to his practice, Boone is an academic lecturer (University of Metz, France) and is active in legal publications in the fields of private international law, banking and finance, and corporate law. Régis Steiner Kleyr Collarini Grasso Régis Steiner joined the transactional department of Kleyr Collarini Grasso in September 2006 as an associate. Admitted at the Luxembourg bar in 2006 after experience as a legal tax counsel in France, Steiner has extensive experience that enables him to advise local and international clients in tax, corporate and banking and finance matters. With his dual French and Luxembourg background, Steiner's innovative technical skills are highly regarded. In parallel to his practice, Steiner is a recognised writer for French and Luxembourg legal publications, and is actively involved in professional training activities, with a focus on tax and corporate matters.