The draft bill 5730 aims to amend the Luxembourg law of August 10 1915 on commercial companies, as amended (the Law). The proposed amendments aim to continue the process of modernisation of Luxembourg corporate law and corporate governance rules.
The proposed reform is mainly inspired by the Belgian and French legal systems. Nevertheless, the Luxembourg legislator has taken into account the uniqueness of Luxembourg corporate law in order to develop an original and useful corporate practice.
The scope of the changes contemplated by the draft bill is very broad and relates to the different legal forms of companies and to the various aspects of their corporate life. Within the framework of this limited contribution it is not possible to give an extensive overview of the contemplated changes and it has thus been decided to focus on some of the key amendments proposed by the draft bill.
Transitional regime
The purpose of the draft bill is to combine incitements for companies to use the introduced innovations and provide sufficient time for affected parties to understand and proceed with the required amendments to their articles of association and their internal corporate governance.
Taking into account these two goals, the transitional regime provides that existing companies will have 24 months as from the entry into force of the law resulting from the adoption of the draft bill to comply with any mandatory amendments to their articles of association.
It also says that during the transitional period, companies remain governed by the law as it was prior to the amendments resulting from the draft bill.
And any amendment to the articles of association shall be done in accordance with the rules applicable to the amendment of the articles of association and shall be published as required by the law. However, in order to minimise the costs for companies, the draft bill provides that the management organ instead of the general meeting of shareholders will have the possibility to amend the articles of association. But the changes must be strictly related to the abrogation of articles or to the re-numbering of articles.
Finally, if any required amendments to the articles of association were not made within the required period of 24 months, those provisions of the articles of association contrary to the mandatory provisions of the draft bill, shall be considered as null and void. If, consequently, the running of the company would be impossible, any third party may require the Luxembourg commercial court to dissolve the company.
Civil code
The proposed new paragraph 3 of article 1855 of the Civil Code refers to agreements by which shareholders organise the transfer or acquisitions of shares. The proposed amendment results from the codification of Belgian and French case law and will allow improved certainty regarding the transfer of shares. This new paragraph will not remove the prohibition of the leonine clause but will allow legal arrangements for the transfer of shares as long as they do not exclude one or more shareholders from the participation in the losses or the benefits of the company. This will notably secure securities repurchasing agreements (conventions de portage) by which a financing entity subscribes or buys shares on behalf of a third party which agrees to redeem them, against remuneration, at the expiration of a fixed term.
The legislator intends to introduce a provision regarding the dissolution of a sole shareholder company, without liquidation. This rule follows upon a notary practice and is similar to the French practice of the 'dissolution-confusion'. This provision shall apply to any corporate form save for the public limited liability company, private limited liability company and the simplified public limited liability company because these companies could already exist, without time-limit, with a sole shareholder.
Right of control of the shareholder
The draft bill aims to introduce a right of control for minority shareholders representing at least 10% of the share capital or 10% of the voting rights of a company. This will be done by allowing them to ask questions in writing to the management of the company concerning any management operation of the company or of controlled companies.
The management organ must answer the questions raised within one month. In the absence of answer or if the explanations of the management organ about the concerned management operations are not considered as sufficient or appropriate, shareholders could act in summary procedure for the appointment of an external expert.
Simplified public limited liability company
The draft bill introduces a new form of company, namely the simplified public limited liability company (société par actions simplifiée), inspired by French corporate law. The simplified public limited liability company will, unless otherwise provided by the amended Law, be governed by the provisions applicable to the Luxembourg public limited liability company.
The main original features of this form of company include devolution to a chairman of the powers which are normally those of the board of directors or the day-to-day managers. And the powers of representation of the company towards third parties and in legal proceedings, except otherwise provided in the articles of association
Also, any legal person being chairman or director (dirigeant) of the company has to appoint a permanent representative. Plus there are large discretional powers regarding the articles of association. In addition, the unanimity of the shareholders is required in order to convert the simplified public limited liability company into a public limited liability company.
The powers of the general meeting of the shareholders of the simplified public limited liability company are determined by the articles of association save the resolutions regarding a capital increase/decrease, a merger or demerger, dissolution, modification of the corporate form, appointment of the auditor and the approval of the annual accounts which remain as a matter of law vested with the general meeting of the shareholders.
The sole shareholder can also delegate its powers. In addition, the new system is flexible regarding the transfer of shares; it is possible to provide inalienability clauses for a maximum term of ten years or clauses establishing an approval requirement or pre-emption clause, squeeze-out clause and the like.
Finally, the simplified public limited liability company can issue bonds but has no right to issue convertible bonds.
Executive committee
The draft bill follows the example of the Belgian law and provides, in respect of both the private limited liability company and the public limited liability company, the possibility to set up an executive committee. Such committees already exist in a number of companies out of any legal framework.
The management may delegate any of its powers to the executive committee save for those powers which regard the general politics and duties reserved by law to the management. In case of delegation, the committee would exercise its powers in an exclusive manner, leaving the management with a supervisory power only.
Any committee would have to be composed of at least two persons (whether members of the management or not) and all the conditions regarding its functioning would have to be set out in the articles of association or by way of resolutions of the management of the company.
The recognition of an executive committee will permit private limited liability companies to split (and not to overlay) the exercise of the management powers being exercised by the committee and the control of said exercise being vested with the managers of the company.
Conflicting interest for public limited liability company
The draft bill aims to introduce a reform of the provisions regarding conflicts of interests within the management. The procedure will concern the board of directors but also the day-to-day management, the management committee and the organs resulting from the two-tier system of governance (namely the management board and the supervisory board).
Therefore, if a member of a management organ has a direct or indirect economic interest in a decision of the management, said members must inform the organ of this conflict of interest and will not take part in the decision concerned. Moreover, the minutes relating to the conflict will have to describe the nature of the transaction, justify the decisions and explain the economic consequences of the decisions for the company. The statutory auditor or the auditor will also be informed of the conflict so that they can report the conflict in the management report and describes the economic consequences for the company.
These rules do not, however, apply when the decision of the management organ relates to current operations entered into under normal circumstances.
The draft bill proposes to increase the joint and several liability of directors and members of the executive committee towards the company and third parties for any infringement of the accounting standards.
Board of managers for public limited liability company
The draft bill explicitly provides for the possibility to establish, in the articles of association, a board of managers and to provide the rules concerning the attendance and voting quorums of the board as well as other rules regarding its functioning.
However, the board of managers could, contrary to the board of directors of a public limited liability company, not be considered as a collegial organ of the company. The board of managers would only have an internal effect to the company; the compliance of the rules regarding the management board would not be enforceable against third parties, with each manager retaining the power to bind the company individually.
The draft bill further provides that the board of managers could deliberate by using audio or video-conference systems.
In addition to the possibility for the board of managers to set up an executive committee, the draft bill expressly allows the board of managers to delegate the day-to-day management to one or more managers.
Please note that the concept of day-to-day management is not defined. Therefore, in order to determine whether the actions would fall within the scope of day-to-day management, the actions have to be considered on a case by case basis.
Minority shareholders' right
The draft bill introduces the possibility for minority shareholders (or holders of beneficiary shares with voting rights) to act in court, on behalf of the company, against the management. The two cumulative conditions are: (i) to hold at least 1% of the voting rights of the company and (ii) to disapprove the special discharge given to the management at the annual general meeting.
The purpose of such action is solely the compensation for the damages caused to the company and not the compensation of any personal damage suffered by a minority shareholder. It has to be noted that the holders of shares without voting rights can use in certain circumstances such minority holders' right.
Shareholders' agreement
Following the draft bill, agreements between shareholders regarding the exercise of their voting rights will be expressly allowed insofar as they do not infringe the Law or the corporate interest of the company and further provided that:
(i) a shareholder may not commit to vote according to the voting instructions given by the company, its organs, an affiliated company or its organs; and
(ii) a shareholder may not undertake towards the company, affiliated companies or their organs to approve proposals emanating from the organ of the company.
Finally, please note that no time-limit is established regarding these agreements. As a result, the common right applies and an agreement without time-limitation can thus be terminated by any party with the provision that reasonable advance notice is given.
Judicial redemptions
The draft bill consecrates the judicial redemption's procedure. As a consequence, it will be possible for one or more shareholders holding together (i) at least 30% of the voting rights of the shares of the company (or 20% if the company has issued shares not representing the share capital) or (ii) shares representing 30% of the share capital to request the court to redeem of all of the shares of another shareholder.
This judicial procedure does not prevent other conventional mechanisms regarding the redemption of the shares of a shareholder. It will, however, always be possible for a party to require this judicial mechanism. But, in this case the judge will take into account the lawful conventional provisions.
In consideration of the judicial redemption procedure, the legislator has also adopted a judicial procedure of withdrawal by a shareholder. The mechanism corresponds to the procedure explained above, save that no threshold is required, and allows a shareholder to request the redemption of all of its shares to the shareholders.
Squeeze out for public limited liability company
The draft bill introduces two complementary procedures:
(i) the possibility for a majority shareholder holding at least 95% of the shares and 95% of the voting rights to squeeze-out the minority shareholder(s) and;
(ii) the possibility for minority shareholder(s) to compel the majority shareholder holding at least 95% of the shares and 95% of the voting rights to purchase its/their minority participations.
Provisions relating to the shareholders of a private limited liability company
The draft bill introduces the possibility to limit, in the articles of association, the voting rights provided that any such limitation applies to all shareholders and for any of their decisions. The limitation of the extent of voting rights does not apply to the shares but rather pertains to a shareholder as legal or physical person. As a consequence, the shares will recover their voting rights if the relevant shareholder transfer his shares to a transferee to which the above limitation does not apply.
The draft bill introduces rules regarding the acquisition by a company of its own shares, which have the following features: equal treatment of the shareholders of the company, and such acquisition cannot affect the unavailable net assets of the company. Also, the voting rights of the redeemed shares are suspended and these shares are not taken into account for quorum purposes. Finally, the management has the possibility to suspend the dividend rights for these shares and the acquisition has to be mentioned in the annual report of the company.
The financial assistance shall be explicitly forbidden in principle except in the normal course of business or regarding transactions affected in view of the acquisition of shares by or for the staff of the company. Moreover, the prohibition of financial assistance has been extended to related companies or their employees as well as to the subscription of shares.
The legislator assimilates the operation of pledging its own shares to the acquisition of own shares. As a consequence the same mechanism and rules are applicable.
Bond issuance
Proposed article 11 of the law will allow any company having legal personality to issue (registered of bearer) bonds by way of private or public subscription. The issuance of convertible bonds or bonds with subscription rights is, however, limited to the public limited liability company and under certain conditions (see below) to the private limited liability company.
The aim is to clearly take into account the financing requirements of all types of companies while taking into account the individual features of certain companies.
As a consequence, a private limited liability company may issue convertible bonds but in order to respect the private character of the company any new shareholder of a private limited liability company will have to be agreed under the conditions of majority and quorum prescribed by article 189 of the law. It is thus not possible for a bondholder to become shareholder by the sole conversion of its bonds. The law will provide that a private limited liability company may issue convertible bonds with the provision that the bondholders shall be explicitly agreed under the condition prescribed by article 189 both at the moment of issuance of the bonds and at the moment of transfer of the said bonds.
Operations relating to the shares of a public limited liability company
The draft bill consecrates the possibility to issue shares with unequal values of which voting rights are proportionate to the represented share capital.
In order to consolidate the shareholding of the company, the draft bill consecrates the possibility to award double voting rights to registered shares. The shares have to be held by the same shareholder registered for at least two years in the register of shares of a the company. The double voting right will end in case of transfer of said shares.
Approval of a shareholder of a private limited liability company
In order to transfer shares to a non shareholder, approval by at least three-quarters of the shareholders is required under article 189 of the law. The draft bill proposes to reduce this threshold to the approval by half of the shareholders. Moreover, in order to avoid conflicts regarding the approval of a new shareholder, the legislator has introduced a new mechanism in case the shareholders refuse to approve a new shareholder.
The draft bill constitutes a significant and expected evolution of Luxembourg corporate law but it is not a revolution. The Luxembourg legislator has ensured that the draft bill combines both major principles of contractual freedom and legal certainty as the Grand-Duchy of Luxembourg requires freedom of action for the economic operators. The legislator has also provided general provisions framing this freedom in order to sufficiently secure the economic operations.
| Author biographies |
Dirk Leermakers
Loyens & Loeff Luxembourg
Dirk Leermakers joined Loyens as a partner in 2003. He heads the corporate practice group and specialises in corporate law, corporate finance, private equity, venture capital, mergers and acquisitions and shareholder litigation.
Previously he was a partner with a leading Belgian law firm in Brussels and New York, and thereafter the partner in charge of the corporate and securities practice in the Brussels office of a major US law firm. He has held several management positions in industrial companies.
Dirk is a member of the bars of Luxembourg, Brussels, New York, and California.
Licensed Jurist, University of Leuven, 1978
Masters degree, McGill University, Montréal, Canada, 1980
Languages: Dutch, English and French.
Gérald Origer
Loyens & Loeff Luxembourg
Gérald Origer joined the corporate finance department of Loyens & Loeff Luxembourg as a senior associate in 2005. He is a member of the corporate practice group and he specialises in corporate law, mergers and acquisitions and transactional business law.
He was admitted to practice in Luxembourg (Avocat à la Cour) in 1999. Before joining Loyens & Loeff Luxembourg, he worked for six years for a major UK-based law firm in Luxembourg. While there, he gained corporate, banking and finance experience and had a six-month internship in the banking and restructuring department of the same firm in London.
Law degree, Université Catholique de Louvain (Belgium), 1995.
Special degree in European and International law, Université Catholique de Louvain (Belgium), 1996.
Languages: French, English and Luxembourgish.
About Loyens & Loeff Luxembourg
Loyens & Loeff Luxembourg has a team of more than 120 lawyers and tax specialists who provide fully integrated corporate and fiscal legal advice to clients. The office is affiliated with Loyens & Loeff, which has over 900 fee-earners in 18 offices in the Benelux region and the world's main financial centres.
The authors thank Nicolas Marchand, associate at Loyens & Loeff Luxembourg, for his contribution to this chapter. |