May 29, 2018

Time Is Running Out for Luxembourg Companies to Comply With Companies Law Reform

The reform implemented on 23 August 2016 (the Reform) modernised the Luxembourg act on commercial companies of 10 August 1915 (the Companies Act), amended the Civil Code and the law of 19 December 2002 on the trade and companies register, and the accounting and annual accounts of undertakings applied in full to companies incorporated in Luxembourg after its entry into force in August 2016.

Companies incorporated prior to the Reform continue to benefit from a grandfathering period of 24 months. As from 23 August 2018, any provision in the articles of association of a Luxembourg company contrary to the Reform will be deemed unwritten and the mandatory rules under the Reform will apply, irrespective of any agreement to the contrary between shareholders, i.e., any provision in the articles of association of a Luxembourg company contrary to the Reform shall be deemed unwritten and the mandatory rules under the Reform will automatically apply.

The assessment as to whether a provision is in breach of the Reform must be done on a case-by-case basis for each Luxembourg company/partnership formed prior to the entry into force of the Reform.

It may be that certain provisions of the articles of association/partnership agreement, while not being in actual breach of the Companies Act as amended by the Reform, are nevertheless not in line with the requirements set out by the Reform, a grey area to be avoided. An example of a grey area to be avoided includes the case where the articles of association of an SARL do not consider the new provisions applicable to the transfer of its shares as provided under the new article 710-12 of the Companies Act. In such case, the exit of a shareholder may open the way to a judicial only solution, even if the shareholders did not contemplate that scenario in the first place. The new article 710-12 of the Companies Act provides an exit route for those shareholders of an SARL exposed to dissenting shareholder(s) who would block the approval of the transfer of the SARL’s shares by the selling shareholder. Under this new article, after the failure to reach the 75% majority consent (note that the Reform provides an option to lower that threshold to 50%), the dissenting shareholder(s) have the right to (1) acquire or cause to acquire, the shares of the selling shareholder or (2) the SARL may buy back its shares. If no transfer or buy-back occurs within that period provided in the new article 710-12 of the Companies Act, the transfer as originally rejected by the general meeting may occur. If the articles of association are not updated to provide for a valuation rule as is now provided by the Reform, a court process would have to be undertaken to get a proper valuation of the shares.

Reminder - Key Changes Brought by the Reform

Changes relevant to all companies and partnerships

  • all companies can now issue tracking shares
  • ability for the board to suspend voting rights of shareholders failing to comply with their obligations
  • possibility to issue shares of different value
  • possibility for shareholders to invalidate shareholder meetings
  • unanimity is no longer required to change the nationality of a company
  • validity of voting agreement and clauses providing for restrictions on transferability of shares are now formally recognised
  • prohibition to adopt a denomination similar (but not identical) to an existing company which would be misleading for the public
  • simplified liquidation procedure (dissolution without liquidation) is formally recognised for companies with a sole shareholder company
  • possibility for the board to change the registered office of the company within the Grand Duchy of Luxembourg without shareholders’ consent

Changes relevant to SARLs

  • the minimum share capital is now set at €12,000
  • the maximum number of shareholders is increased to 100
  • an SARL is now entitled to issue redeemable shares (actions rachetables), founder shares (parts de fondateurs), profit shares (parts bénéficiaires) as well as nonconvertible shares to the public
  • changes to the articles of association of an SARL only require a majority representing three-quarters of the corporate capital (as opposed to the previous situation where changes to the articles of association required a dual majority - (1) a majority of the shareholders (in number) and (2) representing three-quarters of the corporate capital)
  • decrease of the required majority to transfer shares to non-shareholders to 50% (if provided for in the articles of association)
  • confirmation that an SARL may implement an authorised share capital allowing the board of managers to issue shares to existing shareholders within the limit of the authorisation
  • confirmation that an SARL may appoint a day-to-day manager
  • confirmation that an SARL may pay interim dividend (subject to the same rules currently applicable to SA)

Changes relevant to SAs and SCAs

  • the minimum share capital is now set at €30,000
  • possibility to issue shares below par value (subject to certain conditions)
  • more flexible regime for non-voting shares: non-voting can now represent more than 50% of the issued share capital and no more requirement for non-voting shares to receive a preferred dividend
  • contribution in kind of a claim (if certain, due and payable) will be treated as a contribution in cash (no audit report will be required)
  • possibility to create committees and delegate the management to a general director or a management committee
  • convening notices for general meetings can now be sent by email or courier services (if provided for in the articles of association)
  • possibility for shareholders holding at least 10% of votes to take legal action against management on behalf of the company for mismanagement and/or breach of the law of the articles of association
  • lock-up clauses which restrict the transferability of shares, beneficial units or debt securities are formally recognised

A new form of company is introduced into Luxembourg law: the SAS

A new form of company, the simplified public limited company (société par actions simplifiées - SAS) has also been introduced into the Luxembourg legal system. SAS offers far more flexibility to the shareholders and managers than the SA. An SAS can be registered with no minimum share capital requirement and have both legal and natural persons as shareholders. Its mode of governance is flexible and can be tailored to the shareholders’ needs. The new law provides that, subject to compliance with mandatory rules (for example, representation of the company by a president, exclusive power of the shareholders’ general meeting for some corporate decisions such as those relating to annual accounts and profits, share capital and the transformation of the company), the articles of association of the SAS can freely provide for the organisation, the management and the operation of the company. Such flexibility will allow setting up governance modalities adapted to the different profiles of the investors in private equity operations, but also within the framework of joint ventures.