Corporate Structuring and financing private equity & venture capital transactions - Luxembourg January 2021 - Ogier
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Corporate Structuring and financing private equity & venture capital transactions Luxembourg January 2021
Corporate
Luxembourg
Structuring and financing private equity and
venture capital transactions
Introduction companies; Société anonyme – public limited
The jurisdiction of choice for there are generally no statutory liability company (SA) - when
many private equity and venture thin capitalisation rules although flexibility in terms of the variety of
capital investors / funds minimum equity may be required instruments that can be issued is
Luxembourg has developed over the in some particular cases; required
last two decades into a major hub in most cases, there is no
for private equity and venture Luxembourg tax on any gains The SA is a public limited liability
capital actors, both as regards to arising on an exit realised by a company which is able (in contrast
the location of their funds and as Luxembourg non-resident to a Sàrl) to make offers of shares
regards to the structuring and investor; to the public, to have a wider
financing of their acquisitions.
there is no withholding tax on shareholder base and to provide a
liquidation proceeds; high level of confidentiality for its
Luxembourg maintains more than there are no CFC rules; and investors. As a public company, it
ever its commitment to the private does however operate in a more
there is no stamp duty on the sale
equity and venture capital industry, extensive statutory framework than
or issuance of shares.
modernising and offering new a Sàrl.
structures that are aligned with the
need of sponsors. Recent examples Vehicle selection
Société par actions simplifiée –
include the complete reform of the Which type of companies to use? simplified public company (SAS)
company law in July 2016 (see The vehicles most frequently used to - when flexible governance is
reference 1) (the New Law), the structure private equity and venture required
introduction of an anglo-saxon type capital investments are:
of partnership (SCSp)(see reference
2) and of the reserved alternative The SAS offers far more flexibility to
investment fund (RAIF)(see Société à responsabilité limitée – the shareholders and managers
reference 3). private limited liability company than the SA. The SAS may be a
(Sàrl) - when control over the suitable alternative to the SA or Sàrl
share capital is required (the for shareholders with special needs
One of the most flexible and shares are not freely transferable) in respect of the balance of powers,
attractive EU tax regimes
shareholder relations and the
Luxembourg offers one of the most distribution of profits (for example
flexible and attractive legal One of the most commonly used
vehicles for structuring an start-ups or joint ventures).
framework and tax regimes in the
EU with a strong and ever acquisition is the Sàrl. It is a private
expanding double-tax treaty limited liability company, managed Société en commandite par
network and attractive effective tax by a board of managers, for the actions – partnership limited by
rates. benefit of its shareholders. It is shares (SCA) - when sponsors
characterised by a very high degree want to retain control over the
of flexibility and a very limited level management functions
Tax benefits of investing through of statutory prescription. It is thus
Luxembourg easily tailored to the requirements
there is a wide participation of single investor or joint venture The SCA is a corporate limited
exemption regime for dividends, private investment. The Sàrl is partnership with a share capital.
capital gains and liquidation check-the-box eligible. This vehicle is frequently
proceeds; encountered in Luxembourg
structures. Although a limited
there is no withholding tax on
partnership (with one or more
market conform interest
general partners /unlimited partners
payments made by LuxembourgCorporate
and one or more limited partners) The SCS and SCSp are fiscally Involvement of an independent
the SCA is also subject to the same, transparent and are therefore not auditor
more extensive, statutory subject to tax and should not in For contributions other than cash in
framework as the SA. The SCA is principle be eligible to double tax a SA, a SAS or a SCA, an
check-the-box eligible. treaty benefits. They can however independent auditor (réviseur
represent an alternative when a d'entreprises agréé) must issue a
fiscally transparent vehicle is report on the nature of the assets
Société en commandite simple –
required. contributed and the valuation
common limited partnership
(SCS) - when tax transparency method used. The report must
and structural flexibility are Comparing the different types of confirm that the value of the shares
required (with legal personality) companies used in private equity issued, nominal and premium, is at
sponsors can retain control over and venture capital deals least equal to the value of the
the management functions A table reflecting the key features noncash contributions. It is
of the most common Luxembourg important to note that the value
vehicles is annexed to this client reported on the report are those
The principle which underpins the which will be reflected in the
SCS is one of contractual freedom briefing.
notarial deed. Such report is not
and the parties are free to contract required in the case of the
on whatever terms suit them best Constituting the vehicle contribution of a receivable held by
from a commercial perspective. The Involvement of a public notary the holder of a debt instrument
partnership agreement can be (such as convertible bonds) against
Luxembourg being a civil law
tailored-made to the respective the company or for incorporation of
jurisdiction, the SA, SAS, SCA and
needs and objectives of fund reserves, profits or share premium
Sàrl must all be constituted by a
promoters and investors. to the nominal share capital.
formal deed, made before a
Luxembourg notary. This notarial
Société en commandite spéciale – deed is the constitutional document It is worth mentioning that a similar
special limited partnership of the vehicle, including a report shall also be prepared in the
(SCSP) - when tax transparency statement of all the characteristics case of a capital increase by way of
and structural flexibility are of share classes. In order to carry a contribution in kind and if, in the
required (without legal out incorporation, the initial first two years of the company's
personality) - sponsors can retain economic contribution of the existence, the company purchases
control over the management founding investors must be assets from a founding shareholder
functions unconditionally held by the vehicle amounting to more than 10% of the
at the moment of its incorporation share capital of the company. As an
with a value at least equal to the exception that rule, no report is
The SCSp is very similar to the SCS
minimum required by Luxembourg required when the transaction is in
and most of the legal regime which
law. Where this initial contribution/ the normal course of the company's
governs it is identical. The one
subscription is made in cash, this business or is subject to control by a
major difference between the two
cash sum, equal to at least EUR regulatory authority.
vehicles is that the SCSp does not
12,000 in the case of Sàrl and EUR
have legal personality.
30,000 in the case of SA, SAS or
No similar requirements exist for a
SCA, must be deposited with a Sàrl, a SCS and a SCSp.
Sàrl, SA, SAS and SCA are typically
(Luxembourg) bank account, in
organized under the Soparfi
cleared funds, in advance of
(Société de Participations Timing / steps
incorporation.
Financières) or holding company
It takes usually around two to three
regime. The Soparfi is not governed
days to incorporate a new company
by any specific law but is a The SCS and SCSp, as an exception
in Luxembourg. Many of the delays
company incorporated under to this rule may be constituted
experienced when setting up a
general Luxembourg law and will in either by a private, non-notarial
Luxembourg company relate to the
principle be a fully taxable resident instrument between their members,
KYC procedures that are required to
company subject to ordinary or by notarial deed. No minimum
be complied with by Luxembourg
income tax that can take capital requirements apply in the
lawyers, domiciliation agents, banks
advantage of the participation case of the SCS or SCSp.
and notaries. The usual steps in
exemption in Luxembourg and that
setting-up a Luxembourg company
is eligible to double tax treaty
are as follows:
benefits.
The first step consists inCorporate
identifying a bank and a Once set up, there are also ongoing held at the company's Luxembourg
domiciliation agent (required if practical requirements to consider. office and (vi) company bank
the client does not already have a In particular, any change to the accounts being in Luxembourg with
place of business in Luxembourg articles of association of a Sàrl, a real cash movement passing
to provide registered office SA, a SAS and a SCA, any capital through them.
services) who can also help with increase or reduction (unless Implementing the adequate level of
setting up a bank account in specific provision has been made for substance comes at a cost.
Luxembourg. an authorised share capital), any However, one of the more
The domiciliation agent and the merger or liquidation will require the important reasons to structure
bank will need to be supplied with involvement of a public notary and private equity deals through
AML/KYC information such a the passing of a notarial deed, Luxembourg in the first place is to
notarised copy of the passport of which can take up to a couple of benefit from certain tax
the beneficial owner and a utility days to arrange. advantages, which far exceed the
bill of that person. costs of creating the tax substance.
Next step would be the wiring of The SCS and SCSp are generally
the share capital to the bank constituted by a private instrument Structuring the investment
account with the bank issuing a between their members (the limited Thin capitalisation
certificate confirming the partnership agreement) and no
Luxembourg tax law does not
blocking of the capital on the notary will need to be involved.
provide for formal thin
bank account pending the Incorporation process is therefore
capitalisation rules applicable to
incorporation of the company to generally relatively straightforward.
holding activities. However, the
the officiating notary who will It takes approximately one or two
Luxembourg direct tax authorities
incorporate the Company. days to establish a SCS or SCSp,
have developed an administrative
Without that certificate stating longer if a general partner has to be
practice whereby a debt-equity
that the funds are held in a set-up first.
ratio of 85/15 is considered as a safe
blocked account, the notary
harbour for the financing of share
cannot incorporate the company.
Substance capital participations. The latter
Once the Company will be One growing issue when structuring ratio assumes a market interest rate
incorporated, the notary will issue a deal through Luxembourg is the on the debt portion whereas
a certificate confirming to the requirement by foreign tax interest-free shareholder debt is
bank that the capital can be authorities of real substance for considered as equity for the
released, i.e. the blocking will be private equity and venture capital purposes of the debt-equity ratio.
lifted. vehicles in order to benefit from the Borrowings for on-lending purposes
The Company will receive legal desired tax status. The required level are disregarded for the
personality at the incorporation of substance is determined primarily computation of the above debt
meeting. The registration and by the tax rules of the country(ies) equity ratio but may be subject to
filing of the incorporation deed where the assets are / will be other minimum capitalization rules,
with the Company Register and located and will have to be such as for intra-group financing.
the publication of the considered on a case by case basis. Under current tax practice laid as
incorporation deed with the RESA down in the Circular Letter.
(Recueil Electronique des
Sociétés et Associations) are to Substance is therefore more a
matter of creating a tangible Contributing the equity
occur after the incorporation
meeting. economic reality in Luxembourg Equity may be contributed to a
than an exhaustive list of prescribed Luxembourg company in cash or, by
The information to be filed on the requirements. Factors focussed on way of assets transfer. In relation to
Company Register includes the by foreign tax authorities in asset transfer, almost any tangible
beneficial owner(s) of the assessing substance generally or intangible assets may be
company. The wide public and include: (i) active, Luxembourg contributed, provided that such
the national authorities whose based employees, (ii) majority of assets are capable of credible and
purpose is to combat money directors being private individuals reliable valuation. Eligible intangible
laundering have access to this and Luxembourg tax resident, (iii) assets include securities, debt
information. However, decision making process taking claims, goodwill in a specific
shareholders of a SA are not place in Luxembourg, (iv) specific business and intellectual property
published. Luxembourg office space and rights.
utilities, (v) accounting and specific
company documentation beingCorporate
Where shares in an SA, SAS or SCA does not involve the issuance of compartmentalisation is not
are issued partly paid up in shares. The absence of share statutorily recognised. If differential,
consideration of an undertaking to issuance removes the requirement asset-specific leverage is envisaged
make a contribution of assets, such that otherwise often applies to then structural asset ring-fencing
assets must be fully transferred to make such transactions by way of may be advisable.
the vehicle within five years. In notarial deed. This mechanism
relation to an SA, SAS or SCA, the therefore provides a highly flexible
Alphabet shares
valuation of an equity contribution way of ensuring a company's equity
of assets must be supported by an that can be actively managed so as Also frequently encountered in the
up-to-date valuation report from to ensure on-going compliance with Luxembourg market is the use of
an independent auditor. This required debt-equity ratios and can alphabet shares. This technique
contribution-in-kind report therefore facilitate active portfolio involves the issuance of several
requirement does not apply in management. classes of shares whose economic
relation to a Sàrl but the valuation rights are not correlated to only
of the assets must be certified to certain portfolio assets, but rather
The corporate requirements to apply to a pool of assets as a whole
the notary incorporating the
make such contributions are: and/or to specific investment
company. No report is furthermore
enabling provisions in the articles of periods. The use of a number of
required when the contribution in
association; ordinary (non-notarial) classes of alphabet shares of this
kind consist in a receivable held by
shareholders resolutions or board nature allows the vehicle to redeem
the holder of a debt instrument
resolutions; and implementation by individual classes of those shares at
against the Company.
the directors. A short form appropriate points in time so as to
contribution agreement may also effect transfers of value, by means
Equity may also be contributed in be required depending on the of redemption payments to
the form of share premium nature of the contribution. shareholders, following the receipt
attaching to specific shares or in of value from the underlying asset
the form of capital surplus pool. Such redemption payments do
contribution (i.e. capital Financing instruments
Depending on the legal form, the not attract a withholding tax under
contribution without the issuance of Luxembourg law, if properly
shares), with a great level of proposed strategy in terms of
economic and voting rights, a structured.
flexibility. Any share premium or
capital surplus contribution shall be Luxembourg company can be
fully subscribed for and paid up. financed through a variety of Redeemable shares
equity, debt and hybrid Redeemable shares may be issued,
instruments. Here are the different subject to the following statutory
Sweet equity contributions (apports instruments typically used by
en industrie) can also be made to requirements: redemption is
Luxembourg companies outside authorised in the articles prior to
the extent that the shares issued in external financing, ordinary shares
consideration are not considered as issue of the redeemable shares;
and intragroup loans: shares to be redeemed must be fully
share capital from an accounting
perspective and are not paid up; and redemption can only
transferable. Such shares will Asset-tracking shares be funded from distributable profits
benefit from governance and / or Where a vehicle makes multiple and reserves or the proceeds of a
economic rights as set out in the investments with a commercial new issuance of shares made for
articles of association. requirement for asset-correlated the purposes of the redemption.
investment returns to different When funded from distributable
classes of investors then asset reserves /profits, a figure equal to
Equity contribution without the redemption price must be
tracking classes of shares and
issuing shares recorded in a non-distributable
"account 115" equity contributions
An alternative way of making or are entirely acceptable. Such asset reserve in the accounts of the
increasing equity contributions to a tracking mechanisms are company. Any redemption premium
Luxembourg company (of any contractually binding absent may only be paid where it will not
description) is by means of an insolvency. Insolvency-proof cause the company's net asset
"account 115 contribution". This compartments have statutory value (as set out in its most recent
involves a contribution of value to recognition in the case of annual accounts) to fall below its
the vehicle which is recorded to a Luxembourg securitisation vehicles subscribed share capital plus non
special account /reserve in the or specialised investment funds. In distributable reserves.
company's books and records which relation to unregulated, investment
is characterised as equity but which holding vehicles, insolvency-proofCorporate
Mandatory redeemable preference Preferred shares parts bénéficiaires”) which do not
shares Preferred shares carry the form part of the share capital. The
In common with many other preferential right to receive a fixed articles of association determine
jurisdictions, the equity in a percentage of profits before others. the rights that are attached to such
Luxembourg investment holding In some cases, they also offer the beneficiary shares. These rights
vehicle can be structured so as to preferential right to capital could conceivably be voting rights
provide preferential distribution distribution before other classes. As and/or dividend rights or rights to
rights to certain share classes. Such a result they often carry no voting participate in the liquidation or a
rights may take the form of rights. combination thereof. It is possible
mandatory redeemable preference to issue beneficiary shares with or
shares which may bear a fixed or without the right to participate in
Share with different nominal value profits or with or without voting
variable, preferred, cumulative
dividend right. Such shares would All companies can issue shares with rights. These beneficiary shares can
often be redeemable at the option different nominal values. As regards be issued for a consideration in cash
of the issuing vehicle in accordance voting rights, shares issued by SA, or kind, but can also be issued
with its articles and carry a SAS and SCA will benefit from without consideration.
preferred right to repayment at voting rights that are proportionate
maturity. Mandatory redemption is to their nominal value. With respect
Bonds and Convertible bonds
often set at the expiry of a fixed to the Sàrl, majority requirements
are determined based on the The bond issuance period may be
term (such as 10 years). Such shares
proportion held by each shareholder short, medium or long. Bonds can
tend to have very limited voting
in the share capital of the company easily be transferred to a third party
rights and do not carry any
(irrespective to the number of and generate a fixed or variable
additional profit entitlement above
shares), thus achieving the same interest rate. The interest they bear
the preferred dividend. Whilst
outcome. Through the issuance of is payable periodically or at
considered as equity from a
shares carrying multiple votes, it is maturity, depending on the
corporate law perspective, the
possible to further affect the coupon's terms and conditions.
prevalent debt features of MRPS
proportionality between capital Bond issuance may include
may lead to a debt treatment for
investments and governance rights, subordination as well as
accounting and tax purposes. MRPS
and to entrust the control of a convertibility. All Luxembourg
are mainly used for on-lending
company with a minority. companies can publicly issue bonds.
activities and could therefore cater
for a tax deduction and payment
free of withholding tax. Free shares PECs and CPECs
It is possible for SA, SAS and SCA to Hybrid instruments, such as
Non-voting shares award free shares to certain Preferred Equity Certificate (PEC)
employees and officers of the and Convertible Preferred Equity
Non-voting shares can be issued by
company and affiliated companies. Certificate (CPEC), are often used
SA, SAS or SCA and are, as their
An award of free shares is a right in cross-border investment
name implies, equity that does not
given to an individual to receive, structures. They are designed to be
have a vote, even though it is
subject to specific conditions being regarded as debt at the level of a
entitled to a share of the profits.
met, a certain number of shares. Luxembourg issuer from a
The economic rights of the
The ability to issue shares without Luxembourg tax perspective whilst
nonvoting shares must be
consideration must be provided in in some cases as equity for foreign
specifically stated in the articles of
the articles of association and the tax purposes (notably for the US).
association. The most typical rights
decision is to be taken by the board Because PECs and CPECs are
for nonvoting share are identical to
of directors / management. treated as debt for Luxembourg tax
those of ordinary shares apart from
Conditions of the issue (such as purposes, interest expense may be
the lack of a vote at general
vesting period and holding period) imputed on PECs and CPECs
meetings. Shares without voting
are fixed by the general meeting of resulting in Luxembourg tax
rights shall recover their voting
the shareholders. deductions, subject to recapture. In
rights when the resolutions of the
addition, interest paid on PECs and
general meeting amend their rights.
CPECs as well as the payment of a
The purpose of non-voting shares is Beneficiary shares redemption premium, is generally
to allow the holders of the ordinary
In addition to shares, Luxembourg exempt from Luxembourg
shares to maintain control. No-
company law allows the issue of withholding tax.
voting partnership interests can
participation certificates, also
also be issued by a SCS or a SCSp.
called founder shares (“titres ouCorporate
Typical features of PECs and CPECs requires a majority of 66.67% of Redemption of shares
include a 30-year term; a fixed shareholder votes (present or Share buy-back
annual interest rate computed represented at the meeting) with a Whilst subscription by an SA, SAS or
based on the “arm’s-length” quorum of shareholders SCA for its own shares is not
principle, convertibility (as regards representing at least 50% of the permitted, it is permitted for these
to CPECs) into shares of the issuer issued share capital. Quorum and vehicles (and for a Sàrl) to buy back
at a fixed ratio established upon the the conditions of majority are freely their own shares which are then
issuance of the CPECs, the determined in the articles of either cancelled or are held in
possibility to be redeemed at fair association of the SAS. treasury (under certain conditions).
market value under certain For a Sàrl, the ability to buy-back
conditions, transferability the shares must be set out in its
Increases of share capital by an SA,
restrictions, deep subordination to articles of association, the company
SAS or SCA for cash subscription
other debt and no voting rights. must have sufficient funds to do so
(but not by way of a contribution in
kind) will generally be subject to and transfers into treasury requires
Profit participating loan or asset statutory, preferential subscription shareholder approval as set out
linked loan rights. No such statutory, above under "pre-emption rights",
preferential subscription rights exist but is otherwise largely a matter of
The main characteristic of profit
in relation to an Sàrl although contract.
participating loans or asset linked
loans is that the lender's equivalent contractual rights may
remuneration depends on the be included in its articles. The SA, In relation to an SA, SAS or SCA, an
company’s profits or the income SAS and SCA statutory, preferential additional, generally applicable
derived from a specific asset. The subscription rights may be waived statutory framework also requires
profit-sharing feature may in by the shareholders individually. The authorisation to the Board (or the
principle not be an obstacle to shareholder's meeting may also chairman or the general partner, as
qualifying the instrument as debt. vote to reduce or cancel these applicable), by a general
Provided the instrument is properly preferential subscription rights, shareholder(s) meeting approving
drafted, and the return is not applying the same requirements as the terms and conditions, the
aligned with the profit distributions for amendment to the articles, maximum number of shares, the
of the company, the payment of which also requires a detailed report period of validity for the
the variable interest is in principle of the reasons for limiting the authorisation of up to five years and
not subject to withholding tax and preferential subscription rights to be the maximum and minimum
is fully deductible. presented to the shareholders consideration to be paid, and a
meeting by the Board. summary in the annual
management report.
Profit participating bonds and PECs
having the same characteristics in Luxembourg companies may also
terms of remuneration can also be state an authorised share capital in Shares bought back must be fully
issued. their articles of association paid up and the buy-back must not
authorising the board or the have the effect of reducing the
chairman or the general partner to vehicle's net assets below the value
Capital increase and preferential determine the terms of further
subscription rights of its subscribed share capital plus
share issuance within certain limits undistributable reserves.
To increase the share capital of a and to carry it out. Such
Sàrl, an amendment of its articles authorisation may be valid for a
of association will be required. Such period of a maximum of five years, Buy-back of limited interests in the
amendment requires a majority of and is renewable. In such case, the case of a SCS or SCSp can be freely
at least 75% of the share capital in board or the chairman or the determined in the partnership
issue. Any new investors (not being general partner may also be agreement.
existing shareholders) must also be authorised in the articles to remove
approved by existing shareholders or limit the preferential subscription It should be further noted that the
holding at least 75% (the majority rights of the shareholders. general civil law principle of equal
can however be decreased to 50%) treatment of shareholders will
of the issued share capital. require that any share buy-back
Requirements regarding capital
increase and preferential needs to be proposed equally to
Where, in relation to an SA or an subscriptions in the case of a SCS or each shareholder in the same
SCA, an increase of issued or SCSp can be freely determined in situation.
authorised share capital requires the partnership agreement.
the articles to be amended, thisCorporate
Reductions of capital exception of the SCS and SCSp) are the decision to distribute must be
Reductions of capital may be obliged to allocate to a non- taken within two months of that
carried out by way of a board distributable reserve an amount balance sheet. At the time the
resolution or a shareholders' equal to 5% of the company's net annual accounts are to be
resolution (with the same quorum profit per annum. This obligation approved, the statutory auditor (if
and majority requirements as for continues until the reserve has any) must confirm to the board or
the amendment of the articles). If accrued to a figure equal to 10% of the chairman or the general
the reduction involves repayment to the company's share capital (share partner, as applicable, whether or
shareholders or waiver of an premium and capital surplus shall not these conditions were met.
obligation to pay up shares, creditor not be taken into account for the
protection principles apply in purpose of this threshold).
Dividend payments attract
relation to SA, SAS and SCA which Luxembourg withholding tax but it
allow any creditor whose claims Dividend distribution may be reduced or exempt in
predate the publication in the RESA certain circumstances.
After payment or provision for debt
(Recueil Electronique des Sociétés
liabilities and allocation to this non-
et Associations) of the
distributable reserve, the company Structuring the governance
shareholders' capital reduction
may then declare and pay annual
resolution, to apply to the court for The importance of shareholders
and interim dividends.
a protective order within thirty days agreements
following such publication. Purpose
In relation to standard, unregulated Luxembourg company law affords
companies (not constituting an relatively few rights to shareholders
That application must be for an
investment fund) annual dividends with the result that a shareholders
order for the provision of security for
are declared by the shareholders at or joint venture agreement can be
the creditor's claim and the court
their annual general meeting used to confer additional rights and
may only reject such application if it
approving the company's annual powers on shareholders, in
considers the creditor already has
accounts, provided that those particular particularly regarding the
adequate protection or if such
accounts demonstrate that the transfer of shares (pre-emption
security is unnecessary in view of
proposed final, annual dividend rights, drag-along rights and
the net asset value of the company.
would not cause the company's net tagalong rights, ….), rights of veto
No payment may be made by the
asset value to fall below the level its and corporate governance matters.
company to the shareholders
subscribed share capital plus
following a capital reduction within
distributable reserves. The amount
this thirty day period, or until any
of the final, annual dividend may Ensuring compliance
objecting creditor applying to the
not exceed distributable profits, To ensure compliance with the
court has had its claim settled or
reserves (and carried forward commercially agreed position in
the court dismisses the application.
profits) net of any current or practice, it is better to replicate
carried-forward losses and certain clauses from the
Unlike in certain other jurisdictions, allocations required to the non- shareholders or joint venture
creditor protection enables distributable reserve(s). agreement in the articles of
application by objecting creditors to association. If the clause appears
the court. It does not require the solely in the shareholders or joint
Interim dividends may also be
positive application by the company venture agreement, the remedy for
declared by the board of directors /
itself for the court's approval of the any breach will generally be a claim
managers (or the chairman or the
proposed reduction. for damages with the related
general partner, as applicable),
provided that the proposed uncertainties associated with
No specific creditor protection distribution does not exceed the litigation risk including any
provisions apply in relation to profits of the company in the difficulties of evidential proof. The
reductions of share capital of Sàrl, current year (plus net profits availability of a court order to
SCS or SCSp. carried-forward) net of any current compel mandatory performance
or carried-forward losses and any (rather than a claim for damages
sums required to be allocated to following non-compliance) will
Distributions to investors often be uncertain.
non-distributable reserve(s). In
Legal reserve declaring any interim dividend, the
After payment or provision for directors /managers must prepare a In many circumstances, the
relevant debt obligations (including balance sheet showing the net shareholders will prefer (at least at
any intra-group debt financing), all funds available for distribution and the outset) that all parties simply
Luxembourg companies (to theCorporate
comply with their agreed joint may become necessary. This the right to a shareholder to
position, rather than to seek generally applicable duty has two appoint one or several directors /
financial compensation for breach, specific, additional areas of managers are in principle not
after the event. Thus, the matters application in the corporate effective under Luxembourg law.
set out below will often be included context: abuse of majority and However, in order to remedy such
in the articles of association, breach abuse of minority. ineffectiveness, different classes of
of which results in immediate shares may be created in the
invalidity. Those constitutional articles of association in order to
Abuse of majority may occur both
documents can also be relied on secure that each shareholder or
in actions taken by shareholders
against third parties by reason of group of shareholders (representing
and in actions taken by directors if
their public filing and consequent each a class of shares) may appoint
those actions are:
registration at the Luxembourg one or more directors /managers on
companies registry, in the case of taken contrary to the general the board. Each class would be
Sàrl, SA, SAS and SCA. A best corporate interests of the entitled to propose one or more
shareholders or joint venture company; candidates for a directorship. The
agreement, in contrast, being a are taken either with the sole and shareholders would elect the
private contract, cannot be relied exclusive intention to favour or directors /managers among the
on against third parties. prefer the majority shareholders candidates proposed by the
to the detriment of the minority shareholders of such class. This
or to have, and to be intended to formal procedure is necessary in
However, as the articles of
have, a damaging effect on the order to circumvent the rule
association are publically available
minority shareholders. according to which the power to
on the Luxembourg companies'
appoint directors /managers is
registry, a balance between the
exclusively vested in the general
commercial confidentiality on one Abuse of minority refers to a
meeting of shareholders acting as a
hand and the reliance against third situation where minority
global corporate body.
parties and constitutional effect on shareholders refuse to take
the other hand, may need to be decisions which are in the best
considered. corporate interests of the company Voting undertakings (which are
and includes both voting under the recognised by law) whereby all
articles and taking decisions within shareholders undertake to vote in
Duration
the contractual framework of the favour of directors / managers
Shareholders or joint venture shareholders or joint venture nominated by a specific shareholder
agreement are subject to a general agreement. Such refusal must be can also be implemented.
principle of civil contract law that characterized by bad faith and be
no contract can be made for an taken for exclusively self-referential,
infinite duration. This does not Management clauses
non-corporate reasons, contrary to
necessarily require that a fixed the company's best corporate The board / general partner is in
number of years be set out in the interests and causing damage to charge of determining the
agreement. As many shareholders the company out of proportion to guidelines for the company’s
or joint venture agreements are positive effects sought by the management and business
constituted for the purpose of a minority. development. Contractual
specific project with a required provisions in a shareholders or joint
period of time or for a set venture agreement aiming at
investment period, reference to Governance arrangements delegating the decision taking to a
such a period for determining the Governance arrangements would CEO or an executive committee
duration of a shareholders or joint typically involve voting would in principle be valid. Other
venture agreement is an undertakings, veto rights in favour down-stream delegations would
appropriate approach. of a class of shareholder or class of only be acceptable provided that
directors /managers and rights to the management may not be
nominate directors / managers. deprived of any power to interfere in
Duty of good faith
the management and to act in the
In relation to any Luxembourg law interest of the company.
governed contract, an overriding Appointment of directors /
duty of good faith applies between managers
the parties not only in their Private equity and venture capital Veto rights – reserved matter
performance of the contract but investors would usually have the Board level
also in pre-contractual matters and rights to appoint directors / Different classes of directors /
in any ultimate enforcement that managers. Provisions that reserve managers may be created, each orCorporate
some of them benefiting from Veto rights
certain veto rights on matters
falling within the competence of Corporate affairs
the board and that are of particular
interests for the shareholder(s) that amendment to the constitutional documents
"appointed" them.
alteration of the financial year end or of the accounting policies
Thresholds and majority variation in the authorised or issued share capital
requirements applicable to declaration or distribution of dividends
resolutions to be taken by the board
can also be structured in order to approval right of any transfer of shares, pre-emptive right, exercise of drag
ensure that no decision could be along and tag along rights
taken without the attendance or listing on an international stock exchange
the approval of the relevant class of
directors /managers. appointment and change of the auditors
appointment or removal from office of any director
Shareholders level
liquidation, winding-up or dissolution
Different classes of shares may also
be created. Each shareholder or
category of shareholders (e.g.
majority shareholder, sponsor,
minority shareholder, management, Material changes
…) will hold a class of shares
sale, transfer, leasing, licensing or disposal of all or a substantial part of the
entitling it /them to specific voting
company / subsidiary's business, undertaking or assets whether by a single
or economic right.
transaction or series of transactions, related or not
transfer of any shares in the capital of subsidiaries
In relation to general meeting of
shareholders, the statutory entry into a partnership or joint venture arrangement, merger or similar
quorums and majority requirements
may be increased so as to ensure demerger, division or split of the company or subsidiary
that no key decisions can be taken
without the affirmative vote of the
relevant category(ies) of
shareholder(s). Each class of shares Commitment
may also have veto rights over
certain matters. They arrangements adoption of or any amendment to the operating budget
are generally quite effective
entry into any contract or arrangement (including mortgages or charges)
provided they are included in the which is unusual, onerous or otherwise outside the normal course of trading
articles of association of the
company. making of any payment otherwise than on an arm's length basis
entry into by any (new) borrowings facility, the variation of the terms of
Veto rights held by private equity or any borrowing facilities or the issue or redemption of any loan capital prior
venture capital investors usually to its due date
cover the following matters (either
entry into any commitment or arrangement which is material to the
at the level of the investment
business of the company or subsidiary
vehicle or of the subsidiaries).
granting of any guarantee (other than in relation to the supply of goods or
services in the normal course of trading) or the creation or issue of any
debenture, mortgage, charge, pledge or other security (other than liens
arising in the course of trading)
entry into any lease, contract, memorandum or other agreement for the
licence, lease, sale or purchase of land or real property
establishment of any pension, profit sharing, bonus or incentive scheme
initiation and the subsequent conduct of any litigation, arbitration or
mediation proceedingsCorporate
Voting rights majority and the general principle share capital may request the
General principle of good faith. adjournment a general meeting of
As a general rule, one share gives the shareholders. The request
right to one vote. It is however should be addressed in session to
Minority action
possible to issue shares with the board of director / general
Shareholders of an SA or an SCA partner and for a maximum period
different nominal values with representing at least ten percent of
related pro rata voting rights of four weeks.
the share capital and/or of the
(please see above under the voting rights entitled to be
financing instruments section exercised, have the rights to initiate Enhancing minority shareholder
(preferred shares)). an individual actio mandati (on protection
behalf of the company) against Improving the protection of
Voting arrangements members of the board of directors minority shareholders can be
Voting arrangements among having defaulted in their duties. achieved by stipulating certain
shareholders are valid and can be provisions in a shareholders'
enforced to the extent that (i) they agreement or in the company’s
Independent investigation
do not infringe the law or the articles of association (e.g.,
Minority shareholders of all types of information rights, right to have a
corporate interest of the company companies representing at least ten
and (ii) shall not be construed as representative appointed to the
percent of the share capital and/or management board, provisions for
granting the management of the of the voting rights entitled to be
company or of a subsidiary the right a more stringent majority for
exercised, have the rights to address certain decisions, veto rights on
to give instructions to the questions on the company and
shareholders. certain matters, approval clauses or
affiliated entities’ affairs. In the share transfer restrictions).
absence of a response by the
Suspension of voting rights management, an independent
expert may be appointed by a Profit allocation
If provided by the articles of
Luxembourg court to establish a In principle, the shareholders are
association, the management can
report on the matters that were the free to determine profit allocation
be authorized to suspend the voting
object of the questions. as they consider commercially
rights of a “defaulting” shareholder
appropriate, subject only to a
under the conditions and formalities
generally applicable, longstop
specified in the articles of Convening of general meetings prohibition on clauses which
association. Suspending the voting Shareholders of an SA or an SCA purport to totally exclude certain
rights of defaulting shareholders holding ten per cent of the shareholders from participation in
may impact quorum requirements registered share capital may profits or exposure to risk of loss (
for holding a general meeting and request a shareholders’ meeting in clauses léonines).
approval requirements for ballot writing, indicating the purpose of
issues. Shareholders whose voting the meeting. Shareholders
rights have been suspended still representing ten per cent of the Transfer of shares
have the right to attend meetings. registered share capital may also Introduction
request that a certain matter be Shares in a SA, SAS or SCA are in
Waiver of voting rights put on the agenda of a principle freely transferable.
A shareholder may agree to waive shareholders’ meeting. However any transfer of shares
in full or in part its voting rights on performed in violation of the
a permanent or temporary basis. transfer restrictions included in the
With respect to the S.à r.l., the
This option may use to articles of association of a SA, SAS
threshold to convene a
accommodate certain regulatory or SCA shall be null and void.
shareholders' meeting is set at fifty
obligations that a shareholder may per cent of the registered share
be subject to. capital. Threshold for an SAS can be Shares in a Sàrl are not freely
freely fixed in the articles of transferable to non-shareholders.
Minority shareholders rights association.
Majority shareholder(s) / private The prior approval of at least
equity or venture capital investor(s) Adjournment of a general meeting seventy-five percent of the share
do not owe a fiduciary duty to the of the shareholders capital (this can be reduced to fifty
minority shareholders. Luxembourg Shareholders of SA, SAS and SCA percent) is required. Stricter
law however provides for certain representing ten percent of the consent thresholds may also be
limitations such as the abuse of contractually agreed in the articlesCorporate
of association. In the case of a proposed future transferees. Unless advantage of entering the transfer
transfer to a fellow shareholder, no supported by a proprietary security restriction in the articles of
such consent is required. interest, the most that can be done association is that the restrictions
is to include a contractual provision will apply to all future shareholders,
in the shareholders' agreement / whether parties to the agreement
Transfer of shares in a SCS or SCSp
voting agreement where all parties or not to the shareholders or joint
can be freely organized in the
agree to vote in favor of such venture agreement.
partnership agreement.
transfer.
Conclusion
Approval and pre-emption clauses
Good-leaver and bad-leaver It is important to ensure both the
In the Sàrl, the approval clause is provisions private equity or venture capital
automatically provided for by law investors and, as the case may be,
One of the most important
and the shares in a Sàrl are no freely management teams receive proper
elements of a management
transferable to nonshareholders. advice to ensure that:
incentive program is the leaver
scheme, which makes provisions the deal is structured in the most
Approval clauses and pre-emption concerning the compulsory transfer tax efficient manner possible and
clauses in a SA, SAS or SCA are valid of the manager’s shares if the that the commercial deal works
provided that the nontransferability manager ceases to be active for the for all parties; and
period (which starts from the date company. Technically, this is the deal is structured in a manner
of the transfer of approval request structured by call and/or put which is effective under
or the invitation to exercise pre- options. The validity of such clauses Luxembourg law and which works
emptive rights) does not exceed is expressly recognized by article for both tax and legal purposes.
twelve months. After such period, 1855 of the Luxembourg civil code.
the parties will have to find an
arrangement to allow the departing If not, either party could end up
Efficiency making an expensive mistake,
party to leave the company.
If a share transfer restriction clause particularly if a falling out were to
is valid, it is however not necessarily occur between the management
Lock-up effective in practice. Indeed, future team and the sponsor at a later
Lock-up clauses in a SA, SAS or SCA shareholders are not automatically point when, for example, the
should be reasonably limited in time bound by an existing shareholders investors could (if not properly
and in the corporate interests of the or joint venture agreement and advised at the outset) find
company. No such requirements shareholders or joint venture themselves trapped, should they
exist for Sàrl. agreements are not enforceable not have taken into account the
against third parties (except in case restrictions for the transfer of
of fraud of the latter). shares to non-shareholders.
Drag-along and tag-along clauses
Drag-along and tag-along clauses
are in principle valid under Therefore, when a party transfers its
Luxembourg law (article 1855 of the shares in breach of the transfer
Luxembourg civil code formally restrictions, the transferee (who
recognized the validity of was not aware of the transfer
arrangements organizing the restrictions) becomes the legal
transfer of shares that do not have owner of such shares, though the
as sole purpose the control of transferor may be sued for
participation in profits and losses). damages for breach of contract or,
as the case may be, be required to
pay a contractual penalty.
The statutory framework regarding
the transfer of shares applicable to
Sàrl (i.e. the prior approval of new Inserting the transfer restrictions
shareholders by at least seventy five into the articles of association
(or fifty) percent of the share would improve their enforceability
capital) however results in an area against third parties - transferees
of sensivity in relation to drag-along will not be able to claim that they
and tag-along provisions. It is not were unaware of the transfer
possible to pre-approve a possible restrictions as the articles of
transfer blind as to the identity of association are public. AnotherCorporate
Contact us
Bertrand Géradin
Partner
Background: Recognition:
Bertrand specialises in corporate Very user-friendly and responsive to
law, advising hedge funds, private client needs.
equity and real estate clients as well Legal 500 EMEA, 2020
as multinational companies in
Culturally sensitive and pragmatic.
connection with mergers and
acquisitions, joint ventures, Legal 500 EMEA, 2020
structuring of international Recommended Lawyer for the
transactions, reorganisations, Corporate and M&A practice in
refinancing and corporate finance. Luxembourg.
He has working experience in The Legal 500 Europe, 2019
Belgium, England and the United The strength of Bertrand is that he
States. understands the client's needs first
and also the client's business, which
Bertrand is also a lecturer on civil enables him to make proposals.
law and corporate governance at Client feedback 2019
T: +352 2712 2029 the University of Luxembourg and He is commercially orientated and
E: bertrand.geradin@ogier.com regularly speaks at seminars in he easily understands areas that
Practice Areas: Corporate, Digital Luxembourg on a broad range of need to be focused on, it is a
Blocakchain and Fintech, Equity topics, including recently on pleasure to collaborate with him.
Capital Markets, Mergers and directors’ duties. Director of an international
Acqusitions and Private Equity fiduciary company, November
Admitted in: 2017
Prior to joining Ogier in 2016,
2000 – Brussels, Belgium (not Bertrand was a corporate partner Recommended Lawyer for the
practising) in the Luxembourg office of a global Corporate and M&A practice in
elite firm and also worked in a Luxembourg.
2006 - Luxembourg
magic-circle firm in Luxembourg The Legal 500 Europe, 2018
2013 – England & Wales
and London. We truly appreciate the efforts and
support of you (Bertrand Geradin,
Partner) and your team. We look
He received his LLM in ICT Law and
very impressed and look forward to
Management from the University of
working with you again on other
Namur, having previously studied
matters.
law at the University of Louvain-la-
Client feedback 2018
Neuve and University of Saint-Louis
as well. He also has a Master’s
degree in tax from the Solvay
Business School.Legal services in: Ogier provides practical
British Virgin Islands advice on BVI, Cayman
Cayman Islands Islands, Guernsey, Jersey
Guernsey and Luxembourg law
Hong Kong through our global network
Jersey of offices across the Asian,
London Caribbean and European
Luxembourg timezones. With a growing
Shanghai team of more than 500
Tokyo people around the world,
we regularly win awards for
innovation, client service
and quality. Regulatory
information can be found
at ogier.com
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