Corporate Structuring and financing private equity & venture capital transactions - Luxembourg January 2021 - Ogier

Page created by Andy Reed
 
CONTINUE READING
Corporate Structuring and financing private equity & venture capital transactions - Luxembourg January 2021 - Ogier
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 Luxembourg
Corporate

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 in
Corporate

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 being
Corporate

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-proof
Corporate

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 ou
Corporate

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, this
Corporate

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 the
Corporate

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 or
Corporate

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 proceedings
Corporate

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 articles
Corporate

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. Another
Corporate

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

ogier.com
You can also read