PLACE FINANCIÈRE & MARCHÉS — Fonds

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“Luxembourg corporate law: asset for Private Equity”


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The number of PE firms with a presence here, through physical offices or transaction structures, is continuing to grow, with Luxembourg having been chosen over other key jurisdictions by firms looking to relocate in view of Brexit.

Luxembourg's corporate law

While the Luxembourg legal framework may seem a less significant drawcard than other aspects of the Luxembourg landscape, its importance should not be underestimated – for inward investment, having a legal framework to which those coming from a common law background (be it the United Kingdom or the United States) can relate simplifies entry.

Notwithstanding implementation of directives at a European level, there is still broad power given to Member States to govern their own corporate legal systems and it is in Luxembourg’s interest to consider all those to whom the law applies when assessing areas for review and amendment – from small local family run companies to large foreign corporates that, together with everything that falls in between, make up the Luxembourg corporate world.

It may seem surprising that there is anything left to criticise.
Siobhán McCarthy

Siobhán McCarthy,  Local Partner,   Loyens & Loeff Luxembourg

The foundation of Luxembourg’s corporate law is the law of commercial companies of 10 August 1915 (the 1915 Law). There has been much written in the Luxembourg media, including in this very publication, about the much anticipated amendment to the 1915 Law adopted on 13 July 2016 (the Amendment).

Given such a significant amendment less than three years ago, it may seem surprising that there is anything left to criticise.

However, as John Lydgate wrote (the saying later adapted and made famous by Abraham Lincoln):

You can please some of the people all of the time, you can please all of the people some of the time, but you can’t please all of the people all of the time”.

As it relates to the Amendment, the Luxembourg legal world welcomed the long discussed and awaited Amendment but inevitably, as is human nature and, in particular a human lawyer’s nature, criticisms can still be made.

Statutory transfer provisions: a concern for PE firms

A point which frequently raises questions from PE firms and their foreign legal advisors – as the concept is often not one they have encountered in other jurisdictions – is the application of statutory transfer provisions in respect of private limited liability companies (société à responsabilité limitée) (SARL) and, in particular, how such provisions interplay with transfer restrictions customarily agreed in PE structures.

The law now expressly provides that any provision which is contrary to this principle shall be deemed unwritten.
Siobhán McCarthy

Siobhán McCarthy,  Local Partner,   Loyens & Loeff Luxembourg

The relevant provision of the 1915 Law (article 710-12) provides that a transfer of shares to a non-shareholder requires the general meeting’s prior consent. Prior to the Amendment, without such consent, no share transfer could occur; the Amendment has set out a procedure in the event that no consent is given, pursuant to which the SARL, the remaining shareholders or a third party designated by the remaining shareholders may purchase the shares from the selling shareholder at a price determined in accordance with the articles of association.

If such right is not exercised, the selling shareholder may proceed with the transfer.

In addition, the law now expressly provides that any provision which is contrary to this principle shall be deemed unwritten.

Approaches and consequences

There are different ways to address this, but for now, one of the most common approaches in the market is to have the articles of association provide for a set lock-up period for a relatively limited duration (generally less than 5 years), with the articles of association stating that during such lock-up period shares cannot be transferred other than in accordance with the relevant shareholders agreement.

Unfortunately, there is no guidance available as to how this approach would be viewed by the Luxembourg courts – it is not a guaranteed solution as a court could find that such restriction is contrary to the law and accordingly deemed to be unwritten.

The SARL is a tried and tested vehicle that the PE firms are familiar with and used to navigating.
Siobhán McCarthy

Siobhán McCarthy,  Local Partner,  Loyens & Loeff Luxembourg

To date, this uncertainty has not dissuaded persons from using the SARL – while the use of Luxembourg’s more flexible corporate vehicles such as the société en commandite spéciale and the société en commandite is increasing, the more traditional corporate vehicles (SARL, société anonyme, société en commandite par actions), remain popular.

This is unsurprising – the SARL is a tried and tested vehicle that the PE firms are familiar with and used to navigating. In addition, the Amendment introduced a number of positive changes to the 1915 Law, such as the ability for a SARL to publicly issue debt and express recognition of tracking shares and voting arrangements.

However, in a competitive global economy, Luxembourg should not let any opportunity to strengthen its offering to the PE firms pass it by.