Luxembourg Court of Appeal finds that 50% shareholders are entitled to initiate a minority action against directors

In a judgment dated 27 October 2021, the Seventh Chamber of the Luxembourg Court of Appeal declared admissible a minority action based on article 444-2 of the modified law of 10 August 1915 on commercial companies (the "Companies Act 1915") by a 50% shareholder in a public limited company (société anonyme).

Article 444-2 of the Companies Act 1915 allows minority shareholders – provided that, at the annual general meeting, they hold at least 10% of the voting rights – to initiate a liability claim on behalf of the company against its directors.

This judgment overrules a decision dated 13 June 2019 of the District Court of Luxembourg which declared such a minority action inadmissible on the grounds that article 444-2 of the Companies Act 1915 makes this minority action available to "minority shareholders" only, which the District Court found to refer to shareholders holding less than 50% of the total voting rights, thus excluding a 50% shareholder.

The literal reading of the provision would imply that a shareholder holding 50% of the share capital, i.e. nominally not a "minority" shareholder, would neither be in a position to force an action by the company against its directors (as this requires the passing of a resolution at the general meeting of shareholders at a 50% plus one vote majority) nor in a position to initiate a minority action. In that respect, the 50% shareholder would have been in a worse situation than a 49.99% shareholder.

Also, applying such an interpretation would mean that, in the context of 50/50 joint ventures, directors would be immune from a liability claim as long as they had one member of the joint venture "on their side".

To justify its decision, the Court of Appeal first set aside the application of the "acte clair" theory according to which courts should not interpret a legal provision beyond its unambiguous and literal terms. Instead, the Court of Appeal found that the ambiguity of a legal provision can arise from various factors, not just from linguistic questions posed by a formal and literal reading of its terms.

The Court of Appeal added that where two opposite interpretations of a legal provision are reasonable, the judge must interpret the law by analysing the will of the legislator and the purpose of the law, taking into account justice considerations, the requirement to avoid inconsistent or rationally unjustified solutions and to preserve the effectiveness of the law.

The Court of Appeal conducted such an analysis in respect of the 2016 reform of the Companies Act 1915, which, inter alia, introduced the minority action, and found that the introduction of the minority action was primarily intended to reinforce the protection of corporate interest, which requires that directors be judicially liable for their actions.

The conclusion was that article 444-2 of the Companies Act 1915 should be construed as allowing a 50% shareholder to initiate a minority action.

This solution applies to all companies where the minority action is available, i.e. public limited companies (sociétés anonymes) as well as corporate partnerships limited by shares (société en commandite par actions) and simplified joint stock companies (sociétés par actions simplifiées).

Please contact our experts if you have any questions.

Antoine Reillier, Luxembourg, Senior Counsel

Gérard Maitrejean, Luxembourg, Partner | Avocat à la Cour

Pawel Hermelinski, Luxembourg, Partner | Avocat à la Cour

Pierre-Emmanuel Roux, Luxembourg, Managing Associate