Modernisation of Luxembourg Company Law - What's New?

Today, the Luxembourg Parliament adopted long-awaited Bill No. 5730 modernising Luxembourg company law.

Certain market practices now have a formal legal basis, and discussions on a number of questions have been put to rest. Freedom of contract and flexibility have, in keeping with Luxembourg tradition, been maintained while legal certainty has been enhanced.

The changes are expected to make Luxembourg even more attractive for multinationals, private equity firms and investors seeking to structure their investments internationally.

Companies will have two years from the publication date of the act to align their articles of association to the new statutory provisions.

A formal legal basis

One market practice that has been given a formal legal basis is the possibility for all types of companies to issue tracking shares, i.e., shares issued by a company for the purpose of tracking the performance of a specific underlying asset.

The simplified liquidation procedure, whereby a sole shareholder company is dissolved without liquidation, is now recognised by law as is the transfer by operation of law of all assets and liabilities of the dissolved company to its sole shareholder.

As far as the SA is concerned, transfer restrictions (such as lock-up periods) and voting undertakings and arrangements are now formally recognised as are the conditions for the validity or invalidity thereof. Furthermore, there is now a formal legal basis for the appointment of a general manager or CEO (directeur général) and the establishment of a management committee (comité de direction), while the creation of other committees is also expressly authorised.

The most appreciated changes, however, relate to the SàRL. For instance, the law now formally recognises the possibility for SàRLs to distribute interim dividends, delegate daily management to a board member, third party or employee, have authorised share capital, carry out share redemptions, and issue beneficiary units.

Flexible simplicity - the new approach

In addition to providing a legal basis for certain practices, such as those mentioned above, the act simplifies other practices or makes them more flexible.

The minimum share capital has been lowered from EUR 30,986.69 to EUR 30,000 for SAs and from EUR 12,394.68 to EUR 12,000 for SàRLs. Furthermore, unanimity is no longer required to change the nationality of an SA or SàRL; rather the majority rules to amend the articles of association will apply. Finally, management can transfer the company's registered office outside the original municipality without shareholder consent, provided it is not transferred abroad.

Regarding the SA, the conditions for the issuance of non-voting (preferred) shares have been abolished and the rules governing non-voting shares simplified with the parties afforded more flexibility to regulate financial rights and the number of non-voting shares. In addition, it is now possible to grant shares free of charge (or without consideration) in an SA, which should facilitate, for example, the set-up and implementation of management incentive plans. The board of directors of an SA can suspend the voting rights of a shareholder that does not fulfil its obligations, provided this option is set out in the company's articles of association. An SA can now issue shares with unequal par value under certain circumstances, in which case the voting rights are proportional to the percentage of share capital they represent.

For the SàRL, a majority of shareholders (in numeric terms) is no longer required to amend the articles of association which now can be amended with the approval of shareholders representing 3/4 of the share capital. Likewise, the majority required to transfer shares to a third party can be lowered from 3/4 to 1/2 the share capital in the company's articles. The rules governing share transfers to third parties have been further amended by introducing the possibility to transfer shares to third parties even if shareholder consent was not obtained, under certain conditions. The maximum number of shareholders of an SàRL has been raised from 40 to 100. Under the new rules, it is also possible for an SàRL to issue bonds to the public, including convertible bonds under certain conditions, although the issuance of shares to the public is still prohibited.

Finally, following the French example, Luxembourg has introduced a new legal form, the SAS or simplified public limited company (société par actions simplifiée), meant to give more freedom to shareholders to organise themselves. This form allows for maximum flexibility in the articles of association and gives the president a major role. An SAS cannot list its shares but can issue bonds to the public. The SAS may be a suitable alternative to the SA or SàRL for shareholders with special needs in respect of the balance of powers, shareholder relations, and the distribution of profits (for example start-ups or joint ventures).

 Useful clarifications for enhanced legal certainty

The new legislation clarifies certain points which were previously debatable.

With respect to the SA, the capital impairment rules (so-called "Article 100" or the "alarm bell procedure") have been clarified to apply where a loss results in the value of the company's net asset value falling below 1/2 or 3/4 of the share capital. The rules on authorised capital have also been adapted to meet market requirements, with the possibility to use the authorised capital immediately upon the adoption thereof or to issue shares upon the conversion or exercise of instruments even after the authorisation period. The contribution to an SA of a claim against the SA itself is now viewed as a cash contribution, for which an auditor's report is no longer required. Similarly, in relation to convertible bonds, an auditor's report is only required upon issuance of the convertible bonds if they are not paid up in cash. The rules applicable to the issuance and conversion of convertible bonds have been extended to a number of other instruments that are either convertible into or exercisable as shares (e.g. CPECs and warrants).

The financial assistance rules have not been extended to the SàRL.

For various types of companies, the grounds to invalidate shareholder meetings and the company itself have now been aligned and clarified. Furthermore, specific rules on the conversion of companies from one corporate form to another have been introduced.