New capital impairment rules

The Luxembourg law of 10 August 2016 modernising the law on commercial companies of 10 August 1915 (the “Company Law”) and amending the Civil Code (the “New Law”) has amended article 100 of the Company Law concerning the impairment rules. The new text is in force since 23 August 2016.

If Luxembourg law accepts that companies  which have losses continue to exist, there are nonetheless rules protecting the shareholders of such companies in a loss situation. These rules are of particular importance in case of a dispute or a disagreement between shareholders.

1 Recall of the previous capital impairment rules

According to the former version of the Company Law, when it appeared that a société anonyme (SA) or a société en commandite par actions (S.C.A.) was confronted with a loss of half the share capital or more, the management body of the company shall convene a general meeting to resolve on the possible dissolution of the company to be held in a period not exceeding two months from the time at which the loss was or should have been ascertained by the management body.

The resolution on the dissolution of the company was to be adopted according to the rules applicable to the amendment of the company's articles of association unless the loss was equal or exceeded three-quarters of the share capital, in which case a resolution to wind up the company could be adopted with the approval of only a quarter of the votes cast at the general meeting.

In the event of any infringement of their obligations to convene a meeting in due time, all members of the management body of the company could be declared personally and jointly severally liable vis-à-vis the company for all or part of the increase of the loss. This risk is not theoretical and there are have been precedents of sentencing of directors and managers under this article. Luxembourg case law has also specified that a third party such as a creditor may also introduce a claim against the management body following a violation of the impairment rules by the management body.

The principle of the impairment rules of the Company Law, including the majority rules to vote the dissolution and the liability regime of the management body remains unchanged with the New Law.

However, the New Law has clarified the triggering conditions of the rule and strengthened the information of the shareholders by extending the mission of the management body.

2 Clarification of the triggering conditions of the alarm mechanism

The first contribution of the New Law is the clarification of the triggering conditions. The law now expressly states that the capital impairment rules will only apply if, as result of losses, the net asset (actif net) of the company falls below half or more of the share capital of the company.  

From now on, the alarm mechanism shall be applied as soon as, pursuant to losses incurred, the company's net asset (actif net)  falls below half of its share capital.

3 Substantial strengthening of the protection of shareholders by extending the scope of mission of the management body

Further to the New Law, the management body shall prepare a special report explaining the reasons of the company's financial situation. Should the management body proposes to continue the company's activity despite the loss situation, it shall then proposes measures to remedy the company's financial situation.

This report has to be made available to the shareholders at least eight days before the holding of the general meeting called to vote on the continuation or dissolution of the company.

Failure of the management body to establish and provide this report shall render any resolutions passed at the general meeting invalid, unless all shareholders waive this requirement.

4 Primary effects of the New Law

Since the capital impairment rules are still not legally applicable to certain types of companies and especially not to SARLs (limited liability companies), it will remain an important criterion to consider when choosing a corporate form for a joint-venture vehicle.

As of now, it is also recommended to management bodies to ensure in advance either that the shareholders waive the requirement of a special report or that the special report that they will submit will correspond to the requirements of the law.

It should finally be reminded that the holders of non-voting shares will in principle have the right to vote at shareholders’ meetings called to decide on the possible continuation of the company.