Private Equity transactions - Luxembourg Company Law Reform: the two year transitory period is coming to an end

​Following the reform of the Luxembourg law on commercial companies (the Law) on 10 August 2016 (the Reform) and with the end of the two year transitory period approaching fast, this is an excellent opportunity to summarise the impact the Reform has had on Luxembourg vehicles frequently used in cross-border private equity transactions. These vehicles include private limited liability companies (SARLs), public limited liability companies (SAs) and partnerships limited by shares (SCAs).

Relevant to SARLs, SAs and SCAs

Tracking shares

Though tracking shares were, in practice, widely used before the Reform, the Law now provides a specific legal regime. Tracking shares reflect the performance of underlying investments, regardless of the company’s overall results. Investors, as holders of one or several classes of tracking shares, may receive dividends mirroring the performance of one or several specific underlying investment(s).

Relevant to SAs and SCAs

Proportional voting rights

For an SA and an SCA, the Law now provides the possibility, not only for each share to have voting rights that are proportionate to its nominal value, but to have one vote for each share irrespective of the share's nominal value, provided that such option is expressly foreseen in the articles of association (the Articles) of the SA or the SCA.

By this means, an SA or an SCA could achieve a plural voting system. Indeed, while each share entitles its owner to one vote, the share capital of an SA or an SCA could include a class of shares (class A) having a nominal value of EUR 1 while shares of another class (class B) would have a nominal value of EUR 100 - the result would mean the class A and the class B shareholders would have different voting powers even though each has an equal investment of EUR 100.

Suspension of voting rights

Voting rights of shareholders of a SARL, SA or SCA may now be suspended by the management of such companies should they breach their obligations under the Articles. However, the rules surrounding such suspension must be set out in the Articles.

The Law now provides a legal basis for default mechanisms typically included in investment agreements where it is proposed to suspend or remove the voting rights of defaulting shareholders.

Non-Voting Shares

Prior to the Reform, SAs and SCAs could only issue up to 50% of the share capital in voting shares. Furthermore, the holders of such shares were granted a right to a preferred dividend. The Law abolished both conditions.

The rights attaching to such non-voting shares must be detailed in the Articles and it should be noted that holders of non-voting shares can recover their voting rights in general meetings convened to decide upon a change in their rights or a share capital decrease.

Free Shares - stock option plans

The management of both SAs and SCAs may issue free shares without consideration to officers or employees of the issuing company and/or an affiliate if such a possibility is permitted under the Articles.

This option encourages the implementation of management incentive plans in a Luxembourg private equity structure.

Based on the new Circular No. 104/2, the tax regime for stock option plans granted to the employees depends on the actual features of the stock options plan but essentially (i) the benefit in kind derived from stock options should represent an income derived from employment income and be taxed accordingly; (ii) the potential capital gain realised on the sale of the option or on the sale of the shares is taxed as miscellaneous income (either as a speculative income or as an extraordinary income).

Relevant to SARLs only

Introduction of an Authorised Share Capital for a SARL

Previously restricted to SAs and SCAs, the Law now explicitly provides for the possibility to implement an authorised capital for a SARL.

If included in the Articles, the board of managers of a SARL may issue new shares so long as they are issued to either existing shareholders or non-shareholders, in which case their identity must be been previously approved by a decision of the general meeting of shareholders taken at a majority of 75% of the share capital. If provided in the Articles, the majority may be reduced to half of the share capital.

Redemption of Shares and Issuance of Redeemable Shares by a SARL

The Law now authorises an SARL to redeem its shares.

Since the Reform, a SARL may also issue redeemable shares if provided in the Articles together with the conditions applicable thereto.

Contrary to the redemption of ordinary shares, the board of managers is authorised to redeem the redeemable shares. There is no need for authorisation by a general meeting of shareholders.

It is to be noted that once the shares are redeemed, the voting and financial rights attached thereto are suspended so long as the shares are held by the SARL. Generally this does not pose a problem in private equity structures as the redemption of shares is usually followed by the cancellation of such shares.

If an SA, the financial rights attached to the redeemed shares are not automatically suspended. The board of directors however has the power to decide upon such suspension.

Flexible majority requirements for a SARL

Following the Reform, the majority required to approve the amendment of the Articles is of at least three quarters (3/4) of the share capital.

This has replaced the previous regime which required not only a majority of shareholders per head but also in shareholding.

Implementation of an Exit Procedure in SARLs

The majority required to approve the transfer of shares in a SARL to a non-shareholder was previously set at the approval by shareholders holdings at least 75% of the share capital. Such requirement was often perceived as an obstacle to the enforceability of exit, tag and drag along clauses. Since the Reform, the Articles may now reduce this majority to 50% of the share capital.

In the event that such transfer is not approved by the general meeting of shareholders, the Law now sets out an exit procedure, either through share redemption or sale to another shareholder or third party, within a certain time period which in principal is three months.

Just a few years after the modernisation of Luxembourg’s limited partnership regime (société en commandite simple) and the introduction of the special limited partnership (société en commandite spéciale), a new type of partnership without legal personality characterised by the absence of formalism and the freedom of contract, the legislator has once again reinforced the flexibility and pragmatism of the vehicles Luxembourg has to offer. The Reform reflects Luxembourg’s commitment to remain a country of choice for structuring private equity investments.

We would be happy to provide more information on other aspects of the Law as well as provide any further details on the above.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.