New Company Law
On July 13, 2016 – after almost 10 years of steady maturation – the Luxembourg parliament adopted the bill of law 5730 modernising and amending the law of August 10, 1915 on commercial companies, the Civil Code and the law of December 19, 2002 on the trade and companies’ register and on the accounting and annual accounts of undertakings (to simplify, the “New Company Law”).
The New Company Law will however become only effective the fourth day following its formal publication in the Luxembourg Official Gazette, which is expected to occur in the coming weeks (most probably in August although there is no clear confirmation on this).
The main objectives pursued by the New Company Law are (i) to recognise a number of common established corporate practices, providing hence more clarity and legal certainty so as (ii) to introduce new mechanisms and solutions in order to make the Luxembourg company regime even more attractive and competitive, by strengthening the contractual freedom, flexibility and pragmatism which have made its success over the years.
Application in time of the New Company Law – transitional period
For new companies incorporated after the entry into force of the New Company Law, the latter shall automatically and fully apply.
Luxembourg companies which are already organised and existing before the entry into force of the new regime will have two years to adapt their articles to the mandatory provisions of the New Company Law, where required. During this transitional period, the current legislation shall remain applicable to all provisions of the pre-existing companies’ articles while the New Company Law shall be immediately applicable to all other matters not regulated in the articles – which distinction may appear quite difficult to circumscribe in practice. An extensive review of the articles of the Luxembourg entities shall therefore be carried out at some point to verify their compliance with the mandatory provisions of the New Company Law.
Comprehensive overview of the changes introduced by the New Company Law
Most of the changes introduced by the New Company Law are relating to sociétés anonymes (public limited liability companies or “SA”) and sociétés à responsabilité limitée (private limited liability companies or “Sàrl”), which are the most commonly used type of companies in Luxembourg. But the New Company Law also provides for recognition and/or innovation benefiting to all companies, summarised here below.
A. Innovations affecting all type of companies:
- Tracking-shares (actions traçantes) – being shares that track the performance of specific activities or assets – are now legally recognised. Such type of shares are often used to structure private equity deals notably;
- The distribution of rights among the usufructuary and the bare-owner in case of dismemberment of the ownership of shares is clarified;
- The scope of the so-called clauses léonines (that are prohibited clauses whereby the entire profits are allocated to one shareholder only or which exempt a shareholder from any contribution to the loss1) is also clarified so that the validity of certain financial arrangements regarding transfer of shares (and especially put option agreements and other kind of “conventions de portage”) is recognised;
- One-step dissolution (without liquidation) practice is permitted for companies with a sole shareholder but more strictly circumscribed under the new regime: a certain number of clearance certificates is in particular to be obtained from tax and social securities authorities beforehand. Under this simplified dissolution process, assets and liabilities of the dissolved company are transferred – by effect of law – to its sole shareholder (same effect as for a simplified merger). The recognition of this automatic effect is expected to make this solution more efficient and secure in the context of reorganisation or restructuring of group companies,
- A comprehensive and standardised set of rules regarding the conversion of companies is introduced under Section XVquater of the New Company Law;
- All commercial companies are now allowed to issue bonds to the public (including the Sàrl which were previously prevented to proceed with such public debt issuance). In addition, it should now be possible for Luxembourg companies issuing bonds subject to Luxembourg law to choose not to apply rules regarding the representation of bondholders;
- The criteria for obtaining the annulment of resolutions adopted at ordinary general meetings are set in a new article 12septies;
B. Innovations for the SA2:
Corporate capital and securities
- The minimum share capital of a public limited liability company is rounded to EUR 30,000;
- The general meeting (or the board of directors3 within the authorised share capital) has the possibility to issue shares without (mention of) nominal value, with a subscription price below their accounting par value. Such a possibility could prove useful for companies in a difficult financial situation to attract new investors in equity for recapitalisation purposes;
- The board of directors has the possibility to issue free shares (i.e. without consideration) to employees and management of the issuing company and/or its affiliates, if provided in the articles. The recognition of such a possibility should ease the implementation of incentive plans within group of companies;
- The regime of non-voting shares becomes more flexible since the issuance of non-voting shares is no longer limited to 50% of the share capital nor the non-voting shares are to grant a preferred dividend (i.e. the financial rights to be attached to the non-voting shares are freely fixed in the articles);
- A possibility to issue shares with different nominal values is introduced4, which possibility could be of use in private-equity, joint-ventures or even listed structures as it is coupled with a proportionate vote mechanism: voting rights attached to shares having different nominal values may indeed be proportionate to their nominal value, which allows to implement structures where founders or key shareholders have a dominant voting power;
- Statutory mechanisms limiting the transferability of shares (e.g. pre-emption clauses, lock-up clauses, etc.) are permitted, under certain conditions to be complied with (in particular with regard the duration of such mechanisms);
- A new regime on the preferential subscription rights of shareholders is introduced, formally recognising the possibility for existing shareholders to subscribe such rights on a reducible basis;
- A more attractive regime on the contribution of receivables by set-off is also introduced where such kind of contribution is seen as contribution in cash rather than in kind. This is also true for the issuance and conversion of convertible bonds having been subscribed in cash, which no longer require the intervention of an independent auditor.
Voting rights accommodation
- Voting arrangements (pactes de votation) are formally recognised under certain conditions5 (they must in particular be in line with the corporate interest of the company);
- The board of directors is allowed to suspend the voting rights of a “defaulting” shareholder under conditions and formalities to be specified in the articles6;
Corporate governance and Management
- The board of directors, management board and supervisory board may create (advisory) committees. This was already the case but is now enshrined in the law;
- The board of directors, while keeping the ultimate direction of the company’s affairs, may delegate part of its authority to an executive committee (“comité de direction”) or a chief executive (“directeur général”) – being both recognised as legal bodies;
- The rules on the conflict of interest have been clarified and extended (in particular to day-to-day managers, members of the executive committee of the chief executive who are subject to same conflict rules as applicable to directors);
- The board of directors is required to establish a report in case of substantial losses of the company, identifying the reasons for such losses and providing its recommendations regarding the continuation of the company’s activities;
- The use of written circular resolutions is permitted and recognised (if provided for in the articles of the company) but should be used sparingly, i.e. in consideration of substance requirements7;
- The board of directors may decide on the transfer of the registered office within the territory of the Grand Duchy of Luxembourg (and not only within the same municipality, as before);
General meetings and Shareholders rights
- The general meeting may decide to change the nationality of a company (by transferring its registered office abroad) without unanimous consent of the shareholders – a quorum and majority vote as for the amendment of the articles is sufficient in this regard8;
- The procedure to convene a general meeting (ordinary or extraordinary) has been simplified – e.g. express or electronic mails may replace the traditional registered letters addressed to registered shareholders if approved by the latters;
- The rights of minority shareholders are reinforced – e.g. minority shareholders representing at least 10% of the share capital and/or of the voting rights entitled to be exercised, have the rights to address questions on the company and affiliated entities’ affairs, to request for the adjournment of meetings and, under certain conditions, may even initiate an individual actio mandati (on behalf of the company) against members of the board of directors having defaulted in their duties (the extension of this legal action to minority shareholders aim at making the directors more diligent in the management of the companies);
C. Innovations in relation to Sàrl:
Corporate capital and securities
- The minimum share capital of a private limited liability company is rounded to EUR 12,000;
- Apports en industrie (e.g. contribution of work, expertise or services) are permitted under certain circumstances and give right to subscribe to beneficiary units (which are not part of the corporate capital);
- Issuing convertible bonds, beneficiary units and redeemable units is possible provided that they are issued to specific or identifiable persons, to comply with the intuitu personae nature of the Sàrl;
- The board of managers may increase the corporate capital of the company within the limits of the authorised capital, which mechanism is now expressly allowed for Sàrl;
- Interim dividend distribution are permitted under the same conditions as for the SA;
- The members of the company may decide to approve the transfer of corporate units to a third-party with a reduced voting majority of 50% of the corporate capital (instead of 75%, if provided as such in the articles of the company). A statutory exit mechanism is further to be put in place in case of transfer of shares to a third party which is not approved by the general meeting;
Corporate governance and Management
- The rules on the conflict of interest have been introduced for managers;
- The board of managers may delegate a part of its powers to a day-to-day manager;
- The attendance to a meeting of the board of managers (or a general meeting of members) by video-conference is permitted and recognised (if provided for in the articles of the company);
General meetings of Members
- The maximum members is raised from 40 to 100;
- Annual general meetings have to be held only in case there are more than 60 shareholders;
- The so-called “double majority requirement” to amend the articles of a Sàrl (majority per head and per capital) is abolished – the threshold for statutory amendments is set at 75% of the corporate capital only;
D. Introduction of a new type of Company: the Société par action simplifiée (simplified company limited by shares or “SAS”):
- While this new vehicle follows basically the same regime as for SA, it benefits from greater contractual freedom, in particular with respect to the determination of its corporate governance rules and policy or the rights attached to its shares (including with respect to their transferability), thus making SAS as an interesting alternative to Sàrl for private-equity industry;
- Issuing shares to the public is however not possible for SAS.
Written by Nicholas Martin – Coficom Trust S.à r.l. – Luxembourg