UK: Modernization Of The Luxembourg Law On Commercial Companies: The Transitory Period Is Ending Soon - Is Your Company Compliant?

Last Updated: 25 June 2018
Article by Gérard Maîtrejean and Pawel Hermeliński

Towards a more comprehensive, attractive and competitive legal framework for Luxembourg companies and private equity investors:

The Luxembourg law effective as of August 23, 2016 modernizing the amended law of August 10, 1915 on commercial companies, amending the civil code and the amended law of December 19, 2002 on the register of commerce and companies and the accounting and annual accounts of companies (the Law) enacted a major reform of the Luxembourg company law.

The Law aims to recognize a certain number of well-established corporate practices, thus reinforcing legal certainty for the Luxembourg entities and their investors as well as introducing new mechanisms to further increase Luxembourg's attractiveness and competitiveness as a hub for international investments and cross-border equity transactions.

Due to the significant changes introduced by the Law, a 24-month transitional period for adapting the articles of association of Luxembourg companies, starting on August 23, 2016 and ending on August 23, 2018, was provided.

The following changes are particularly noteworthy and may impact / be of interest for your company:

  • Changes relevant to the S.à r.l.: authorized share capital, redeemable shares, profit units (parts bénéficiaires), sweat equity contributions without external revision, public issuance and listing of bonds, distribution of interim dividends by the managers, delegation of the daily management to third party
  • Changes relevant to the S.A. and S.C.A.: possibility to issue shares without consideration (actions gratuites) and allocate them to employees and management of the issuing company and affiliated companies to implement incentive schemes, more flexible non-voting share regime, possibility to create committees and delegate the management to a general director (directeur général) or a management committee (comité de direction), new rules on share transfer restrictions

The Law further authorizes the government to proceed with a coordination of the Luxembourg law on commercial companies as amended. In that context, complete overhaul of its numbering came into force on December 19, 2017 following a Grand-Ducal decree of December 5, 2017 coordinating the law of August 10, 1915 on commercial companies, as amended.

Transitory period ending soon: what are the implications?

Companies incorporated before August 23, 2016 continue to benefit from a grandfathering period of 24 months but the August 23, 2018 deadline is now fast approaching.

Less than three months are left for Luxembourg companies/partnerships to assess whether they should adapt their articles of association and/or any other corporate and financing documents to comply, to the extent required, with the new requirements introduced by the Law and proceed with the necessary amendments.

As from August 24, 2018, all Luxembourg companies/partnerships incorporated before August 23, 2016 will be fully subject to the new mandatory provisions introduced by the Law.

As far as they are concerned, Luxembourg companies incorporated after August 23, 2016 are already subject to all binding and supplementary provisions of the Law since their incorporation.

What will be the consequences in case of non-compliance?

As from August 24, 2018, any provisions contained in the articles of association in contradiction with the mandatory provisions of the Law will be overruled by virtue of law. It means that the contradictory provisions contained in the articles of association will be deemed unwritten, and the mandatory rules of the Law will automatically apply instead, irrespective of any agreements to the contrary between shareholders.

As the Law mainly expressly confirms a certain number of existing practices, and the newly introduced provisions are in their majority of supplementary and not mandatory nature, it should be assessed on a case-by-case basis whether there is a specific need to update the articles of association of your company.

In case there is a need to update the articles of association, we would recommend proceeding with those changes before the end of the grandfathering period to avoid situations where the full application of the overriding provisions of the Law would render provisions contained in the articles of association inapplicable or unclear and thus subject to court interpretation.

By way of example, an update of the articles of association of a S.à r.l. may be desirable in relation to the rules on transfers of shares to non-shareholders: The Law introduced a framework for an orderly exit in the event a transfer of shares to a non-shareholder is not approved by the general shareholders' meeting of the S.à r.l. In case of refusal, the other shareholders or the company may purchase the shares offered for transfer. In this respect, would the articles of association of the S.à r.l. not provide for a method of calculation of the transfer price of the shares, the President of the Luxembourg District Court dealing with commercial matters and sitting as in urgency matters will be designated to determine it in the place of the parties. In order to ensure that the shareholders maintain control over this process, it is recommended to amend the articles of association and clearly set out the rules on the determination of the price of the shares applicable in such scenario.
Also, while the cases where an amendment to the articles of association is strictly required should remain limited, you may wish to consider benefiting from the new non-binding rules introduced by the Law and/or ensure that they are in line with your business objectives and properly reflected in your legal documentation.

By way of example, you may wish to see the articles of association of your company amended to allow the management to transfer the registered office of the company anywhere in the Grand-Duchy of Luxembourg without need for shareholder's consent, to implement an authorized share capital within a S.à r.l., to decrease the required majority to transfer shares to non-shareholders to 50 percent (instead of 75 percent) in a S.à r.l., to enable the S.à r.l. to proceed to a public issuance of bonds, to issue shares below par value (subject to certain conditions) in an S.A., to allow for convening notices for general meetings to be sent by email or courier services for an S.A. or to allow the board of directors/managers to suspend the voting rights of shareholders in the event of a breach of their obligations under the articles of association or other agreements.

Actions we can help you with in the coming weeks:

  1. Reviewing all provisions of the articles of association to ensure that they are fully compliant with the Law and remain in line with the shareholders/investors' intention and expectations.
  2. Considering any new flexibility and contractual freedom introduced by the Law that could benefit your organization and respond to the specific needs of your business and tailor your company's legal documentation accordingly.
  3. Considering whether other documents your company is a party to should also be amended to avoid potential discrepancies and misleading cross-references.

How can we assist you?

Our dedicated team would be happy to assist you in reviewing any relevant legal documentation (e.g. articles of association, partnership agreements, shareholders' agreements, joint venture agreements, incentive plans, financing instruments and any other corporate agreements) and identifying whether any changes need to be made in light of the Law and the complete renumbering.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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