1. Transaction Activity
1.1 M&A Transactions and Deals
Luxembourg remains a pre-eminent jurisdiction for private equity investment funds, with unregulated funds being the most utilised format. A great number of the transactions are share deals, often involving Luxembourg-resident asset-holding entities. Typically, however, although the holding entity may be located in Luxembourg, the assets are not.
Technology, healthcare, renewable energy, structured debt and credit funds are the areas of investment that have been favoured by sponsors in recent years. In addition, a reasonably large number of structures still invest in real estate in Europe.
An increasing number of participants are less willing to limit their investment policy to specialised areas but are happy to consider a wide range of investment options as they arise on an opportunity basis. Having said that, despite this increase, most private equity sponsors still continue to operate within a well-defined and focused investment strategy.
1.2 Market Activity
The increase in biotech, fintech and professional services transactions seen in 2019, 2020 and 2021 has continued in 2022.
2. Private Equity Developments
2.1 Impact on Funds and Transactions
Over a number of years, Luxembourg has taken steps to position itself as Europe's leading location for both private equity fund vehicles and asset-holding vehicles. Luxembourg partnerships – in particular the special limited partnership (SCSp) and (although to a lesser extent) the simple limited partnership (SCS) – have become the go-to form of entity for private equity pooling vehicles, while private limited liability companies (SARLs) remain the preferred asset-holding vehicles for private equity funds globally.
The introduction of the AIFMD-compliant Reserved Alternative Investment Fund (RAIF) regime in 2016 added another available option, and this form is often used by private equity sponsors for pooling vehicles, especially in the context of pan-European marketing to professional investors.
In keeping with global developments, the new laws regarding the introduction of the beneficial owner register, enacted on 13 January 2019 (the "BOR Law"), and the law dated 25 March 2020 transposing EU Council Directive 2011/16 (DAC6) are the most recent changes in the private equity legal environment in Luxembourg.
According to the BOR Law, which came into force on 1 March 2019, all entities that are registered with the Trade and Companies Register in Luxembourg also have to provide details of the identity of their beneficial owners to the Luxembourg Beneficial Owner Register.
DAC6 introduced an obligation to disclose "cross-border arrangements" involving two EU member states or an EU member state and a third country. The aim of DAC6 is to prevent aggressive tax planning by increasing national tax authority scrutiny of the activities of taxpayers and their advisers. The Law of 25 March 2020 regarding Reporting Cross-border Arrangements implementing EU Directive 2018/822/EU requires intermediaries to report any cross-border arrangements that fall under any of the hall-marks A–E with the Administration des contributions directes, under the following timeframes:
- on the day after the reportable cross-border arrangement is made available for implementation;
- on the day after the reportable cross-border arrangement is ready for implementation; or
- when the first step in the implementation of the reportable cross-border arrangement has been taken, whichever occurs first.
The scope of the above laws is broad and includes downstream structures that are holding companies formed for the purpose of holding the investment in the target.
Finally, it is worth noting that the Luxembourg legislator, to prevent the spread of the COVID-19 virus, approved laws authorising the governing bodies of any Luxembourg company (notwithstanding any provision to the contrary in their articles of association) to hold their meetings without the physical presence of their members, particularly meetings of shareholders and boards of directors/managers.
3. Regulatory Framework
3.1 Primary Regulators and Regulatory Issues
The Commission de Surveillance du Secteur Financier (CSSF) is Luxembourg's regulator for financial services (in addition to other roles). The CSSF has regulatory oversight, and in that capacity has responsibility for product-regulated investment funds and also for investment fund managers located in Luxembourg.
However, the CSSF's oversight authority does not extend to limited partnerships that are not subject to product regulation, such as specialised investments funds (SIFs) and investment companies in risk capital (SICARs), nor does it extend to RAIFs (nevertheless, RAIFs' management companies are still subject to regulatory oversight by the relevant financial regulator for the home jurisdiction of the relevant management company – which would be the CSSF for all Luxembourg-based management companies). In a similar fashion, M&A activity would be subject to the relevant rules and regulations in the home jurisdiction of the target entity.
There are no restrictions in Luxembourg that apply specifically to private equity transactions, but relevant sanctions and the usual anti-money laundering (AML) and "know-your-client rules" do, of course, apply in the same way as for any transaction. Where multiple AML supervisory regimes come into play in the context of a given transaction, compliance with each regime will be required by the applicable parties.
Following the implementation of the Law of 19 December 2019 and the situation in Ukraine, there has been an increased awareness of the need to comply with the Luxembourg sanctions regime. The Law of 20 July 2022 established a Luxembourg financial sanctions committee, which is responsible for monitoring the implementation of financial sanctions issued by the United Nations Security Council, the European Union and the Luxembourg Ministry of Finance. There has also been an increased focus on sanctions evasion risk following the Russian invasion of Ukraine. Antitrust regulations would, in the same way, be applied in accordance with the relevant rules in the appropriate jurisdictions.
4. Due Diligence
4.1 General Information
In Luxembourg, legal due diligence is usually of secondary importance to financial due diligence but it is still carried out and typically consists – in addition to the usual practice of verifying corporate existence, the compatibility of corporate objects, and solvency – of reviewing the corporate governance and past and current activities of the target for compliance with Luxembourg laws and regulations.
The due diligence is usually conducted first via a review of the publicly available documentation (ie, the documents that are required to be filed at, and are available for download from, the Luxembourg Trade and Companies Register), followed by a thorough review of the documentation made available in the data room. Key areas of focus for legal due diligence are company corporate documents, regulatory status and financing arrangements.
4.2 Vendor Due Diligence
Vendor due diligence is an intricate part of the Luxembourg practice in private equity transactions. Advisers will usually rely on the vendor due diligence reports if the adviser is of the opinion that the third party conducting the due diligence is considered reliable, but at least some independent verification is now the rule rather than the exception.
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Originally Published by Chambers and Partners
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