Market and policy climate

Market Climate

How would you describe the current market climate for M&A activity in the financial services sector in your jurisdiction? 

According to the international media agency Thomson Reuters, financial services are among the three sectors, along with TMT and automotive, where public M&A activity has picked up at the fastest pace in Luxembourg since the 2020 covid-19 pandemic.

Overall, the average size of Luxembourg deals has remained stable rather than grown considerably, which has had a certain impact on their features and structuring. Common characteristics of the transactions we come across are the involvement of foreign entities, a clearly above-average deal size and a constant subscription to warranty and indemnity insurance. The Luxembourg M&A market has further seen in the past year a significant increase in transactions in the financial services sector, leading to some concentration in the trust companies' industry.

Luxembourg's highly developed investment fund industry has also had an important impact on M&A transactions. For example, very recently, a European leader in fund data management and reporting solutions for the asset management industry based in Luxembourg was sold to a leading institution.

We also note that several M&A transactions have occurred in the banking sector during the past few years.

Generally, it can be stated that Luxembourg-based structures, including in particular investment fund structures, are often the preferred choice when it comes to M&A transactions relating to European targets. The number of M&A deals channelled through Luxembourg vehicles into non-Luxembourg markets remains high even though it can be observed that Luxembourg's deal volume remains small. The are several factors that account for this situation including the particularities of the covid-19 pandemic (for example, post-takeover reorganisations as well as renegotiations of pre-pandemic financial conditions), the impact of material adverse change clauses and the significant loss of market value of a number of listed issuers. When it comes to distressed deals, which have become increasingly important in the market, adjusted earn-out provisions are one of the techniques being used to facilitate deals in this new environment.

A combination of shareholder financing and third-party debt is the most common financing mechanism for Luxembourg M&A, according to Thomson Reuters. The primary methods for obtaining control are, on the one hand, the acquisition of shares from the shareholders by means of a voluntary or mandatory takeover, and, on the other, a merger, whether by absorption or by incorporation of a new company.

In general, Luxembourg does benefit from above-average systemic stability. This pertains, first, to its political structure and the daily work of its legislative and judicial arms and other legal institutions. As a result, laws and regulations are predictable and applied coherently and with due regard to the rule of law. This stability helps market players with ties to Luxembourg to rely on the frameworks in place and thus act upon sell or buy opportunities decisively and ambitiously.

Furthermore, Luxembourg's central geographical and political position in Europe links its market outlook to developments in the large economic spheres of the EU and beyond. Europe's M&A activity is dominated by banking, asset and wealth management, fintech and e-payments, e-commerce, consumer finance and others. A rush for consolidation in these sectors has brought to life domestic and international stars and starlets. The China-EU agreement from December 2020, in principle, lays out a framework for much better access of European investors to the Chinese market as well as rules for their fair treatment. Luxembourg's active and consistent approach to developing ties to the Chinese market and Chinese investors lends this agreement a particular weight from the Grand Duchy's perspective.

Government policy

How would you describe the general government policy towards regulating M&A activity in the financial services sector? How has this policy been implemented in practice?

The Luxembourg M&A regulations have been developed with a pragmatic, hands-on approach and compared with other EU jurisdictions are comparatively business-friendly. To give an example, the vendor's mandatory disclosures under the 2006 Takeover Law are minimal, with significant discretion given for the structuring of the commonplace data room. Apart from the 2006 Takeover Law, other key pieces of M&A legislation are the Company Law and the RBO Law.

A major overhaul of Luxembourg's competition law is currently in the pipeline. The country's Ministry of Economy (Ministry) has recently commenced consultations on a potential bill of law, which would introduce a merger control regime. So far, Luxembourg has been the only EU member state without a merger control regime. The reforms, if implemented, will have a significant impact on M&A activity within the financial services sectors, particularly, in banking, owing to Luxembourg banking entities' turnover and the usual transaction values. The initial consultations were scheduled to be completed by 31 March 2022.

The envisioned merger control framework is to set up a dedicated national authority and equip it with authority to examine whether transactions surpassing certain fixed thresholds may distort competition in the respective Luxembourg markets. Market players are still providing feedback as to what thresholds should be put in place for turnover, market share and other factors. 

These initial consultations should also help develop the framework for the merger notification procedure. The Ministry is currently considering three options: an optional notification, a mandatory one and a hybrid between the two.

Legal and regulatory framework


What primary laws govern financial services M&A transactions in your jurisdiction? 

The primary laws that govern financial services M&A transactions in Luxembourg include:

  • the Law of 13 January 2019 setting up a register of beneficial owners (the RBO Law);
  • the Law of 10 August 1915 on commercial companies, as amended (the Company Law);
  • the Law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of undertakings, as amended;
  • the Law of 2 September 2011 regulating access to the professions of craftsman, trader, industrialist and certain liberal professions, as amended; 
  • the Law of 4 December 1967 on income tax, as amended;
  • the Law of 28 July 2014 relating to the immobilisation of bearer shares and the holding of the register of registered shares and of bearer shares, as amended;
  • the Law of 24 May 2011 on the exercise of certain rights of shareholders in general meetings of listed companies, as amended;
  • the Law of 11 January 2008 on transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, as amended (the 2008 Transparency Law);
  • the Law of 21 July 2012 relating to squeeze-out and sell-out, as amended;
  • the Law of 19 May 2006 transposing Directive 2004/25/EC of the European Parliament and the Council of 21 April 2004 on takeover bids (the 2006 Takeover Law);
  • the rules and regulations of the Luxembourg Stock Exchange;
  • the Law of 6 April 2013 relating to dematerialised securities, as amended;
  • the Law of 23 December 2016 on market abuse, as amended (the Market Abuse Regulation);
  • the Law of 5 April 1993 on the financial sector, as amended;
  • the Law of 18 December 2015 on the failure of credit institutions and certain investment firms, as amended, transposing Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, as amended;
  • the Law of 7 December 2015 on the insurance sector, as amended;
  • the Law of 12 July 2013 relating to the alternative investment fund managers, as amended;
  • circulars of the Luxembourg financial sector supervisory authority;
  • the Luxembourg Civil Code, as amended;
  • the Luxembourg Commercial Code, as amended; 
  • the Luxembourg Labour Code, as amended; 
  • the Luxembourg Criminal Code as amended; and
  • further laws and regulations in relation to tax, labour law and the domiciliation of companies.

Regulatory consents and filings

What regulatory consents, notifications and filings are required for a financial services M&A transaction? Should the parties anticipate any typical financial, social or other concessions? 

Both the seller and the buyer will typically need to approve the acquisition. Approval is given at board level and shareholder approval or supervisory board approval, or both, may also be needed where the constitutional documents (articles of association or shareholders' agreements) require it. Where the shares of the target company are encumbered, the beneficiaries of such encumbrances may need to release these or consent to such transfer of shares. 

Except for a large concentration that may trigger the application of national or European competition laws, unregulated entities do not require any specific authorisation to proceed with an M&A. 

A regulated entity that is under the permanent supervision of the relevant Luxembourg regulator must evidence, prior to any change of significant shareholding, that the new shareholders are fit and proper for the regulated activity of the acquired company. Such ‘fit and proper' test may vary significantly depending on the type of regulated activity that the company is involved in and is usually driven by the anti-money laundering risks associated with the activity. In certain cases and when this solution is possible, the seller may decide to surrender prior to implementing their M&A. This may reduce the attractiveness of such a structure for potential buyers and therefore prevent the transaction from happening.

Ownership restrictions

Are there any restrictions on the types of entities and individuals that can wholly or partly own financial institutions in your jurisdiction? 

‘Financial institution' is a broad term that can include entities that are regulated by the Luxembourg supervisory authority, the Luxembourg Financial Sector Supervisory Commission (CSSF) including, but not limited to, banks, insurance companies, portfolio management companies and investment management companies. Maintaining a licence as a regulated entity in Luxembourg is generally subject to sound and prudent management as defined in Chapter 3 of the joint guidelines of the European Supervisory Authorities (the European Banking Association, European Insurance and Occupational Pensions Authority and European Securities and Markets Authority) as requiring the direct and indirect shareholdings of such regulated entities to be compliant with the following criteria:

  • reputation or good repute; 
  • professional experience of those who will lead the business; 
  • financial soundness; 
  • compliance with prudential requirements; and
  • absence of suspicion of money laundering or terrorist financing.

These criteria should be fulfilled both before and during the life of the regulated financial institution and are assessed in concreto (ie, depending on the type and nature of the activity of the relevant institution). Therefore, any significant change in direct or indirect shareholding of such regulated financial institution shall be notified to and approved by the CSSF.

Financial institutions whose activities fall outside the scope of any licence are not subject to such restriction.

Directors and officers – restrictions

Are there any restrictions on who can be a director or officer of a financial institution in your jurisdiction? 

In principle, the Company Law does not define nationality, residence or qualification standards as prerequisites to the appointment of managers or directors in a Luxembourg company in general and in financial institutions in particular. However, the shareholders may define such restrictions in the articles of association or in a shareholdersʹ agreement, if any. 

Furthermore, managers or directors must: 

  • have full legal capacity to be able to validly engage the company they are representing; 
  • not have been prohibited from acting as a director by a Luxembourg court in accordance with article 444-1 Luxembourg Commercial Code; and
  • observe the rules foreseen for regulated professional activities, which prohibit persons exercising certain professions, such as lawyers (article 1 of the Company Law) or public officers (article 14 No. 3 of the law of 16 April 1979 on the status of public officers) from acting as managers or directors of a Luxembourg company. 

For Luxembourg-regulated entities, the managers or directors must, fulfil certain criteria and be approved by the relevant authority, notably the Luxembourg Financial Sector Supervisory Commission or the Luxembourg Insurance Commissioner. 

Although residence and citizenship are not legal prerequisites to being a company manager or director, it is important for the company, in line with the applicable real seat theory, to have its central administration in Luxembourg for it to qualify as a Luxembourg entity and for Luxembourg law to apply to it.

If the financial institution exercises an operational activity requiring a business licence, one or more of its directors or managers may need to apply for such a business licence before the Luxembourg Ministry of Economy. To obtain such business licence, the manager or director must comply with certain conditions, and in particular must: 

  • fulfil the required professional qualifications;
  • fulfil the condition of professional repute; and 
  • have no criminal record. 

Directors and officers – liabilities and legal duties

What are the primary liabilities, legal duties and responsibilities of directors and officers in the context of financial services M&A transactions? 

Under Luxembourg law, all managers or directors are independent (regardless of whether they are executive or non-executive or external managers) and have to abide, inter alia, by the fiduciary duties of care and loyalty. 

Managers or directors need to comply with the reference standard of a diligently acting ordinary and reasonable manager or director put in the same circumstances (objective bona pater familias standard) and act at all times in the corporate interest of the company. The concept of corporate interest, although not defined under statute, is, in light of recent case law as regards financial holding companies, generally seen as being tantamount to the financial interest of all shareholders, while there is currently a tendency to factor in the interests of all (but not one particular) stakeholders (concept of ‘enlightened stakeholderism').

The duties of managers of a Luxembourg private limited liability company or directors of a Luxembourg public limited liability company, during their appointment, can be summarised as follows:

  • duty of care: duty to act in the corporate interest of the company;
  • duty of loyalty: duty to place the company's interest ahead of personal interests; and
  • other duties: Respect signature regime or representation rights of the articles of association, keep confidentiality, access the information needed and exercise investigation rights, act diligently and spend requisite time, monitor affairs of the company (challenge management, no ‘rubberstamping' of decisions, regularly attend meetings, ask for outside counsel advice and (fairness) opinions in the case of doubt). 

The liability of the managers of a Luxembourg private limited liability company or directors of a Luxembourg public limited liability company can be triggered on the following grounds.

Civil liability grounds

Liability of managers for a breach of duty towards the company (article 441-9, 1st paragraph juncto article 710-16 of the Company Law)

This individual contractual liability may be engaged by the general meeting of shareholders or the bankruptcy receiver in the case of a bankruptcy. The three following criteria must be established: fault, loss and causal link. 

This joint and several liability towards company and third parties for violation of the Company Law or the articles of association can be initiated by the general meeting of shareholders or a bankruptcy receiver in the case of bankruptcy or a third party. 

General civil liability (‘tort liability') under article 1382 of the Luxembourg Civil Code 

This personal and individual liability may be initiated by any individual, but to succeed a personal fault of the manager outside of their ordinary duties as an agent of the company (fault severable from the mandate) has to be established. It covers all kinds of erroneous behaviour or wrongdoing and fault that is a breach of a provision of any law applicable to managers or general duty of care, prudence, diligence and competence or provision imposing a specific obligation of a non-contractual nature. 

Criminal liability grounds

Criminal liability regime for legal entities

In this case, the company is liable for acts of its corporate body, statutory or de facto managers, committing felonies and offences in the name and for the interest of the legal entity. 

White-collar crimes set out in articles 1500-1 to 1500-15 of the Company Law comprise, for example: 

  • distribution of fictitious dividends;
  • failure to submit annual accounts; and
  • abuse of corporate assets. 

Crimes and offences as provided by the Luxembourg Criminal Code are:

  • passive private corruption; and
  • fraud.

Liability in the context of bankruptcy proceedings

Managers or directors have a legal obligation to declare, within a month, with the clerk of the district court sitting in commercial matters, a bankruptcy if payments ceased and if the company lost its creditworthiness.

Managers or directors need to be aware of a ‘hardening' or ‘twilight' period set out in article 445 of the Luxembourg Commercial Code; a period of up to six months (plus 10 days) prior to judicial bankruptcy adjudication; specific transactions will be voided upon demand of the bankruptcy receiver (such as for nil transfers, for instance). 

Extension of bankruptcy proceedings to the real decision maker, including statutory or de facto manager, of the company (article 495 of the Luxembourg Commercial Code) 

Managers or directors may be declared personally bankrupt if payments ceased and gross misconduct of the manager is established; there is commingling of estates (eg, use of corporate assets for personal purposes, commingling of assets, abusive pursuit of loss-making business); or the plaintiff is a bankruptcy receiver on behalf of company or creditors.

Liability to cover unpaid debts (article 495-1 of the Luxembourg Commercial Code)

Such liability ground requires a fault of particular gravity, such as the pursuit of a loss-making business clearly leading to bankruptcy; the entering into transactions completely out of proportion to the company's financial capabilities.

Liability under the Luxembourg Criminal Code article 489 provides for criminal sanctions against managers of bankrupt companies who:

  • entered into considerable obligations without adequate compensation;
  • entered into transactions at undervalue or paid creditor to detriment of bankruptcy estate;
  • failed to declare bankruptcy within one month of the company ceasing payments and lost its creditworthiness; and
  • fraudulently embezzled or hid part of assets or attempted to get rid of the bookkeeping of the company.

Foreign investment

What foreign investment restrictions and other domestic regulatory issues arise for acquirers based outside your jurisdiction? 

In accordance with article 3 of the current Competition Act dated 23 October 2011, as amended, there shall be prohibited any agreements between undertakings, decisions by associations of undertakings and concerted practices that have as their object or effect the prevention, restriction or distortion of competition within the market, and in particular those that: 

  • directly or indirectly fix purchase or selling prices or any other trading conditions; 
  • limit or control production, markets, technical development or investment; 
  • share markets or sources of supply; 
  • apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; and
  • make the conclusion of contracts subject to acceptance by other parties of supplementary obligations that, by their nature or according to commercial usage, have no connection with the subject of such contracts.

However, for now, the laws of the Grand Duchy of Luxembourg do not foresee the implementation of an autonomous merger control regime. According to a recent decision of the Luxembourg Administrative Tribunal dated 25 January 2021 (Role No. 43114), the Luxembourg Competition Council is not competent to carry out a purely preventive merger control, but only control based on concrete abuses, within the framework of its competences being the monitoring of compliance by market participants with the provisions on abuse of dominant positions. 

A new draft law (No. 7479) was filed, which intends to reorganise the competition law-related matters, whereby (1) the Luxembourg Competition Council will be replaced by the National Competition Authority being a public institution with further powers in other domains including unfair practices (pratiques déloyales), the agri-food sector, services in the internal market or relations between online platforms and their professional users and (2) the Competition Act dated 23 October 2011 will be repealed. Such draft law was subsequently split into two separate draft laws (No. 7479A and No. 7479B), such that the provisions regarding the determination of prices by way of Grand-ducal regulations now form part of the draft law 7479B. The reason for this was to (1) provide more time to adapt the price determination procedure as requested by the Luxembourg Conseil d'Etat, and (2) to react to ongoing infringement proceedings against the Grand Duchy of Luxembourg for failure to transpose Directive (EU) 2019/1 on time. 

The draft law (No. 7479A) was voted on 24 November 2022 and the exemption of the second constitutional vote was granted by the Luxembourg Conseil d'Etat on 29 November 2022. The law (No. 7479A) will enter into force on 1 January 2023, but still does not foresee a preventive merger control while its vote opens the door, however, to the introduction of a contemplated merger control of companies on a national level, which was subject to a public consultation. Such draft law is expected in spring 2023. 

Competition law and merger control

What competition law and merger control issues arise in financial services M&A transactions in your jurisdiction? 

Luxembourg does not currently have its own national merger control regime. However: 

  • In January 2022, Luxembourg's Ministry of the Economy launched a consultation  on the possible introduction of a national merger control regime. An interim report was published in July 2022 indicating broad support for a national regime, and a draft Bill providing for this is expected by spring 2023.
  • Luxembourg's Competition Council has considered whether M&A transactions might be challenged under its general competition law rules in certain cases. In particular, the Luxembourg Competition Council received a complaint in 2015 that Utopia's takeover of CinéBelval amounted to an abuse of Utopia's dominant position. While the Luxembourg Competition Council considered it could investigate whether a takeover amounted to an abuse of dominant position, it concluded  that Utopia had not committed any infringement. In 2017, in the Transport Union Lëtzebuerg  case, the Luxembourg Competition Council also investigated whether arrangements concerning the creation of a joint venture company for responding to a tender constituted an anticompetitive agreement. That case was closed  with commitments. In another case, in January 2021, the Luxembourg Administrative Tribunal upheld  a decision by the Luxembourg Competition Council dismissing a complaint that Encevo's acquisition of Paul Wagner et Fils amounted to an abuse of dominant position. 

Although Luxembourg does not currently have its own merger control regime, M&A transactions involving Luxembourg entities may require merger control filings or approvals in other jurisdictions:

  • As an EEA member state, Luxembourg is within the ‘one-stop shop' EU merger control regime. Under the EU Merger Regulation, ‘concentrations' must be notified to the European Commission for prior approval before they can close if certain thresholds are met (and generally cannot also be reviewed by national competition authorities in member states). The thresholds are based on relevant parties' group worldwide and EU turnover (including Luxembourg turnover), with specific rules on how turnover should be calculated, including for credit and financial institutions and insurance companies.
  • More generally, if Luxembourg entities (or their corporate groups) have activities or turnover outside Luxembourg or are entering into M&A transactions with parties that do so, such transactions may also qualify for review in other jurisdictions. The need for filings or approvals will depend on whether applicable thresholds are met in relevant jurisdictions. 

M&A parties should also be mindful of not infringing the general EU and Luxembourg competition law rules regarding arrangements they enter into in the context of M&A transactions. In particular, ‘clean team' or confidentiality arrangements offer protection against the risk that information exchanged during due diligence or transaction planning might constitute an unlawful exchange of competitively sensitive information between competitors (and, if merger control approvals are required, also protect against the risk that unrestricted exchanges of such information before completion can amount to ‘gun-jumping' – implementing the transaction before required approvals).

The scope and duration of non-compete provisions to protect the value of the acquired business should be carefully drafted. Overly broad restrictions may amount to unlawful market sharing. Guidance is provided in the European Commission's Ancillary Restraints Notice. 

Deal structures and strategic considerations

Common structures 

What structures are commonly used for financial services M&A transactions in your jurisdiction? (What are the advantages and disadvantages of each?)

The main vehicles used for acquisition structures in the Grand Duchy of Luxembourg are Luxembourg private limited liability companies, Luxembourg public limited liability companies, Luxembourg common limited partnerships and Luxembourg special limited partnerships. 

These corporations or partnerships are often used to structure the sale or purchase of shares or units respectively (share deal) or may be the vehicle that sells or purchases an asset such as non-performing loans, real estate, domestic or foreign companies directly (asset deal). The choice for a share rather than an asset deal or vice versa may depend on various factors (such as the tax treatment of the buyer or seller, the willingness to buy all the assets and liabilities (share deal) instead of only certain ones, resulting in a different level of due diligence and risk, etc).

Three of the most popular acquisition structures are the following: 

  • Incorporation of one (or two) Luxembourg private limited liability companies being holding entities, holding themselves foreign holding entities in the relevant jurisdictions to acquire and hold an asset. Such acquisitions are often typically financed by a mix of debt and equity funded down the chain. It is usual to see founders of targets reinvesting part of the proceeds of their sale with a view to continuing holding a small portion in the sold structure, thus satisfying the conditions of the buyer to benefit from the knowledge and expertise of the founders during a certain period of time. It should be noted that:
    • Such acquisition structures are very often combined with management incentive plans, whereby senior executives at the level of the buyer or the target may be offered the opportunity to hold interests in one or more pooling vehicles that shall be set up with a view to holding shares in the target post-closing. 
    • Joint ventures are very popular. Different joint venture vehicles can be found in acquisition structures and these include Luxembourg private limited liability companies and Luxembourg special limited partnerships. The latter partnership type permits a very high level of contractual freedom.
  • Another very common acquisition structure is, of course, the incorporation or use of an existing Luxembourg company that merges with another Luxembourg or foreign company by absorbing or being absorbed by such company. Luxembourg law provides for two forms of merger (mergers by acquisition (simplified or not) and mergers by incorporation by a new company). The advantage a merger entails is the transfer of all assets and liabilities from the absorbed to the absorbing entity or to the new entity. However, certain time lines must be kept in mind, such as: (1) the minimum one-month waiting period between the filing of a merger proposal with the Luxembourg Register of Commerce and Companies, followed by a publication with the Luxembourg Official Gazette, and (2) the two-month creditor protection period starting from the publication of the notarial deeds approving the merger with the Luxembourg Official Gazette.
  • Finally, a very common acquisition structure consists of incorporating a Luxembourg company or using an existing Luxembourg company to which the shareholders of a domestic or foreign target company contribute in kind shares in exchange for the issuance of new shares. 

Time frame

What is the typical time frame for financial services M&A transactions? What factors tend to affect the timing? 

The overall timing of an M&A transaction, the negotiation of the term sheet and dealing with investment banks pitching the transaction and proper tax structuring left aside, is largely driven and influenced by the following key considerations.

Regarding the set-up of an acquisition structure, there is a need to organise the opening and running of bank accounts allowing for wire transfers. 

General considerations include: 

  • compliance with anti-money laundering and know your customer obligations to be fulfilled notably by lawyers, service providers, banks and notaries enacting cross-border restructurings;
  • the need to check relevant legal considerations of a transaction with foreign legal counsel (to assess waiting periods or creditor protection periods, particular local transfer requirements involving courts or notaries and administrative complexities (linked to the need for notarised and sometimes apostilled translations and the like); and 
  • the need to ensure fulfilment of conditions precedent for completion (such as the receipt of competition law clearance or the obtaining of consents from regulators, such as the Luxembourg Financial Sector Supervisory Commission (CSSF) or the Luxembourg Insurance Commissioner (CAA) or waivers of pre-emptive rights). 

Regarding a share sale or asset sale: 

  • the performance of more and more thorough due diligences or confirmatory due-diligences on a vendor due diligence report (if acting as buy-side counsel), the negotiation of warranties qualified against disclosures (involving the negotiation of disclosure letters and warranty deeds), material adverse change clauses (MAC clauses), price-adjustment mechanisms (in the case of completion-accounts-based sales and purchases), earn-out clauses and the liaising with warranty and indemnity (W&I) insurers insuring seller warranties for the buyer if the acquisition is structured as a sale; 
  • the need to evaluate the undertaking being the subject matter of the transactions and to have auditors confirm such valuations (which is important for instance in insurance deals where between the signing of a merger or demerger plan and the closing there are value fluctuations warranting the implementation of a post-closing valuation adjustment mechanism due to value fluctuations of the insurance undertaking);
  • the need to ensure the release (if sell-side counsel) or creation (if buy-side counsel) of a security package; and
  • absent the use of a transfer mechanism involving a universal succession of assets and liabilities (as would be the case for a merger, de-merger or contribution of a branch of activities with opt-in by the parties to the de-merger rules) there is a need to carefully identify each of the assets, liabilities and agreements that must be individually transferred, assigned or novated.

Regarding a merger, demerger or contribution of branches of activity (with opt-in to demerger rules) entail: 

  • the lapse of a one-month waiting period starting from the publication of the common merger plan, demerger plan or plan of contribution of branches of activity with the Luxembourg Official Gazette before such an operation can be legally consummated; 
  • the need to align dates of legal effectiveness if several countries and time zones are involved in deals such as a relocation of an insurance undertaking having branches in several countries on top of the desire to ensure a simultaneous rollover of employees to a new insurance undertaking; and
  • compliance with employment law considerations (for example, the transfer of employment contracts and the information period to be respected).


What tax issues arise in financial services M&A transactions in your jurisdiction? To what extent do these typically drive structuring considerations? 

In financial services M&A transactions, a buyer will usually seek both tax warranties and a tax covenant on a share acquisition. The tax covenant gives protection for historic tax liabilities of the target up to an agreed date (usually the date by reference to which the purchase price has been determined or from which it has been agreed commercially that risk and reward will move to the buyer).

The tax warranties provide the basis for the disclosure exercise under which the seller provides information about the target. They also provide a basis for a claim for breach of contract if subsequently found to be incorrect. Where a pre-sale reorganisation has been undertaken, the tax covenant is likely to include specific protection for any possible adverse tax consequences.

The buyer should not be subject to Luxembourg tax on receipt where the tax warranty or covenant payments are made by the seller to the buyer as an adjustment to the purchase price. It is increasingly common for a buyer to take out W&I insurance on a share acquisition and for recourse to the seller to be limited as a result.

In this context, the tax impact of some recent new income tax rules deriving from the Council Directive on anti-tax avoidance 2016/1164 of 12 July 2016 (ATAD) such as interest tax deduction limitations or controlled foreign entities should not be overlooked, as they may entail some tax leakages. 

Also, a Luxembourg corporate seller anticipating a gain on a disposal of shares will hope to benefit from the domestic participation exemption regime that, where conditions are met, provides an exemption from corporation tax for taxable gains on share disposals. However, the seller should double-check the full tax neutrality of such exemption due to the recapture mechanism. Under this mechanism, expenses in relation to the participation, which have reduced the company's fully taxable commercial profits, would be recaptured and taxed at the time of the sale. 

Last but not least, where a change of control may intervene, particular attention should be paid to the availability of tax losses. The availability of such losses is not automatic, notably, if the activities performed by the target company are changing post acquisition.

Where leaving a corporate tax group or consolidation, the sale documents may also include provisions addressing VAT groups or corporation tax group payment arrangements under which one group entity accounts for tax on behalf of a group to ensure that payments (or refunds) are allocated and made appropriately between the target and retained group.

ESG and public relations

How do the parties address the wider public relations issues in financial services M&A transactions (eg, commitments to social issues)? Is environmental, social and governance (ESG) a significant factor? 

Increasing shareholder activism, regulatory requirements and societal expectations from companies around matters such as reducing carbon footprint, improving labour policies, diversity, equity and inclusion and community engagement have led companies to become more accountable towards their investors and customers on a voluntary basis in recent years. ESG is one of the most significant topics in Luxembourg since the European Commission introduced its Action Plan on sustainable finance back in March 2018. Since then, ESG issues have become a value driver in financial services M&A deals. The Action Plan has already crystallised its first regulation, Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the SFDR), which came into effect on 10 March 2021. In parallel, on 15 April 2020, the Council of the EU adopted the long-awaited Taxonomy Regulation that establishes an EU-wide taxonomy on environmental sustainability. The combination of the requirement of disclosure under the SFDR and the introduction of a standard classification under the Taxonomy Regulation provides transparency to both investors and stakeholders so that they may monitor compliance more efficiently.

In the light of the regulatory developments, buyers need to conduct due diligence that goes beyond the assessment of historical non-compliance and assess how the target will comply with those obligations that have not yet come into force under the SFDR, the Taxonomy Regulation and their technical regulatory standards. When making this assessment consideration is not only given to current disclosures but also to future disclosures that will likely become mandatory. The purpose of such due diligence can be clustered as for transaction risk mitigation, reputational and fiduciary issues, assessment of corporate values, access to acquisition financing as well as the ongoing financing post-closing, and reporting obligations. In the pre-closing phase once ESG due diligence has been completed the above-mentioned issues can be addressed by contractual protections. In addition to standard representations and warranties, more specific ESG-focused representations and warranties and special pre-closing covenants requiring detailed reporting and disclosure of any new ESG issues that may arise, and in the case of private company transactions, special indemnity clauses related thereto may be included.

In the post-closing phase, it is essential to keep ESG as a strong focus for integration as well as to address material ESG risks of the target company and monitor remedial efforts and compliance going forward.

Political and policy risks

How do the parties address political and policy risks in financial services M&A transactions? 

Political and policy risks that may potentially lead to changes in laws or regulations represent a risk in financial services M&A transactions. Luxembourg is a very stable country and policymakers observe to keep this stability. However, to mitigate the risks, buyers are advised to conduct a heightened due diligence or risk assessment and be particularly prepared when it comes to negotiations regarding representations and warranties in relation to potential unexpected material events. For transactions that are in the process of being negotiated, buyers and sellers, with a view to addressing such risk, may want to include provisions in the share purchase agreement (SPA) specifically relating to: 

  • termination rights; 
  • purchase price adjustments or earn out clauses (ie, contractual clauses providing that a seller will be entitled to an additional price in the future, provided that the target achieves certain financial goals) if profits are adversely impacted during a specified time period post-completion; 
  • specific warranties regarding operational and financial risks; 
  • post-signing and pre-closing covenants; 
  • specific indemnity, force majeure clauses, hardship clauses or materially adverse change (MAC) clauses; and 
  • W&I insurance non-recourse exceptions

The covid-19 pandemic is a good example for the parties to M&A deals to seek enhanced contractual protection against the occurrence of unexpected risks between the signing and closing dates.

For instance, in the pre-closing stage, parties should look at whether covid-19 constitutes a MAC under the SPA. To qualify as a MAC, an event must be unforeseeable at the time of engaging the contract and must have a long-term and material impact on the target. A MAC clause can be qualified as either a condition precedent or a condition subsequent. If the MAC is qualified as a condition subsequent, the agreement will automatically terminate if a MAC event occurs.

A MAC event can also be qualified as a unilateral termination clause. This gives the contractual right to one of the parties to walk away from the contract, provided certain circumstances occur to unilaterally terminate the agreement.

In Luxembourg, the validity of MAC clauses is based on the prevailing principle of freedom of contract so that the parties are free to allocate risk as they deem appropriate.

In the post-closing phase, the parties to an SPA should consider trying to negotiate the implementation of force majeure and hardship mechanisms.

Shareholder activism

How prevalent is shareholder activism in financial services M&A transactions in your jurisdiction?

As there are very few publicly available examples of shareholder activism in Luxembourg-listed companies, it is difficult to assess the practical importance of shareholder activism in Luxembourg, which appears to be more of an Anglo-Saxon concept to us. The takeover of Arcelor by Mittal is the best-known example and was only made possible following shareholder pressure. 

In addition to the Company Law, there are other pieces of legislation that seek to improve the rights of activist shareholders. Many of these have been influenced by EU legislation and include: 

  • the Market Abuse Regulation; 
  • the law of 24 May 2011, aiming to increase shareholder activism, and amended by a law of 1 August 2019 implementing the Second Shareholder's Rights Directive (Directive (EU) 2017/828); 
  • the Markets in Financial Instruments Directive; 
  • the 2006 Takeover Law providing for minority shareholder protection; 
  • the 2008 Transparency Law; and 
  • the 10 Principles of Corporate Governance of the Luxembourg Stock Exchange, as amended, provide guidelines on best practice in corporate governance for all companies listed on the Luxembourg Stock Exchange.

Of these pieces of legislation, shareholders tend to rely on: 

  • in the case of listed entities, the provisions of the law of 24 May 2011, as amended (granting information rights, an enhanced ability to participate at a shareholders' meeting, foreseeing transparency rules as well as the right to request additional points to the agenda if one or more shareholders represent at least 5 per cent of the share capital, and the right to ask questions and to vote on the remuneration policy); or
  • in the case of a non-listed company, the provisions of the Company Law (granting information rights, an enhanced ability to participate at a shareholders meeting, foreseeing the right to request additional points to the agenda if one or more shareholders represent at least 10 per cent of the share capital). 

Third-party consents and notifications

What third-party consents and notifications are required for a financial services M&A transaction in your jurisdiction?

Financial services M&A transactions are no different from regular M&A transactions insofar as customary consents may be required. These may relate to obtaining: 

  • clearance from a foreign competition authority; 
  • consent from the board of directors, supervisory board (if any), committees (if any) or shareholders of the seller, buyer or purchaser under specific reserved decision matters lists; 
  • release of securities on shares of the target (including bank consent); 
  • the consent to and waiver of co-shareholders to certain transfer restrictions; and/or 
  • the sign-off on a W&I insurer for the warranties given by the seller.

If an acquisition is structured as a share-for-share exchange at the level of the Luxembourg acquirer, no statutory preferential subscription rights will apply but the target shareholders would need to ensure that no such rights have been contractually inserted into the articles of association of the target to ensure that they are dis-applied by virtue of a waiver or reflected in the economics of the transaction price. 

If an acquisition is structured as a merger particular attention needs to be paid to the form and constitutional documents of the target or acquiring company, the transaction and the merger plan to be compliant with Luxembourg administrative formalities (regarding depositing of documents at the registered offices of the merging entities, the auditor and management report requirements, filing of the merger plan with the Luxembourg Trade and Companies Register and creditor protection rules). 

Setting aside the required regulatory consents (as set out in this chapter), be it with the Luxembourg Financial Sector Supervisory Commission or another Luxembourg regulatory authority, depending on the type and constellation of the transaction (eg, licence of the entity sold or the licence to be granted to an entity merged or moved cross-border including managers etc, as the case may be) and creditors, there is no third-party consent or notification for a financial services M&A transaction in Luxembourg prior to the transaction. 

Due diligence

Legal due diligence 

What legal due diligence is required for financial services M&A transactions? What specialists are typically involved? 

The acquisition of a financial services institution is usually subject to a thorough due diligence process often involving a multi-disciplinary team of lawyers and professional advisers who specialise in corporate, anti-money-laundering, contract law, tax, employment, environmental and financial services regulatory. The following briefly touches on financial services regulatory due diligence.

The financial services regulatory due diligence process includes an evaluation of the compliance risk and the regulatory hurdles that need to be dealt with prior to signing. 

Sometimes there is insufficient time in the context of the transaction to verify compliance of the entirety of the target firm's business with the full spectrum of financial services regulation and therefore the assessment is carried out only in relation to specific areas of the target firm's business. In such instances the issues that are often covered revolve around whether the target firm has the necessary regulatory permissions to carry on its activities, whether individuals performing certain activities have regulatory approval and whether the firm is complying with rules that are currently the focus of attention by the regulator. 

In terms of reviewing the target firm's documentation, regulatory due diligence normally covers, among others, reviews of internal or external compliance reports, the minutes of board and compliance committee meetings and any documents regarding investigations or enforcement taken by the regulator. 

Consideration is also given as to whether any regulatory notification or approval is required (if so, how long this will take) and whether any conditions precedent will need to be inserted into the sale agreement. 

If the acquirer is subject to the Alternative Investment Fund Managers Directive (Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No. 1060/2009 and (EU) No. 1095/2010), it may be required to make certain notifications under the ‘portfolio company disclosure rules'.

Representations and warranties are also considered and these may include, a fairly generic warranty that the target firm is in material compliance with all applicable laws and regulation, and then, supplemented by warranties covering specific areas that may have arisen during due diligence.

Other due diligence

What other material due diligence is required or advised for financial services M&A transactions? 

The recommended material due diligence always depends on the assets held or the activities of the target company. In addition to corporate, tax, employment, environmental and financial services regulatory, the following aspects may, for example, be analysed: 

  • contractual matters;
  • permits or licences;
  • pensions;
  • employee benefits/incentives;
  • banking or finance;
  • IP/IT;
  • real estate;
  • health and safety;
  • competition law matters;
  • litigation, disputes or investigations;
  • other regulatory matters;
  • data privacy and cybersecurity;
  • anti-bribery, corruption and human rights; and 
  • export controls or sanctions. 

Emerging technologies

Are there specific emerging technologies or practices that require additional diligence (eg, blockchain and cryptocurrency activities)? 

Previously, Environmental, Social, and Governance (ESG) issues were not something that generally required additional due diligence. However, this is changing given the introduction at the EU level of legislation, notably, the SFDR, the Taxonomy Regulation and their Regulatory Technical Standards (RTS), which enter into force on 1 January 2023. These regulations are directly applicable at the national level and aim to prevent the actors of the financial place to value or market their companies based on criteria that are not considered as ‘green' in the meaning of European laws. This has a huge impact on the marketing practice of the financial market as the companies will be under the loop of any green lies towards the markets and their potential investors and advisers and lawyers need to remain vigilant when advising their client on the topic as clients that may not understand the wrong in casually promoting shady or even false ESG criteria.

Distributed ledger technology (DLT) is a type of technology that has been used for many years and its rise coincided with the appearance of blockchain (which is nothing less than a type of DLT). According to the Luxembourg Regulator, DLT is seen, by some, as the next stage in digital transformation and may have a significant impact on the financial sector in the decade to come. In this regard, the Luxembourg Financial Sector Supervisory Commission published a white paper on 21 January 2022 aimed at guiding professionals on the due diligence process related to the DLT.

Pricing and financing


How are targets priced in financial services M&A transactions? What factors typically affect valuation?

Three main factors regarding the valuation of the target are the following:

  • Valuation method: for example, fair market value, book value or nominal value of the target. 
  • Valuation moment: the value may change between the moment negotiations to acquire are started, the moment of signing and the moment of closing, which is why price adjustment mechanisms are typically put in place. The same applies in the framework of management incentive plans under which stock options are granted to employees or managers having the ability to ‘acquire' shares either for free if shares are issued following an incorporation of reserves or against the payment of a subscription price previously fixed and being lower than the real value of such shares. 
  • Value of the target based on different factors, being:
    • sales growth, ‘analysed in terms of volume, product ranges, price trends and organic and growth'; 
    • production, meaning ‘production sold plus changes in inventories of finished goods and work in progress at cost price plus production for own use, reflecting the work performed by the company for itself and carried at cost'; 
    • gross margin, meaning ‘production minus purchase of raw materials plus change in inventories of raw materials'; 
    • gross trading profit, meaning ‘sale of goods minus purchase of goods for sale plus change in inventories of goods for sale'; 
    • value added, meaning ‘gross trading profit plus gross margin minus other operating costs purchased from third parties' or ‘operating profit (EBIT) plus depreciation, amortisation and impairment losses on fixed assets plus personnel costs plus tax other than corporate income tax'; 
    • personnel cost; 
    • earnings before interest, taxes, depreciation and amortisation, meaning ‘operating profit plus depreciation, amortisation and impairment losses on fixed assets' or ‘value added minus taxes other than on income minus personnel cost and payroll charges minus impairment losses (net of reversals) on current assets and additions to provisions plus other operating revenues minus other operating costs';
    • general regulatory compliance elements, including potential exposure in this respect concerning the relevant activity;
    • use of real leverage (including external financing); and
    • compliance with own funds requirements and ongoing screening.

Purchase price adjustments

What purchase price adjustments are typical in financial services M&A transactions (eg, earn-outs and net value adjustments)?

Typical price adjustments are the following:

Completion accounts
This mechanism is used if the parties agree that the buyer once they took ownership of the target at closing shall be able to assess with the help of a third-party auditor the financial position of the target at completion based on final completion accounts drawn up at or shortly after completion. Such accounts will then fix the final purchase price. 

This is a contractual arrangement where the purchase price or a portion thereof is calculated on a target's post-completion performance. Practically, a first payment is made by a purchaser at completion. Then, one or more deferred payments, depending on the target's financial performance, are made.

Locked box mechanism 
The purchase price for a target is determined before signing a purchase agreement by reference to a recent balance sheet. Protection against any subsequent value leakage from a target between the date of a target balance sheet (the ‘locked box date') and the date of completion is provided through leakage provisions, an indemnity for any leakage and sometimes the insertion of a list of key-trigger events that when they occur between signing and closing may give rise to a purchase price adjustment upwards or downwards at closing.

Material adverse change clauses (MAC) clauses
To qualify as a material adverse change, an event must be unforeseeable at the time of engaging the contract and must have a long-term and material impact on the target. A MAC clause can be qualified as either a condition precedent or a condition subsequent. If the MAC event is qualified as a condition subsequent, the agreement will automatically terminate if a MAC event occurs. 

Hardship mechanisms
such mechanisms may be put in place if parties are affected by an economic hardship, which caused unpredicted and thoroughgoing changes in the market conditions, whereby the parties may agree to adjust the contractual terms post-closing.

Force majeure mechanisms
Luxembourg jurisprudence foresees the concept of force majeure as being an event that is exterior, irresistible and unforeseeable, which disables a party to fulfil its contractual obligation. To limit the liability exposure of a defaulting party, such contractual remedy must be expressly foreseen in the agreement. 

Purchase price adjustments may generally be foreseen in agreements in accordance with the principle of contractual freedom. The purchase price may generally be adjusted upward or downward to reflect the final fair market value or book value of the target as of the transfer date. It may be foreseen that the final purchase price shall be determined by an auditor. 


How are acquisitions typically financed? Are there any notable regulatory issues affecting the choice of financing arrangements?

In the context of holding activities, a mix of debt and equity instruments typically finances acquisitions, whereby a generally accepted debt-equity ratio of 85/15 shall be respected. 

The approximate 15 per cent equity ratio will typically be financed via an equity increase of the relevant company, generally via an increase of the share capital (with or without share premium) or the 115 account (equity contribution without issuance of shares) by way of a contribution in cash or in kind or the incorporation of reserves. 

The approximate 85 per cent debt ratio will typically be financed by way of debt instruments such as loans, preferred equity certificates (convertible or not) or warrants. 

The choice of such instruments are mainly tax, efficiency or time and cost driven. 

Deal terms

Representations and warranties 

What representations and warranties are typically made by the target in financial services M&A transactions? Are any areas usually covered in greater detail than in general M&A transactions?

The target as such is typically not giving representations and warranties for itself, as it generally only acknowledges its own transfer. 

The seller generally gives representation and warranties, whereby obviously referring to the target, which in general M&A transactions concern: 

  • the authority, capacity and title of the seller or buyer to enter into the agreement (including the legal capacity of the seller or buyer, obtaining of corporate approvals);
  • the solvency of the seller or buyer; 
  • the financial situation of the target and the filing of the annual accounts;
  • existence and organisation of the target (including the due existence, the positive net asset value of and the absence of any kind of litigation in relation to the target);
  • share capital and the shares of the target (including the absence of any encumbrance over, the full legal title held by the seller over and the free transferability of the target's shares); 
  • assets, properties, IP/IT rights or whatsoever held by the target; 
  • employees in the target and any financial commitments in place such a pension plan or an incentive plan in favour of the employees of the target;
  • any tax-related matters;
  • any ongoing litigation implying the target;
  • interest held by the target in other entities; 
  • books and records of the target (including that these are all up to date, all filings with the relevant registers and authorities were completed, a proper corporate housekeeping and an up-to-date shareholders' register);
  • all existing agreements entered into by the target; 
  • the annual accounts and closing accounts of the target (including the fact that they were prepared in accordance with Luxembourg laws and regulations and Luxembourg generally accepted accounting principles, standards and practices, reflect all debts and liabilities, tax provisions were made), and
  • the corporate authorisations obtained by the target, to the extent necessary. 

Depending on the target and its activities or held assets, further representations and warranties may be given, in particular in relation to: 

  • potential ownership of assets or intellectual property rights held by the target;
  • contracts entered into by the target;
  • employees of the target;
  • general compliance with laws, such as anti-money-laundering obligations, regulatory consents;
  • the absence of any litigation or insolvency proceedings; and
  • adequate insurance. 

The list is not exhaustive and may be contractually adapted depending on the activities of a target and the protections requested by a buyer. 


What indemnities are typical for financial services M&A transactions? What are typical terms for indemnities? 

Typical indemnities requested by the seller include those relating to: 

  • bank guarantees; 
  • comfort letter;
  • guarantees given by a group entity of the seller; 
  • portion of the purchase price is blocked on an escrow; 
  • pledge over shares held by the seller; and 
  • specific indemnities (for example, in the case of environmental pollution, both parties know about it and a simple disclosure will not suffice. The buyer can therefore ask for a specific indemnity, whereby the seller undertakes to bear all costs that may arise in connection with the disrespect of environmental laws). 

Typical terms for indemnities are: 

  • quantitative limitations (liability caps, individual and aggregate thresholds, indemnification is not required where W&I insurance is in place or if sufficient cash was provisioned on the target's bank account, the buyer shall indemnify only once the same breach of representation and warranty); and 
  • temporal limitations (limitations to generating events that occurred before signing or closing, prescription periods limiting the time line during which the buyer may act against the seller). 

Statute of limitation 

The statute of limitations is 30 years for civil law matters and 10 years for commercial law matters. 

For tax warranties, the statute of limitations is in principle five years in Luxembourg starting on 1 January following the fiscal year under review. This period might be extended to 10 years if no tax return has been filed or if it reported incorrect information (new facts discovered by the tax administration and not reported) or if the tax returns were incomplete (irrespective of the existence of a fraudulent intention). 

In practice, time limitations with respect to core warranties may usually be capped at around five years and time limitations with respect to non-core warranties may usually be capped at around two years. 

Liability may be further capped by way of: 

  • a de minimis clause to limit legal actions for contractual breaches where the impact of the breach is immaterial. According to market practice, such limit consists generally of an amount inferior to 0.25 per cent of the purchase price; and
  • a basket clause where claims, in aggregate, may be made only once the aggregate sum of all claim items exceed a certain threshold. According to market practice, such a threshold consists generally of an amount inferior to € 1 per cent of the purchase price. 

Closing conditions

What closing conditions are common in financial services M&A transactions? 

The following closing conditions are common: 

  • the completion of the financing of the acquisition;
  • the full payment of the purchase price;
  • the replacement of the managers, directors and auditors or independent auditors, if any, of the target company;
  • the amendment of the articles of association of the target company; 
  • the material transfer of the target company's books and records to the buyer (including the shareholders' register and share certificates, if any); 
  • termination of bank mandates regarding the former managers, directors and proxies; 
  • corporate approvals, such as completion board minutes or shareholder consent (if a shareholder reserved decision matter is concerned);
  • the termination of agreements entered into by the target company with service providers or members of the selling group; 
  • bringing down the disclosure letter; 
  • release of any debt owed by the target or security given by the target; 
  • consent from regulator (such as Luxembourg Financial Sector Supervisory Commission or Luxembourg Insurance Commissioner, if needed);
  • consent from foreign competition authority (if needed);
  • waiver and consent letter from co-investors as regards transfer restrictions (pre-emptive rights, preferential subscription rights); and
  • successful granting of W&I insurance.

Interim operating covenants

What sector-specific interim operating covenants and other covenants are usually included to cover the period between signing and closing of a financial services M&A transaction? 

During signing and closing, a seller shall maintain the target entity in the same situation as known to the buyer as of signing. Hence, during this period, the seller may not cause any material changes affecting the target company or sell the target company to a third party without the approval of the buyer. 

During signing and closing, once the terms and conditions are agreed upon between the parties and in particular, the will to respectively sell and buy a target company, usually the following covenants are foreseen: 

  • tax covenants: giving protections (typically) for pre-completion tax liabilities that have not been paid or provided for in the relevant accounts as well as other specific identified tax risks; 
  • transitional services agreement: typically setting out a description of centrally provided or shared services, which are to be provided by the seller to the buyer or target group (or vice versa) for an agreed period and at an agreed cost following closing;
  • financing of the acquisition of the target; 
  • non-compete obligations (including a limitation in time and the relevant jurisdiction(s));
  • non-solicit of clients' or employees' obligations (including a limitation in time and the relevant jurisdictions; and
  • confidentiality obligations. 


Common claims and remedies 

What issues commonly give rise to disputes in the course of financial services M&A transactions? What claims and remedies are available?

Before going into detail, a clear difference must be made between (1) a breach of representations and warranties leading to compensation or indemnification (such as the reduction of the value of shares), and (2) contractual violations (such as covenants or any other contractual obligations) leading to damages under the Luxembourg Civil Code. 

Common issues that may give rise to claims in financial service M&A transactions are breaches of representations and warranties that are given in relation to tax, financial statements, corporate statements or compliance with the laws and regulations, for example. 

Other issues stem from price adjustment notably when based on completion accounts and the parties are unable to agree upon such accounts determining the final purchase price. The same issue may also arise when the earn-out mechanism is being implemented, whereby the target's financial performance may be analysed in different ways by the parties.

Further issues may arise from uncovering historic issues post-completion that may lead to interpretation issues of certain provisions of the SPA over which the parties may be in disagreement. 

Most remedies to such issues can be found through negotiation and discussion between the parties if found at an early stage, such as during the due diligence process. If commercial resolution fails, litigation ensues.

In addition to the indemnifications in the case of breach of representations and warranties, which are mostly explicitly foreseen in the relevant agreements, the following remedies are possible in the case of a contractual breach under Luxembourg law: 

  • specific performance; 
  • compensatory damages; 
  • suspension of performance of its own obligations; and
  • resolution of the agreement with damages. 

Dispute resolution

How are disputes commonly resolved in financial services M&A transactions? Which courts are used to resolve these disputes and what procedural issues should be borne in mind? Is alternative dispute resolution (ADR) commonly used?

It is difficult to assess how disputes are commonly resolved given that ADR proceedings are confidential. 

It is, however, no secret that in the case of litigation, the district court is most likely to be the most appropriate forum given the value of the claim. In this respect, the claimant will have to choose between filing the claim with a civil chamber or a commercial chamber. In the case of the latter, the claimant must also bear in mind the complexity of the case and decide in light thereof between the normal oral procedure or a written procedure. While the normal – oral – procedure in commercial chambers is usually fast, the complexity of the case may suggest using a written procedure to ascertain that the court can fully grasp the extent of the issues before rendering its ruling.

ADR in Luxembourg in financial services M&A transactions are mainly arbitration and mediation. Arbitration covenants are often implemented in M&A agreements and thus constitute a common form of dispute resolution. 

Update and trends

Trends, recent developments and outlook 

What are the most noteworthy current trends and recent developments in financial services M&A in your jurisdiction? What developments are expected in the coming year? 

The covid-19 pandemic has made customers more reliant and comfortable with digital transactions and in response the financial services industry has focussed more and more on technology and digitalisation. In light of this, there may be a greater need for acquirers to start investigating their target's IT systems as part of the due diligence process. In particular, how can the target's systems integrate with the acquirer's own systems?

It may be that it will become more common for financial institutions to hold crypto-assets and this will add a further layer of complexity to the due diligence process. In particular, the acquirer will want a clear understanding of the nature and extent of the target firm's crypto dealings and ascertain whether any crypto-related prohibitions or sanctions apply in the target's jurisdiction.

Regulatory reform, particularly in the environmental, social and governance space, continues in a number of jurisdictions, and acquirers will need to keep a close eye on what new rules come into force before their transaction closes. 

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.