I OVERVIEW OF M&A ACTIVITY
M&A activity remained relatively strong in Luxembourg in 2016 and 2017, despite a global slowdown due to the uncertainties resulting from Britain's decision to leave the European Union and key global elections. Some of the reasons therefor are Luxembourg's regulatory and legislative framework, its legal and political stability and its domestic market, in particular its fund industry and financial sector.
Luxembourg remains the largest investment funds centre in Europe, and the second-largest in the world behind the United States. At the close of March 2017, the net assets under management in Luxembourg amount to €3.943 billion.2 Hence, the investment funds industry continues to play a major role in stabilising the Luxembourg market.
Luxembourg continues to be ideally placed to implement tax-efficient M&A transactions and hence to be a key platform for M&A and private equity activity. One reason for this is that the relevant legislation continues to be adapted and modernised in order to be as attractive and flexible as possible: this includes new forms of companies, namely the special limited partnership and the simplified stock company, which offer additional solutions for economic actors, including those of the private equity world. Funding instruments and methods created and used by practitioners over past decades, such as the use of tracking shares or the issuance of hybrid instruments, have recently been confirmed by the legislator and codified in the law of 10 August 2016 amending the law of 10 August 1915 on commercial companies (1915 Law), hence creating additional legal certainty.
Luxembourg remains one of the leading European hubs for vehicles investing directly or indirectly in European real estate. It is also worth noting that a lot of actions are being undertaken by the government to make Luxembourg a leading hub in the areas of information and communication technology, FinTech and space technology.
Chinese banks continue to establish their European headquarters in Luxembourg. In general, Asian dealmakers and investors continue to set their sights on European targets in a bid to reduce reliance on their domestic market. North American investors on the other hand may feel more inclined to stay at home, as there may be new opportunities in a less regulated and lower tax US environment as promised by the new US President.
With a number of promising drivers and deals in place, we anticipate a relatively active M&A market in 2017. Low costs of funding and the continued desire to expand geographic reach and innovation capabilities speak in favour of an active year. On the other side, key global elections, heightened regulatory scrutiny, in particular of Chinese investors, and speculations around 'Brexit', may result in a slowdown in M&A activities. Whether investors fleeing Brexit may find Luxembourg an adequate alternative remains also uncertain, especially given the strong concurrent bids from other leading European hubs.
IIGENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The Luxembourg Civil Code, notably the provisions governing contracts, and the Luxembourg Commercial Code provide the statutory framework and form the legal basis for the purchase and sale of corporate entities in Luxembourg.
Statutory mergers, including cross-border mergers with EU or non-EU entities, demergers, splits and spin-offs, as well as contributions of branches of activities, or of part or all of the assets and liabilities of Luxembourg undertakings, are mainly governed by the 1915 Law, which implemented the EU Cross-Board Mergers Directive.3
In addition, the law of 5 August 2005 on collateral agreements, which provides legal certainty to lenders, is commonly used in M&A transactions irrespective of the location of the target to secure financing. In that context, it should be noted that Luxembourg continues to offer a legal environment more favourable to lenders than any other European jurisdiction.
In the case of an offer for the acquisition of a target whose shares are admitted to trading on a regulated market in one or more Member States, the law of 19 May 2006 transposing the Takeover Law4 will apply in cases where the target is a Luxembourg company or where its shares are admitted to trading on the regulated market of the Luxembourg Stock Exchange (LSE), or both. If the target is a Luxembourg company and its shares are listed on the regulated market of the LSE, all aspects of the offer will be governed by the Takeover Law (even if the shares are additionally listed on other regulated markets in the EU or the EEA). If the target is a Luxembourg company but its shares are listed only on a regulated market in the EU or the EEA outside of Luxembourg, a split jurisdiction regime will apply, with the law of the listing jurisdiction being applicable for the offer, and Luxembourg law being applicable for corporate law matters, the legality of measures by the target that could defeat the offer as well as information to be provided to employees of the target. With respect to Luxembourg companies, Luxembourg law will also be competent to determine the 'central threshold' from which a mandatory offer will have to be made and exemptions from these obligations as well as sell-out and squeeze-out rules following a successful offer.
If a bidder does not achieve the necessary threshold for a squeeze-out as a result of an offer under the Takeover Law, but reaches that threshold at a later stage, such bidder may be in a position to squeeze-out minority shareholders under the law of 21 July 2012 on mandatory squeeze-out and sell-out of securities of companies currently admitted or previously admitted to dealing on a regulated market in the European Union or having been offered to the public. Conversely, minority shareholders may have the right under that law to cause the majority shareholder to purchase their shares.
Public offerings on the Luxembourg territory and admissions to trading on the Luxembourg regulated market of securities are governed by the Luxembourg prospectus law of 10 July 2005, as amended, implementing the Prospectus Directive (Prospectus Law),5 and the Financial Sector Supervisory Commission (CSSF) is the supervisory and regulatory authority competent to oversee these operations.
For companies whose securities are admitted to trading on the regulated market of the LSE, and whose home Member State will be Luxembourg, a certain number of additional Luxembourg laws (mainly deriving from the implementation of relevant European directives) may apply, in particular the Luxembourg law of 11 January 2008, as amended, implementing the Transparency Directive (Transparency Law)6 and the Luxembourg law of 26 December 2016 on market abuse, implementing the Market Abuse Directive II.7
The law of 24 May 2011 on the exercise of certain rights of shareholders in general meetings of listed companies will also apply to Luxembourg companies whose shares are admitted to trading on a regulated market in the EU (Shareholder Rights Law).
The Takeover Law, the Prospectus Law, the Transparency Law and the Shareholder Rights Law are not applicable to Luxembourg or foreign companies whose shares or other securities are admitted to trading on the Euro multilateral trading facility (MTF) market of the LSE.
The Market Abuse Regulation (MAR)8 and relevant implementing and delegated regulations of the European Commission will apply with respect to companies whose securities are admitted to trading on the regulated market or the Euro MTF of the LSE. Moreover, there may be specific legislation to be considered depending on the sector involved in the transaction (e.g., credit institutions, insurance or reinsurance companies, companies operating in the telecommunication business, MiFID firms) and, in particular, prior regulatory approvals or notifications will then be necessary.
Additional regulations will also apply if a purchase, sale or merger of a Luxembourg undertaking involves the transfer of staff.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
iModernisation of Luxembourg company law
On 10 August 2016, Parliament adopted bill of law 5730 modernising the 1915 Law and amending, inter alia, relevant articles of the Civil Code. The new law came into force on 23 August 2016 (New Company Law).
Although the New Company Law brings a lot of significant changes, the contractual freedom of shareholders remains the key feature. The New Company Law mainly aims at integrating some innovations already existing in foreign jurisdictions, to offer new legal instruments to investors, to harmonise rules applicable to the different forms of companies and to formally recognise the validity of legal solutions previously developed by Luxembourg practitioners.
The New Company Law contains new opportunities but also certain additional constraints. As a result, the impact of such legislation should be carefully analysed not only for new entities but also for existing structures.
For any entity incorporated after its entry into force, the New Company Law shall automatically apply in its entirety. For any existing entity, the shareholders have 24 months from the entry into force of the New Company Law to adapt the articles of association. During this period (or at least until the articles are amended so as to comply with the New Company Law), the previous legislation remains applicable to all provisions of the articles of association contrary to the New Company Law, while the New Company Law applies to all matters not mentioned in the articles of association.
Below is a summary of some of the key changes resulting from the New Company Law. Some of these may require specific actions, including appropriate provisions to be inserted in the articles of association or shareholders' agreement:
aKey changes applying to a public company limited by shares, a limited partnership by shares and a private limited liability company:
- agreements governing voting rights are now formally recognised (with certain limits);
- the New Company Law now contains a list of cases where a decision of shareholders or bondholders may be declared void;
- a shareholder of an SA, an Sàrl or an SCA may validly undertake not to exercise all or part of his, her or its voting rights either temporarily or permanently;
- management may, if so authorised by the articles of association, suspend the voting rights of a shareholder that is in default of its obligations under the articles of association or a shareholders' agreement or the relevant shareholder's undertakings;
- the change of nationality of a Luxembourg company will no longer require a unanimous decision by the shareholders (and bondholders); and
- recognition of provisions where current or future shareholders organise the transfer or acquisition of shares.
bKey changes pertaining only to a private limited liability company:
- the majority requirement applicable to the transfer of shares in a Sàrl to a non-shareholder may be reduced from 75 to 50 per cent of the share capital in the articles of association. If the proposed transfer of shares is not approved, the remaining shareholders may propose alternatives within three months of this refusal to the leaving shareholder allowing it to transfer its shares, and if no solution has been found, the leaving shareholder is authorised to transfer its shares to the third party initially identified;
- the foregoing is without prejudice to the pre-emption and tag-along right agreed among the parties;
- "abolishment of the double majority requirement (majority of shareholders representing 75 per cent of the shares) for extraordinary shareholder decisions. A 75 per cent majority of the shares is now sufficient;
- the possibility for managers to pay an interim dividend;
- the possibility to issue redeemable shares; and
- the possibility to provide for an authorised share capital (but shares thereunder may only be issued to existing shareholders).
cKey changes pertaining only to a public company limited by shares and a limited partnership by shares alone:
- the validity of lock up clauses in the articles of association is formally recognised, with the consequence that any transfer made in breach of such clauses is expressly null and void;
- prior consent clauses and pre-emption clauses relating to shares provided for in the articles of association are formally declared as being valid as long as such clauses do not prevent the leaving shareholder from transferring its shares for more than 12 months;
- the issuance of non-voting shares is no longer limited to 50 per cent of the share capital, and non-voting shares do not necessarily need to receive a preferred dividend; and
- an auditor's in kind report is no longer required for the contribution to a company consisting in a claim against or receivable issued by the same company (under certain conditions).
iiMarket abuse law
By a law dated 23 December 2016, the Luxembourg legislator adopted bill of law 7022: (1) implementing the Market Abuse Directive II9 and the Commission Implementing Directive10 with regard to reporting to the competent authorities actual or potential infringements in relation to the MAR; (2) supplementing specific provisions of the MAR on administrative measures and sanctions; and (3) amending the Transparency Law (New Market Abuse Law).
When implementing these provisions, the Luxembourg legislator did not go beyond what was required pursuant to the provisions of said directives.
Chapter 2 of the New Market Abuse Law relates to the administrative sanctions and powers conferred on the CSSF in that context. Chapter 3 relates to criminal law sanctions and implements the relevant provisions of the Market Abuse Directive.
To a large extent, Chapter 2 confirms the powers already provided under the law of 9 May 2006 on market abuse (repealed by the New Market Abuse Law) (2006 Market Abuse Law) given to the CSSF as the competent administrative authority, and provides for further precisions in or extensions of the CSSF's investigative powers.
With the implementation of Article 32 of the MAR in the New Market Abuse Law, a specific regime for 'whistleblowers' was enacted. The CSSF is hereby required to put into place procedures that allow the efficient notification to the CSSF of effective or potential violations of the MAR. At the time of writing, the CSSF has not yet adopted any such procedures. Employers who carry out activities that are regulated by financial services regulation are further required to implement appropriate internal procedures that allow their employees to notify any such violations of the MAR.
To avoid any violation of the ne bis in idem principle, the New Market Abuse Law maintains the consultation procedure between the CSSF and the State Prosecutor during which these authorities determine whether a suspected infringement of MAR will give rise to an administration or a criminal investigation and sanctions already provided in the now-abrogated 2015 Market Abuse Law.
1 Philippe Hoss is a partner and Thierry Kauffman is a senior associate at Elvinger Hoss Prussen.
2 CSSF press release 17/30 of 4 August 2017.
3 Directive 2005/56/EC.
4 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.
5 Directive 2003/7/EC.
6 Directive 2004/109/EC.
7 Directive 2014/57/EU.
8 Regulation No. 596/2014/EU.
9 Directive 2014/57/EU.
10 Directive 2015/2392/EU.
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.