Who may initiate legal proceedings for management fault against directors of an SA?
Before the 2016 reform of the Luxembourg company law, only the shareholders' meeting deciding by a simple majority (or possibly the board itself) has the authority to decide on actions against a director of a public limited liability company (société anonyme or SA) for management faults.
The 2016 reform extended the possibility to initiate legal proceedings against directors on behalf of the SA to minority shareholders. Article 444-2 of the Luxembourg company law provides that “an action may be brought against the directors or the members of the management board or the supervisory board, as the case may be, on behalf of the company by minority shareholders or holders of profit units. This minority action may be brought by one or more shareholders or holders of profit units who, at the general meeting which decided upon discharge of such directors or members, owned securities with the right to vote at such meeting representing at least 10 per cent of the votes attaching to all such securities.”
Is an equal shareholder a minority shareholder?
If the law fixes a minimum shareholding (10%), it does not indicate if an equal shareholder (holding exactly 50% in the share capital) shall be treated as a minority shareholder for the purpose of Article 444-2.
In a judgment dated 13 June 2019, the District Court of Luxembourg decided that the provisions of Article 444-2 were clear in that they reserved the minority action only to minority shareholders holding less than 50% of the voting rights.
In a judgment dated 27 October 2021, the Seventh Chamber of the Luxembourg Court of Appeal overruled the above judicial decision and declared that minority shareholder should not be understood as designating the one which has fewer voting rights than the "majority", but should be considered more broadly in the context of the law which led to the introduction of Article 444-2. In view of the purpose of the law introducing the minority shareholder, the action of Article 444-2 of this law goes beyond the sole minority shareholder taken in the literal sense and benefits the equal shareholder.
Is the vote by the shareholders' meeting on the discharge a preliminary condition to the minority action?
Article 444-2 reserves the minority action to minority shareholder which holds at least 10% “at the general meeting which decided upon discharge of such directors or members”. Does it mean that the shareholders' meeting shall have approved the discharge before the minority shareholder can initiate the proceedings?
In the same judgment, the Court of Appeal says no to this question. Article 444-2 does not expressly state that the discharge had to be voted for the minority action to be initiated. The use of the verb "to decide" means that it is sufficient that a vote has taken place and that this has not resulted in either a discharge or a refusal of discharge.
What about an Sarl?
A minority shareholder holding at least 10% is entitled to initiate proceedings against a director for management fault only for a public limited liability company (société anonyme or SA), a corporate partnership limited by shares (société en commandite par actions or SCA) and as simplified joint stock companies (société par actions simplifiée or SAS) but not for a private limited liability company (société à responsabilité limitée or Sàrl).
Does it mean that an equal shareholder will always be considered as a minority shareholder for the purpose of the Luxembourg company law?
Not necessarily: the Court of Appeal concluded that an equal shareholder is a minority shareholder taking into account the aim pursued by the law which established the minority action. Depending on the context, a different conclusion might be reached for other provisions of the Luxembourg company law.
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.
