The Luxembourg Company Act presents interesting opportunities for international groups with finance or holding companies domiciled in Luxembourg. This development concerns Bill No 5829, which was adopted in Luxembourg in June 2009 and includes changes to the law of 10 August 1915 on commercial companies.
Draft Bill No 5829 has been relative to the cross-border mergers of companies and to the simplification of public limited company incorporation and maintenance and changes of their capital. Its implementation has opened up an array of new possibilities for practitioners.
Certain cases, for example, can now proceed with capital increases by contribution in kind without the need for an external audit report. The EC Cross-Border Mergers Directive 2005/56 has also been transposed into Luxembourg law and provides Luxembourg with the wide range of legal instruments for international restructuring operations. Generally, it brings a more simplified legislative framework and introduces the possibility for cross-border mergers with EU and non-EU companies using Luxembourg as the structuring platform.
Easier does it
A most interesting change with the bill also concerns prohibited financial assistance. The rules in this respect have been liberalised and it has been confirmed that the prohibition covers both direct and indirect assistance, something that has long been contested by certain practitioners. The prohibition will be lifted entirely provided that certain conditions are met. This will particularly be the case for employment benefit plans.
Before June 2009 the Company Act maintained a strict prohibition on financial assistance and, among others, an exception for shares acquired by employees of a company. However, this exception only applied to employees of the company itself, not to the employees of other group companies, and neither did it extend to officers of the company. Provided certain conditions are met, Luxembourg-based holding and finance companies will now be entitled to finance acquisitions through their own shares by their officers, their employees as well as group employees. This sets new standards in the area and should have an important impact on employee benefit schemes and also offer companies an alternative for employees to assist in intra-group financing.
Under the new law transactions must take place under the responsibility of the management body, where they must ensure such a transaction is made at arm’s length, particularly with respect to the interest perceived by the company, the security provided by the company and the financial situation of every third party involved. The purpose here is clearly to avoid any excesses.
Before proceeding to any financial assistance the management body must prepare a written report and submit it at the General Shareholders’ Meeting (GSM) to obtain the green light. As the report will be filed with the Company Registry, transparency and publicity will be guaranteed.
In line with good corporate governance principles, the report must indicate the reason for the transaction, the corporate interest, the terms and conditions of the transaction, the risk of the transaction and details for the liquidity and solvability of the company and the price at which the third party is deemed to acquire the shares.
Another way to limit excesses can be achieved by cutting the aggregate amount of assistance. The total financial aid granted to third parties will not go to companies’ net assets to become inferior to the amount of the subscribed capital plus any reserves which may not be distributed under law or by virtue of the articles. In addition, the company will have to account for enough available reserve equal to the amount of the total financial aid as a liability on its balance sheet.
Particular attention has been made to possible conflicts of interest arising in situations where the financial aid is granted to members of the management body. The law expressly provides that in such event the auditors must present a special report on such a transaction at the GSM, with the members then making decision on such a report.
Another draft law, Bill No 5730, which is currently in the legislative process, also aims to modernise the Luxembourg corporate law further. The scope of the changes in this respect is very broad and relates to the different types of companies and the various aspects of their corporate lives. At the same time, preserving the principal of contractual freedom is still pending.
There is no doubt that, amid a backdrop of global economic uncertainty, the above amendments have required a degree of courage from the Luxembourg politicians.
With strict prohibition, for example, before June 2009, it was completely outdated and no longer met the needs of modern international operating groups. The new flexibility will be greeted warmly by the markets, while at the same time excesses and abuses will be limited through the conditions and restrictions built into the system. And with further developments in the pipeline, Luxembourg remains on track to modernise its company law, making it an attractive centrepiece for today’s highly sophisticated marketplace.
Stef Oostvogels is a senior partner at Oostvogels Pfister Feyten