Structuring and Financing Private Equity and Venture Capital Transactions

Corporate Structuring and financing private equity & venture capital transactions Luxembourg January 2021 Corporate

Luxembourg Structuring and financing private equity and venture capital transactions

Introduction companies; Société anonyme – public limited The jurisdiction of choice for there are generally no statutory liability company (SA) - when many private equity and venture thin capitalisation rules although flexibility in terms of the variety of capital investors / funds minimum equity may be required instruments that can be issued is Luxembourg has developed over the in some particular cases; required last two decades into a major hub in most cases, there is no for private equity and venture Luxembourg tax on any gains The SA is a public limited liability capital actors, both as regards to arising on an exit realised by a company which is able (in contrast the location of their funds and as Luxembourg non-resident to a Sàrl) to make offers of shares regards to the structuring and investor; to the public, to have a wider financing of their acquisitions. there is no withholding tax on shareholder base and to provide a liquidation proceeds; high level of confidentiality for its Luxembourg maintains more than there are no CFC rules; and investors. As a public company, it ever its commitment to the private does however operate in a more there is no stamp duty on the sale equity and venture capital industry, extensive statutory framework than or issuance of shares. modernising and offering new a Sàrl. structures that are aligned with the need of sponsors. Recent examples Vehicle selection Société par actions simplifiée – include the complete reform of the Which type of companies to use? simplified public company (SAS) company law in July 2016 (see The vehicles most frequently used to - when flexible governance is reference 1) (the New Law), the structure private equity and venture required introduction of an anglo-saxon type capital investments are: of partnership (SCSp)(see reference 2) and of the reserved alternative The SAS offers far more flexibility to investment fund (RAIF)(see Société à responsabilité limitée – the shareholders and managers reference 3). private limited liability company than the SA. The SAS may be a (Sàrl) - when control over the suitable alternative to the SA or Sàrl share capital is required (the for shareholders with special needs One of the most flexible and shares are not freely transferable) in respect of the balance of powers, attractive EU tax regimes shareholder relations and the Luxembourg offers one of the most One of the most commonly used distribution of profits (for example flexible and attractive legal start-ups or joint ventures). framework and tax regimes in the vehicles for structuring an EU with a strong and ever acquisition is the Sàrl. It is a private expanding double-tax treaty limited liability company, managed Société en commandite par network and attractive effective tax by a board of managers, for the actions – partnership limited by rates. benefit of its shareholders. It is shares (SCA) - when sponsors characterised by a very high degree want to retain control over the of flexibility and a very limited level management functions Tax benefits of investing through of statutory prescription. It is thus Luxembourg easily tailored to the requirements there is a wide participation of single investor or joint venture The SCA is a corporate limited exemption regime for dividends, private investment. The Sàrl is partnership with a share capital. capital gains and liquidation check-the-box eligible. This vehicle is frequently proceeds; encountered in Luxembourg structures. Although a limited there is no withholding tax on partnership (with one or more market conform interest general partners/unlimited partners payments made by Luxembourg Corporate

and one or more limited partners) The SCS and SCSp are fiscally Involvement of an independent the SCA is also subject to the same, transparent and are therefore not auditor more extensive, statutory subject to tax and should not in For contributions other than cash in framework as the SA. The SCA is principle be eligible to double tax a SA, a SAS or a SCA, an check-the-box eligible. treaty benefits. They can however independent auditor (réviseur represent an alternative when a d'entreprises agréé) must issue a fiscally transparent vehicle is Société en commandite simple – report on the nature of the assets required. common limited partnership contributed and the valuation (SCS) - when tax transparency method used. The report must and structural flexibility are Comparing the different types of confirm that the value of the shares required (with legal personality) companies used in private equity issued, nominal and premium, is at sponsors can retain control over and venture capital deals least equal to the value of the the management functions A table reflecting the key features noncash contributions. It is of the most common Luxembourg important to note that the value reported on the report are those The principle which underpins the vehicles is annexed to this client briefing. which will be reflected in the SCS is one of contractual freedom notarial deed. Such report is not and the parties are free to contract required in the case of the on whatever terms suit them best Constituting the vehicle contribution of a receivable held by from a commercial perspective. The Involvement of a public notary the holder of a debt instrument partnership agreement can be Luxembourg being a civil law (such as convertible bonds) against tailored-made to the respective jurisdiction, the SA, SAS, SCA and the company or for incorporation of needs and objectives of fund Sàrl must all be constituted by a reserves, profits or share premium promoters and investors. formal deed, made before a to the nominal share capital. Luxembourg notary. This notarial Société en commandite spéciale – deed is the constitutional document It is worth mentioning that a similar special limited partnership of the vehicle, including a report shall also be prepared in the (SCSP) - when tax transparency statement of all the characteristics case of a capital increase by way of and structural flexibility are of share classes. In order to carry a contribution in kind and if, in the required (without legal out incorporation, the initial first two years of the company's personality) - sponsors can retain economic contribution of the existence, the company purchases control over the management founding investors must be assets from a founding shareholder functions unconditionally held by the vehicle amounting to more than 10% of the at the moment of its incorporation share capital of the company. As an with a value at least equal to the The SCSp is very similar to the SCS exception that rule, no report is minimum required by Luxembourg and most of the legal regime which required when the transaction is in law. Where this initial contribution/ governs it is identical. The one the normal course of the company's subscription is made in cash, this major difference between the two business or is subject to control by a cash sum, equal to at least EUR vehicles is that the SCSp does not regulatory authority. 12,000 in the case of Sàrl and EUR have legal personality. 30,000 in the case of SA, SAS or No similar requirements exist for a SCA, must be deposited with a Sàrl, SA, SAS and SCA are typically Sàrl, a SCS and a SCSp. (Luxembourg) bank account, in organized under the Soparfi cleared funds, in advance of (Société de Participations incorporation. Timing / steps Financières) or holding company It takes usually around two to three regime. The Soparfi is not governed days to incorporate a new company by any specific law but is a The SCS and SCSp, as an exception in Luxembourg. Many of the delays company incorporated under to this rule may be constituted experienced when setting up a general Luxembourg law and will in either by a private, non-notarial Luxembourg company relate to the principle be a fully taxable resident instrument between their members, KYC procedures that are required to company subject to ordinary or by notarial deed. No minimum be complied with by Luxembourg income tax that can take capital requirements apply in the lawyers, domiciliation agents, banks advantage of the participation case of the SCS or SCSp. and notaries. The usual steps in exemption in Luxembourg and that setting-up a Luxembourg company is eligible to double tax treaty are as follows: benefits. The first step consists in Corporate

identifying a bank and a Once set up, there are also ongoing held at the company's Luxembourg domiciliation agent (required if practical requirements to consider. office and (vi) company bank the client does not already have a In particular, any change to the accounts being in Luxembourg with place of business in Luxembourg articles of association of a Sàrl, a real cash movement passing to provide registered office SA, a SAS and a SCA, any capital through them. services) who can also help with increase or reduction (unless Implementing the adequate level of setting up a bank account in specific provision has been made for substance comes at a cost. Luxembourg. an authorised share capital), any However, one of the more The domiciliation agent and the merger or liquidation will require the important reasons to structure bank will need to be supplied with involvement of a public notary and private equity deals through AML/KYC information such a the passing of a notarial deed, Luxembourg in the first place is to notarised copy of the passport of which can take up to a couple of benefit from certain tax the beneficial owner and a utility days to arrange. advantages, which far exceed the bill of that person. costs of creating the tax substance. Next step would be the wiring of The SCS and SCSp are generally the share capital to the bank constituted by a private instrument Structuring the investment account with the bank issuing a between their members (the limited Thin capitalisation certificate confirming the partnership agreement) and no Luxembourg tax law does not blocking of the capital on the notary will need to be involved. provide for formal thin bank account pending the Incorporation process is therefore capitalisation rules applicable to incorporation of the company to generally relatively straightforward. holding activities. However, the the officiating notary who will It takes approximately one or two Luxembourg direct tax authorities incorporate the Company. days to establish a SCS or SCSp, have developed an administrative Without that certificate stating longer if a general partner has to be practice whereby a debt-equity that the funds are held in a set-up first. ratio of 85/15 is considered as a safe blocked account, the notary harbour for the financing of share cannot incorporate the company. Substance capital participations. The latter Once the Company will be One growing issue when structuring ratio assumes a market interest rate incorporated, the notary will issue a deal through Luxembourg is the on the debt portion whereas a certificate confirming to the requirement by foreign tax interest-free shareholder debt is bank that the capital can be authorities of real substance for considered as equity for the released, i.e. the blocking will be private equity and venture capital purposes of the debt-equity ratio. lifted. vehicles in order to benefit from the Borrowings for on-lending purposes The Company will receive legal desired tax status. The required level are disregarded for the personality at the incorporation of substance is determined primarily computation of the above debt meeting. The registration and by the tax rules of the country(ies) equity ratio but may be subject to filing of the incorporation deed where the assets are / will be other minimum capitalization rules, with the Company Register and located and will have to be such as for intra-group financing. the publication of the considered on a case by case basis. Under current tax practice laid as incorporation deed with the RESA down in the Circular Letter. (Recueil Electronique des Sociétés et Associations) are to Substance is therefore more a Contributing the equity occur after the incorporation matter of creating a tangible meeting. economic reality in Luxembourg Equity may be contributed to a than an exhaustive list of prescribed Luxembourg company in cash or, by The information to be filed on the requirements. Factors focussed on way of assets transfer. In relation to Company Register includes the by foreign tax authorities in asset transfer, almost any tangible beneficial owner(s) of the assessing substance generally or intangible assets may be company. The wide public and include: (i) active, Luxembourg contributed, provided that such the national authorities whose based employees, (ii) majority of assets are capable of credible and purpose is to combat money directors being private individuals reliable valuation. Eligible intangible laundering have access to this and Luxembourg tax resident, (iii) assets include securities, debt information. However, decision making process taking claims, goodwill in a specific shareholders of a SA are not place in Luxembourg, (iv) specific business and intellectual property published. Luxembourg office space and rights. utilities, (v) accounting and specific company documentation being Corporate

Where shares in an SA, SAS or SCA does not involve the issuance of compartmentalisation is not are issued partly paid up in shares. The absence of share statutorily recognised. If differential, consideration of an undertaking to issuance removes the requirement asset-specific leverage is envisaged make a contribution of assets, such that otherwise often applies to then structural asset ring-fencing assets must be fully transferred to make such transactions by way of may be advisable. the vehicle within five years. In notarial deed. This mechanism relation to an SA, SAS or SCA, the therefore provides a highly flexible Alphabet shares valuation of an equity contribution way of ensuring a company's equity of assets must be supported by an that can be actively managed so as Also frequently encountered in the up-to-date valuation report from to ensure on-going compliance with Luxembourg market is the use of an independent auditor. This required debt-equity ratios and can alphabet shares. This technique contribution-in-kind report therefore facilitate active portfolio involves the issuance of several requirement does not apply in management. classes of shares whose economic relation to a Sàrl but the valuation rights are not correlated to only of the assets must be certified to certain portfolio assets, but rather The corporate requirements to the notary incorporating the apply to a pool of assets as a whole make such contributions are: company. No report is furthermore and/or to specific investment enabling provisions in the articles of required when the contribution in periods. The use of a number of association; ordinary (non-notarial) kind consist in a receivable held by classes of alphabet shares of this shareholders resolutions or board the holder of a debt instrument nature allows the vehicle to redeem resolutions; and implementation by against the Company. individual classes of those shares at the directors. A short form appropriate points in time so as to contribution agreement may also effect transfers of value, by means Equity may also be contributed in be required depending on the of redemption payments to the form of share premium nature of the contribution. shareholders, following the receipt attaching to specific shares or in of value from the underlying asset the form of capital surplus Financing instruments pool. Such redemption payments do contribution (i.e. capital not attract a withholding tax under contribution without the issuance of Depending on the legal form, the proposed strategy in terms of Luxembourg law, if properly shares), with a great level of structured. flexibility. Any share premium or economic and voting rights, a capital surplus contribution shall be Luxembourg company can be fully subscribed for and paid up. financed through a variety of Redeemable shares equity, debt and hybrid Redeemable shares may be issued, instruments. Here are the different Sweet equity contributions (apports subject to the following statutory instruments typically used by requirements: redemption is en industrie) can also be made to Luxembourg companies outside the extent that the shares issued in authorised in the articles prior to external financing, ordinary shares issue of the redeemable shares; consideration are not considered as and intragroup loans: share capital from an accounting shares to be redeemed must be fully perspective and are not paid up; and redemption can only transferable. Such shares will Asset-tracking shares be funded from distributable profits benefit from governance and / or Where a vehicle makes multiple and reserves or the proceeds of a economic rights as set out in the investments with a commercial new issuance of shares made for articles of association. requirement for asset-correlated the purposes of the redemption. investment returns to different When funded from distributable classes of investors then asset reserves/profits, a figure equal to Equity contribution without tracking classes of shares and the redemption price must be issuing shares "account 115" equity contributions recorded in a non-distributable An alternative way of making or are entirely acceptable. Such asset reserve in the accounts of the increasing equity contributions to a tracking mechanisms are company. Any redemption premium Luxembourg company (of any contractually binding absent may only be paid where it will not description) is by means of an insolvency. Insolvency-proof cause the company's net asset "account 115 contribution". This compartments have statutory value (as set out in its most recent involves a contribution of value to recognition in the case of annual accounts) to fall below its the vehicle which is recorded to a Luxembourg securitisation vehicles subscribed share capital plus non special account/reserve in the or specialised investment funds. In distributable reserves. company's books and records which relation to unregulated, investment is characterised as equity but which holding vehicles, insolvency-proof Corporate

Mandatory redeemable preference Preferred shares parts bénéficiaires”) which do not shares Preferred shares carry the form part of the share capital. The In common with many other preferential right to receive a fixed articles of association determine jurisdictions, the equity in a percentage of profits before others. the rights that are attached to such Luxembourg investment holding In some cases, they also offer the beneficiary shares. These rights vehicle can be structured so as to preferential right to capital could conceivably be voting rights provide preferential distribution distribution before other classes. As and/or dividend rights or rights to rights to certain share classes. Such a result they often carry no voting participate in the liquidation or a rights may take the form of rights. combination thereof. It is possible mandatory redeemable preference to issue beneficiary shares with or shares which may bear a fixed or without the right to participate in Share with different nominal value variable, preferred, cumulative profits or with or without voting dividend right. Such shares would All companies can issue shares with rights. These beneficiary shares can often be redeemable at the option different nominal values. As regards be issued for a consideration in cash of the issuing vehicle in accordance voting rights, shares issued by SA, or kind, but can also be issued with its articles and carry a SAS and SCA will benefit from without consideration. preferred right to repayment at voting rights that are proportionate to their nominal value. With respect maturity. Mandatory redemption is Bonds and Convertible bonds often set at the expiry of a fixed to the Sàrl, majority requirements The bond issuance period may be term (such as 10 years). Such shares are determined based on the short, medium or long. Bonds can tend to have very limited voting proportion held by each shareholder easily be transferred to a third party rights and do not carry any in the share capital of the company and generate a fixed or variable additional profit entitlement above (irrespective to the number of interest rate. The interest they bear the preferred dividend. Whilst shares), thus achieving the same is payable periodically or at considered as equity from a outcome. Through the issuance of maturity, depending on the corporate law perspective, the shares carrying multiple votes, it is coupon's terms and conditions. prevalent debt features of MRPS possible to further affect the Bond issuance may include may lead to a debt treatment for proportionality between capital subordination as well as accounting and tax purposes. MRPS investments and governance rights, convertibility. All Luxembourg are mainly used for on-lending and to entrust the control of a companies can publicly issue bonds. activities and could therefore cater company with a minority. for a tax deduction and payment free of withholding tax. Free shares PECs and CPECs It is possible for SA, SAS and SCA to Hybrid instruments, such as Non-voting shares award free shares to certain Preferred Equity Certificate (PEC) and Convertible Preferred Equity Non-voting shares can be issued by employees and officers of the Certificate (CPEC), are often used SA, SAS or SCA and are, as their company and affiliated companies. in cross-border investment name implies, equity that does not An award of free shares is a right structures. They are designed to be have a vote, even though it is given to an individual to receive, regarded as debt at the level of a entitled to a share of the profits. subject to specific conditions being Luxembourg issuer from a The economic rights of the met, a certain number of shares. Luxembourg tax perspective whilst nonvoting shares must be The ability to issue shares without in some cases as equity for foreign specifically stated in the articles of consideration must be provided in tax purposes (notably for the US). association. The most typical rights the articles of association and the Because PECs and CPECs are for nonvoting share are identical to decision is to be taken by the board treated as debt for Luxembourg tax those of ordinary shares apart from of directors / management. purposes, interest expense may be the lack of a vote at general Conditions of the issue (such as imputed on PECs and CPECs meetings. Shares without voting vesting period and holding period) resulting in Luxembourg tax rights shall recover their voting are fixed by the general meeting of deductions, subject to recapture. In rights when the resolutions of the the shareholders. addition, interest paid on PECs and general meeting amend their rights. CPECs as well as the payment of a The purpose of non-voting shares is Beneficiary shares redemption premium, is generally to allow the holders of the ordinary In addition to shares, Luxembourg exempt from Luxembourg shares to maintain control. No- company law allows the issue of withholding tax. voting partnership interests can participation certificates, also also be issued by a SCS or a SCSp. called founder shares (“titres ou Corporate

Typical features of PECs and CPECs requires a majority of 66.67% of Redemption of shares include a 30-year term; a fixed shareholder votes (present or Share buy-back annual interest rate computed represented at the meeting) with a Whilst subscription by an SA, SAS or based on the “arm’s-length” quorum of shareholders SCA for its own shares is not principle, convertibility (as regards representing at least 50% of the permitted, it is permitted for these to CPECs) into shares of the issuer issued share capital. Quorum and vehicles (and for a Sàrl) to buy back at a fixed ratio established upon the the conditions of majority are freely their own shares which are then issuance of the CPECs, the determined in the articles of either cancelled or are held in possibility to be redeemed at fair association of the SAS. treasury (under certain conditions). market value under certain For a Sàrl, the ability to buy-back conditions, transferability Increases of share capital by an SA, the shares must be set out in its restrictions, deep subordination to SAS or SCA for cash subscription articles of association, the company other debt and no voting rights. (but not by way of a contribution in must have sufficient funds to do so kind) will generally be subject to and transfers into treasury requires Profit participating loan or asset statutory, preferential subscription shareholder approval as set out linked loan rights. No such statutory, above under "pre-emption rights", but is otherwise largely a matter of The main characteristic of profit preferential subscription rights exist contract. participating loans or asset linked in relation to an Sàrl although loans is that the lender's equivalent contractual rights may remuneration depends on the be included in its articles. The SA, In relation to an SA, SAS or SCA, an company’s profits or the income SAS and SCA statutory, preferential additional, generally applicable derived from a specific asset. The subscription rights may be waived statutory framework also requires profit-sharing feature may in by the shareholders individually. The authorisation to the Board (or the principle not be an obstacle to shareholder's meeting may also chairman or the general partner, as qualifying the instrument as debt. vote to reduce or cancel these applicable), by a general Provided the instrument is properly preferential subscription rights, shareholder(s) meeting approving drafted, and the return is not applying the same requirements as the terms and conditions, the aligned with the profit distributions for amendment to the articles, maximum number of shares, the of the company, the payment of which also requires a detailed report period of validity for the the variable interest is in principle of the reasons for limiting the authorisation of up to five years and not subject to withholding tax and preferential subscription rights to be the maximum and minimum is fully deductible. presented to the shareholders consideration to be paid, and a meeting by the Board. summary in the annual management report. Profit participating bonds and PECs having the same characteristics in Luxembourg companies may also terms of remuneration can also be state an authorised share capital in Shares bought back must be fully issued. their articles of association paid up and the buy-back must not authorising the board or the have the effect of reducing the chairman or the general partner to vehicle's net assets below the value Capital increase and preferential determine the terms of further subscription rights of its subscribed share capital plus share issuance within certain limits undistributable reserves. To increase the share capital of a and to carry it out. Such Sàrl, an amendment of its articles authorisation may be valid for a of association will be required. Such period of a maximum of five years, Buy-back of limited interests in the amendment requires a majority of and is renewable. In such case, the case of a SCS or SCSp can be freely at least 75% of the share capital in board or the chairman or the determined in the partnership issue. Any new investors (not being general partner may also be agreement. existing shareholders) must also be authorised in the articles to remove approved by existing shareholders or limit the preferential subscription It should be further noted that the holding at least 75% (the majority rights of the shareholders. general civil law principle of equal can however be decreased to 50%) treatment of shareholders will of the issued share capital. Requirements regarding capital require that any share buy-back increase and preferential needs to be proposed equally to Where, in relation to an SA or an subscriptions in the case of a SCS or each shareholder in the same SCA, an increase of issued or SCSp can be freely determined in situation. authorised share capital requires the partnership agreement. the articles to be amended, this Corporate

Reductions of capital exception of the SCS and SCSp) are the decision to distribute must be Reductions of capital may be obliged to allocate to a non- taken within two months of that carried out by way of a board distributable reserve an amount balance sheet. At the time the resolution or a shareholders' equal to 5% of the company's net annual accounts are to be resolution (with the same quorum profit per annum. This obligation approved, the statutory auditor (if and majority requirements as for continues until the reserve has any) must confirm to the board or the amendment of the articles). If accrued to a figure equal to 10% of the chairman or the general the reduction involves repayment to the company's share capital (share partner, as applicable, whether or shareholders or waiver of an premium and capital surplus shall not these conditions were met. obligation to pay up shares, creditor not be taken into account for the purpose of this threshold). protection principles apply in Dividend payments attract relation to SA, SAS and SCA which Luxembourg withholding tax but it allow any creditor whose claims Dividend distribution may be reduced or exempt in predate the publication in the RESA After payment or provision for debt certain circumstances. (Recueil Electronique des Sociétés liabilities and allocation to this non- et Associations) of the distributable reserve, the company shareholders' capital reduction Structuring the governance may then declare and pay annual resolution, to apply to the court for The importance of shareholders and interim dividends. a protective order within thirty days agreements following such publication. Purpose In relation to standard, unregulated Luxembourg company law affords companies (not constituting an That application must be for an relatively few rights to shareholders investment fund) annual dividends order for the provision of security for with the result that a shareholders are declared by the shareholders at the creditor's claim and the court or joint venture agreement can be their annual general meeting may only reject such application if it used to confer additional rights and approving the company's annual considers the creditor already has powers on shareholders, in accounts, provided that those adequate protection or if such particular particularly regarding the accounts demonstrate that the security is unnecessary in view of transfer of shares (pre-emption proposed final, annual dividend the net asset value of the company. rights, drag-along rights and would not cause the company's net No payment may be made by the tagalong rights, ….), rights of veto asset value to fall below the level its company to the shareholders and corporate governance matters. subscribed share capital plus following a capital reduction within distributable reserves. The amount this thirty day period, or until any of the final, annual dividend may Ensuring compliance objecting creditor applying to the not exceed distributable profits, court has had its claim settled or To ensure compliance with the reserves (and carried forward the court dismisses the application. commercially agreed position in profits) net of any current or practice, it is better to replicate carried-forward losses and certain clauses from the Unlike in certain other jurisdictions, allocations required to the non- shareholders or joint venture creditor protection enables distributable reserve(s). agreement in the articles of application by objecting creditors to association. If the clause appears the court. It does not require the Interim dividends may also be solely in the shareholders or joint positive application by the company declared by the board of directors/ venture agreement, the remedy for itself for the court's approval of the managers (or the chairman or the any breach will generally be a claim proposed reduction. general partner, as applicable), for damages with the related provided that the proposed uncertainties associated with No specific creditor protection distribution does not exceed the litigation risk including any provisions apply in relation to profits of the company in the difficulties of evidential proof. The reductions of share capital of Sàrl, current year (plus net profits availability of a court order to SCS or SCSp. carried-forward) net of any current compel mandatory performance or carried-forward losses and any (rather than a claim for damages sums required to be allocated to following non-compliance) will Distributions to investors non-distributable reserve(s). In often be uncertain. Legal reserve declaring any interim dividend, the After payment or provision for directors/managers must prepare a In many circumstances, the relevant debt obligations (including balance sheet showing the net shareholders will prefer (at least at any intra-group debt financing), all funds available for distribution and the outset) that all parties simply Luxembourg companies (to the Corporate

comply with their agreed joint may become necessary. This the right to a shareholder to position, rather than to seek generally applicable duty has two appoint one or several directors / financial compensation for breach, specific, additional areas of managers are in principle not after the event. Thus, the matters application in the corporate effective under Luxembourg law. set out below will often be included context: abuse of majority and However, in order to remedy such in the articles of association, breach abuse of minority. ineffectiveness, different classes of of which results in immediate shares may be created in the invalidity. Those constitutional articles of association in order to Abuse of majority may occur both documents can also be relied on secure that each shareholder or in actions taken by shareholders against third parties by reason of group of shareholders (representing and in actions taken by directors if their public filing and consequent each a class of shares) may appoint those actions are: registration at the Luxembourg one or more directors/managers on companies registry, in the case of taken contrary to the general the board. Each class would be Sàrl, SA, SAS and SCA. A best corporate interests of the entitled to propose one or more shareholders or joint venture company; candidates for a directorship. The agreement, in contrast, being a are taken either with the sole and shareholders would elect the private contract, cannot be relied exclusive intention to favour or directors/managers among the on against third parties. prefer the majority shareholders candidates proposed by the to the detriment of the minority shareholders of such class. This or to have, and to be intended to formal procedure is necessary in However, as the articles of have, a damaging effect on the order to circumvent the rule association are publically available minority shareholders. according to which the power to on the Luxembourg companies' appoint directors/managers is registry, a balance between the exclusively vested in the general commercial confidentiality on one Abuse of minority refers to a meeting of shareholders acting as a hand and the reliance against third situation where minority global corporate body. parties and constitutional effect on shareholders refuse to take the other hand, may need to be decisions which are in the best considered. corporate interests of the company Voting undertakings (which are and includes both voting under the recognised by law) whereby all articles and taking decisions within shareholders undertake to vote in Duration the contractual framework of the favour of directors / managers Shareholders or joint venture shareholders or joint venture nominated by a specific shareholder agreement are subject to a general agreement. Such refusal must be can also be implemented. principle of civil contract law that characterized by bad faith and be no contract can be made for an taken for exclusively self-referential, Management clauses infinite duration. This does not non-corporate reasons, contrary to necessarily require that a fixed the company's best corporate The board / general partner is in number of years be set out in the interests and causing damage to charge of determining the agreement. As many shareholders the company out of proportion to guidelines for the company’s or joint venture agreements are positive effects sought by the management and business constituted for the purpose of a minority. development. Contractual specific project with a required provisions in a shareholders or joint period of time or for a set venture agreement aiming at investment period, reference to Governance arrangements delegating the decision taking to a such a period for determining the Governance arrangements would CEO or an executive committee duration of a shareholders or joint typically involve voting would in principle be valid. Other venture agreement is an undertakings, veto rights in favour down-stream delegations would appropriate approach. of a class of shareholder or class of only be acceptable provided that directors/managers and rights to the management may not be nominate directors / managers. deprived of any power to interfere in Duty of good faith the management and to act in the In relation to any Luxembourg law interest of the company. governed contract, an overriding Appointment of directors / duty of good faith applies between managers the parties not only in their Private equity and venture capital Veto rights – reserved matter performance of the contract but investors would usually have the Board level also in pre-contractual matters and rights to appoint directors / Different classes of directors/ in any ultimate enforcement that managers. Provisions that reserve managers may be created, each or Corporate

some of them benefiting from Veto rights certain veto rights on matters falling within the competence of Corporate affairs the board and that are of particular interests for the shareholder(s) that amendment to the constitutional documents "appointed" them. alteration of the financial year end or of the accounting policies

Thresholds and majority variation in the authorised or issued share capital requirements applicable to declaration or distribution of dividends resolutions to be taken by the board can also be structured in order to approval right of any transfer of shares, pre-emptive right, exercise of drag ensure that no decision could be along and tag along rights taken without the attendance or listing on an international stock exchange the approval of the relevant class of directors/managers. appointment and change of the auditors appointment or removal from office of any director Shareholders level liquidation, winding-up or dissolution Different classes of shares may also be created. Each shareholder or category of shareholders (e.g. majority shareholder, sponsor, minority shareholder, management, Material changes …) will hold a class of shares sale, transfer, leasing, licensing or disposal of all or a substantial part of the entitling it/them to specific voting company / subsidiary's business, undertaking or assets whether by a single or economic right. transaction or series of transactions, related or not transfer of any shares in the capital of subsidiaries In relation to general meeting of shareholders, the statutory entry into a partnership or joint venture arrangement, merger or similar quorums and majority requirements may be increased so as to ensure demerger, division or split of the company or subsidiary that no key decisions can be taken without the affirmative vote of the relevant category(ies) of shareholder(s). Each class of shares Commitment may also have veto rights over certain matters. They arrangements adoption of or any amendment to the operating budget are generally quite effective entry into any contract or arrangement (including mortgages or charges) provided they are included in the which is unusual, onerous or otherwise outside the normal course of trading articles of association of the company. making of any payment otherwise than on an arm's length basis entry into by any (new) borrowings facility, the variation of the terms of Veto rights held by private equity or any borrowing facilities or the issue or redemption of any loan capital prior venture capital investors usually to its due date cover the following matters (either entry into any commitment or arrangement which is material to the at the level of the investment business of the company or subsidiary vehicle or of the subsidiaries). granting of any guarantee (other than in relation to the supply of goods or services in the normal course of trading) or the creation or issue of any debenture, mortgage, charge, pledge or other security (other than liens arising in the course of trading) entry into any lease, contract, memorandum or other agreement for the licence, lease, sale or purchase of land or real property establishment of any pension, profit sharing, bonus or incentive scheme initiation and the subsequent conduct of any litigation, arbitration or mediation proceedings Corporate

Voting rights majority and the general principle share capital may request the General principle of good faith. adjournment a general meeting of As a general rule, one share gives the shareholders. The request should be addressed in session to right to one vote. It is however Minority action the board of director / general possible to issue shares with Shareholders of an SA or an SCA different nominal values with partner and for a maximum period representing at least ten percent of of four weeks. related pro rata voting rights the share capital and/or of the (please see above under the voting rights entitled to be financing instruments section exercised, have the rights to initiate Enhancing minority shareholder (preferred shares)). an individual actio mandati (on protection behalf of the company) against Improving the protection of Voting arrangements members of the board of directors minority shareholders can be Voting arrangements among having defaulted in their duties. achieved by stipulating certain shareholders are valid and can be provisions in a shareholders' agreement or in the company’s enforced to the extent that (i) they Independent investigation do not infringe the law or the articles of association (e.g., Minority shareholders of all types of information rights, right to have a corporate interest of the company companies representing at least ten and (ii) shall not be construed as representative appointed to the percent of the share capital and/or management board, provisions for granting the management of the of the voting rights entitled to be company or of a subsidiary the right a more stringent majority for exercised, have the rights to address certain decisions, veto rights on to give instructions to the questions on the company and shareholders. certain matters, approval clauses or affiliated entities’ affairs. In the share transfer restrictions). absence of a response by the Suspension of voting rights management, an independent Profit allocation If provided by the articles of expert may be appointed by a In principle, the shareholders are association, the management can Luxembourg court to establish a free to determine profit allocation be authorized to suspend the voting report on the matters that were the as they consider commercially rights of a “defaulting” shareholder object of the questions. appropriate, subject only to a under the conditions and formalities generally applicable, longstop specified in the articles of Convening of general meetings prohibition on clauses which association. Suspending the voting Shareholders of an SA or an SCA purport to totally exclude certain rights of defaulting shareholders holding ten per cent of the shareholders from participation in may impact quorum requirements registered share capital may profits or exposure to risk of loss ( for holding a general meeting and request a shareholders’ meeting in clauses léonines). approval requirements for ballot writing, indicating the purpose of issues. Shareholders whose voting the meeting. Shareholders rights have been suspended still representing ten per cent of the Transfer of shares have the right to attend meetings. registered share capital may also Introduction request that a certain matter be Shares in a SA, SAS or SCA are in Waiver of voting rights put on the agenda of a principle freely transferable. A shareholder may agree to waive shareholders’ meeting. However any transfer of shares in full or in part its voting rights on performed in violation of the transfer restrictions included in the a permanent or temporary basis. With respect to the S.à r.l., the articles of association of a SA, SAS This option may use to threshold to convene a or SCA shall be null and void. accommodate certain regulatory shareholders' meeting is set at fifty obligations that a shareholder may per cent of the registered share be subject to. capital. Threshold for an SAS can be Shares in a Sàrl are not freely freely fixed in the articles of transferable to non-shareholders. Minority shareholders rights association. Majority shareholder(s) / private The prior approval of at least equity or venture capital investor(s) Adjournment of a general meeting seventy-five percent of the share do not owe a fiduciary duty to the of the shareholders capital (this can be reduced to fifty minority shareholders. Luxembourg Shareholders of SA, SAS and SCA percent) is required. Stricter law however provides for certain representing ten percent of the consent thresholds may also be limitations such as the abuse of contractually agreed in the articles Corporate

of association. In the case of a proposed future transferees. Unless advantage of entering the transfer transfer to a fellow shareholder, no supported by a proprietary security restriction in the articles of such consent is required. interest, the most that can be done association is that the restrictions is to include a contractual provision will apply to all future shareholders, in the shareholders' agreement / whether parties to the agreement Transfer of shares in a SCS or SCSp voting agreement where all parties or not to the shareholders or joint can be freely organized in the agree to vote in favor of such venture agreement. partnership agreement. transfer. Conclusion Approval and pre-emption clauses Good-leaver and bad-leaver It is important to ensure both the In the Sàrl, the approval clause is provisions private equity or venture capital automatically provided for by law One of the most important investors and, as the case may be, and the shares in a Sàrl are no freely elements of a management management teams receive proper transferable to nonshareholders. incentive program is the leaver advice to ensure that: scheme, which makes provisions the deal is structured in the most Approval clauses and pre-emption concerning the compulsory transfer tax efficient manner possible and clauses in a SA, SAS or SCA are valid of the manager’s shares if the that the commercial deal works provided that the nontransferability manager ceases to be active for the for all parties; and period (which starts from the date company. Technically, this is the deal is structured in a manner of the transfer of approval request structured by call and/or put which is effective under or the invitation to exercise pre- options. The validity of such clauses Luxembourg law and which works emptive rights) does not exceed is expressly recognized by article for both tax and legal purposes. twelve months. After such period, 1855 of the Luxembourg civil code. the parties will have to find an arrangement to allow the departing If not, either party could end up Efficiency party to leave the company. making an expensive mistake, If a share transfer restriction clause particularly if a falling out were to is valid, it is however not necessarily occur between the management Lock-up effective in practice. Indeed, future team and the sponsor at a later Lock-up clauses in a SA, SAS or SCA shareholders are not automatically point when, for example, the should be reasonably limited in time bound by an existing shareholders investors could (if not properly and in the corporate interests of the or joint venture agreement and advised at the outset) find company. No such requirements shareholders or joint venture themselves trapped, should they exist for Sàrl. agreements are not enforceable not have taken into account the against third parties (except in case restrictions for the transfer of of fraud of the latter). shares to non-shareholders. Drag-along and tag-along clauses

Drag-along and tag-along clauses are in principle valid under Therefore, when a party transfers its Luxembourg law (article 1855 of the shares in breach of the transfer Luxembourg civil code formally restrictions, the transferee (who recognized the validity of was not aware of the transfer arrangements organizing the restrictions) becomes the legal transfer of shares that do not have owner of such shares, though the as sole purpose the control of transferor may be sued for participation in profits and losses). damages for breach of contract or, as the case may be, be required to pay a contractual penalty. The statutory framework regarding the transfer of shares applicable to Sàrl (i.e. the prior approval of new Inserting the transfer restrictions shareholders by at least seventy five into the articles of association (or fifty) percent of the share would improve their enforceability capital) however results in an area against third parties - transferees of sensivity in relation to drag-along will not be able to claim that they and tag-along provisions. It is not were unaware of the transfer possible to pre-approve a possible restrictions as the articles of transfer blind as to the identity of association are public. Another Corporate

Background: Recognition: Bertrand specialises in corporate Very user-friendly and responsive to law, advising hedge funds, private client needs. equity and real estate clients as well Legal 500 EMEA, 2020 as multinational companies in Culturally sensitive and pragmatic. connection with mergers and acquisitions, joint ventures, Legal 500 EMEA, 2020 structuring of international Recommended Lawyer for the transactions, reorganisations, Corporate and M&A practice in refinancing and corporate finance. Luxembourg. He has working experience in The Legal 500 Europe, 2019 Belgium, England and the United The strength of Bertrand is that he States. understands the client's needs first and also the client's business, which Bertrand is also a lecturer on civil enables him to make proposals. law and corporate governance at Client feedback 2019 T: +352 2712 2029 the University of Luxembourg and He is commercially orientated and E: [email protected] regularly speaks at seminars in he easily understands areas that Practice Areas: Corporate, Digital Luxembourg on a broad range of need to be focused on, it is a Blocakchain and Fintech, Equity topics, including recently on pleasure to collaborate with him. Capital Markets, Mergers and directors’ duties. Director of an international Acqusitions and Private Equity fiduciary company, November 2017 Admitted in: Prior to joining Ogier in 2016, 2000 – Brussels, Belgium (not Bertrand was a corporate partner Recommended Lawyer for the practising) in the Luxembourg office of a global Corporate and M&A practice in Luxembourg. 2006 - Luxembourg elite firm and also worked in a magic-circle firm in Luxembourg The Legal 500 Europe, 2018 2013 – England & Wales and London. We truly appreciate the efforts and support of you (Bertrand Geradin, Partner) and your team. We look He received his LLM in ICT Law and very impressed and look forward to Management from the University of working with you again on other Namur, having previously studied matters. law at the University of Louvain-la- Client feedback 2018 Neuve and University of Saint-Louis as well. He also has a Master’s degree in tax from the Solvay Business School. Legal services in: Ogier provides practical British Virgin Islands advice on BVI, Cayman Cayman Islands Islands, Guernsey, Jersey Guernsey and Luxembourg law Hong Kong through our global network Jersey of offices across the Asian, London Caribbean and European Luxembourg timezones. With a growing Shanghai team of more than 500 Tokyo people around the world, we regularly win awards for innovation, client service and quality. Regulatory information can be found at ogier.com

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