Luxembourg: The Luxembourg Company Law Is Finally Modernised

On 13 July 2016, the Luxembourg Parliament voted the long-awaited law to modernise the law of 10 August 1915 on commercial companies, commonly referred to as the Company Law¹. The Law enacted a reform of the private limited liability company (S.à r.l.) in order to align it with the regime applicable to public limited liability companies (S.A.) and introduced a new legal form of commercial company, the simplified public limited liability company (S.A.S.). The Law also introduced measures aimed at simplifying intra-group funding flows. Corporate governance and the conduct of business in general have also been improved. Finally, certain measures dedicated to the private equity sector were enacted. Although not detailed here, other measures worth mentioning include: the improvement of the regime of usufruct/bare-ownership of shares, the rights of minority shareholders and the introduction of a regime relating to the conversion from one type of company into another.

How has the S.à r.l. changed?

The reform aims to make the S.à r.l. a more flexible and easier to use vehicle, in particular in the context of its widespread use as a SOPARFI (financial holding company) in Luxembourg. S.à r.l. managers will likely welcome the changes, having been granted increased power to run their business and to make financial decisions regarding the increase (authorised capital) or decrease (cancellation of redeemed shares) of capital or the distribution of interim dividends.

The S.à r.l. has become a more flexible type of company for its shareholders as well. Shareholders are now entitled to make contributions in industry, to create beneficiary shares or redeemable shares and to transfer their shares to non-shareholders under more flexible rules. When it comes to figures, EUR 12.000 is the new amount of minimum share capital, 100 is the maximum number of shareholders and 60 is the number of shareholders triggering the obligation to hold shareholders' meetings or to appoint a statutory auditor. When meetings are held, an individual representing one or more shareholders must always be present in Luxembourg, an obligation which will require a certain level of organisation from companies.

What does the new S.A.S. look like?

The newly introduced simplified joint stock company is built on some of the existing S.A. rules, but it is also meant to offer greater flexibility and simplicity in its organisation and management. Shareholders are free to determine the economic and voting rights attached to the shares, the conditions for the transfers of shares or the rules relating to the division of powers between the president and the general meeting in the by-laws. Only a limited number of decisions are reserved to shareholders' meetings. The company is run and represented by a president, who can appoint a director in charge of the daily management. The S.A.S. cannot issue shares to the public, but it can be financed through private or public issuance of bonds and other debt securities.

How has intra-group funding been made easier?

The Law introduced a number of measures across the Company Law and the Civil Code facilitating the access of Luxembourg companies to (external) capital (all types of companies can issue bonds to the public, tracking shares and convertible instruments). Some provisions are meant to ease and speed up intra-group financing operations. As an illustration of the latter and in certain circumstances, an audit report is no longer required for the issuance or conversion of convertible instruments or for capital increases of S.A., S.C.A. and S.A.S. When authorised, companies can issue new shares below the par value of the existing shares without nominal value.

Additionally, there is no longer a cap on the proportion of non-voting shares that can be issued, nor restrictions as to their economic rights. S.à r.ls can now issue beneficiary shares. And lastly, the management can be empowered to increase the capital as from the date of the authorisation, without waiting for the publication of the deed and thus improving reaction time when faced with funding needs.

The repatriation of profits or proceeds from investments will also be expedited, especially for S.à r.ls, where decisions on the distribution of interim dividends or the redemption of redeemable shares lie with the managers. In the case of single shareholder companies, the one-step dissolution, already carried out in practice, has been formally recognised without the need to follow a separate liquidation process.

How have corporate governance and business conduct been simplified?

The amended Company Law revisits certain rules relating to the corporate governance in order to bring some antiquated legal provisions in line with the current practices. Attendance at meetings by means of video- or conference call and unanimous decisions by written resolutions have finally been enshrined in the law with respect to the S.à r.l. Going forward, shareholders' meetings will have to be carefully planned and orchestrated. Governance best practices will need to be implemented to ensure compliance with the new provisions.

Other measures aim to facilitate and accelerate the conduct of business for Luxembourg companies through increased involvement of management and less interference from shareholders. For instance, managing bodies have gained extended powers to increase or decrease the share capital, to distribute interim dividends or to transfer the registered office of the company from one city to another, regardless of the legal form of the company. Moreover, the board of directors of an S.A. can delegate powers to an executive committee or a general manager.

What about Luxembourg private equity?

The Law represents the opportunity to legislate some of the common market practices already developed in Luxembourg in the context of private equity investment vehicles. Such measures include the introduction of tracking shares, as well as a number of other provisions relating to individual shareholder voting rights. Rules facilitating management/employees incentive plans have also been introduced.

When and how does your company need to comply?

The modernisation Law will enter into force following its publication in the Official Gazette. Companies in existence prior to the entry into force are given 24 months to comply with the new provisions. In the interim, they will continue to be subject to the former legal provisions. The management body is authorised to make clerical updates to the by-laws to render them compliant. If the changes are more substantial, a shareholders' meeting will be required. If the company fails to render its by-laws compliant with the modernised Company Law, non-compliant statutory clauses are invalidated and mandatory legal provisions applied.

What else is in the pipeline?

A separate bill adopted on 13 July 2016 has created a new type of Luxembourg company: the simplified private limited liability company (société à responsabilité limitée simplifiée, Sàrl-S). The Sàrl-S was introduced in the hope it will give start-ups a boost. The Sàrl-S has a specific and restrictive regime: only individuals can hold shares or manage the company, and the purpose of the company is exclusively commercial. In order to ensure a less costly, more expedite and efficient setup, the Sàrl-S can be incorporated with a capital of EUR 1 and by private deed. The Sàrl-S will be available from January 2017.

Footnote

1. The law on the modernisation of the amended law of 10 August 1915 on commercial companies (the "Company Law") and amending the Civil Code and the amended Law of 19 December 2002 on the trade register and companies and the accounting and annual accounts of companies (the Law).

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