Corporate Governance

The Luxembourg law of 10 August 1915 on commercial companies, as amended (‘Companies Law’) is the main source of corporate governance-related legislation. Disclosure obligations are further defined in the law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of undertakings (‘2002 law’).

In addition, issuers whose shares are listed and admitted to trading on a regulated market within the meaning of Directive 2004/39/EC on markets in financial instruments, as amended, are subject, among other things, to:

• the Luxembourg law of 24 May 2011 relating to the exercise of certain shareholder rights in general meetings of listed companies, as amended (‘Shareholder Rights Law’);
• the Luxembourg law dated 11 January 2008 on transparency requirements for issuers, as amended (‘Transparency Law’);
• the EU Prospectus Regulation ((2017/1129) and the Luxembourg law of 16 July 2019 on prospectuses for securities, as amended (‘Prospectus Law’); and
• the Market Abuse Regulation (EU) 596/2014 and the Luxembourg law of 23 December 2016 on market abuse, as amended (‘Market Abuse Law’).

The Luxembourg supervisory authority of the financial sector, the Commission de Surveillance du Secteur Financier (CSSF), regularly publishes circulars, annual reports and FAQs on corporate governance-related topics.

In relation to issuers that are listed and/or admitted to trading on the Official List of the Luxembourg Stock Exchange (‘Luxembourg issuers’), the X Principles of Corporate Governance and the rules and regulations of the Luxembourg Stock Exchange apply.

Luxembourg laws – notably the Companies Law and the 2020 law – stipulate certain basic corporate governance related-regulations which apply mandatorily to all commercial companies. In addition, there are mandatory legal provisions applicable to issuers only (please see question 1.1).

The X Principles, applicable to Luxembourg issuers, provide for mandatory principles, recommendations on a ‘comply or explain’ basis and non-binding guidelines.

Corporate governance-related legislation is drafted either at a EU level or at a national level by the relevant legislative bodies. In Luxembourg, the main body responsible for enforcing corporate governance regulations applicable to issuers is the Luxembourg supervisory authority of the financial sector, the CSSF. The CSSF has the authority to pronounce administrative sanctions and measures, such as specific orders, public warnings and fines.

The X Principles are drafted by the Luxembourg Stock Exchange, which also supervises compliance by Luxembourg issuers.

Most rules and codes concerning corporate governance apply to issuers. In Luxembourg, issuers are most commonly organised as a public limited liability company (sociéte anonyme).

Less stringent corporate governance laws and practices apply to entities whose securities are listed and admitted to trading on the Euro MTF operated by the Luxembourg Stock Exchange, as well as investment fund structures.

Generally, laws and regulations concerning basic corporate governance-related issues are mandatory for all issuers. The more detailed recommendations of the X Principles generally apply a ‘comply or explain’ approach, in order to give Luxembourg issuers more flexibility with respect to the concrete set-up of their corporate governance structure and practice. However, all main principles of the X Principles are mandatory.

The Luxembourg laws applicable to commercial companies generally:

• cover the basic set-up and responsibilities of the management and shareholders;
• regulate conflicts of interest;
• provide for certain disclosure obligations; and
• regulate auditing.

Issuer-specific legislation addresses issues such as:

• shareholder engagement;
• board remuneration;
• transparency;
• takeover offers;
• sell-out and squeeze-out; and
• market abuse.

The X Principles also cover these issues, but focus further on board composition, professional ethics, corporate social responsibility and risk management.

The shareholder base of an issuer is typically diverse, with a significant proportion of free float. Both direct and indirect shareholdings through several group entities or trusts are common.

Commercial companies are controlled by their shareholders, which exercise their rights by means of resolutions of the general shareholders’ meeting. However, directors may exercise their mandates freely and generally are not bound by instructions of the shareholders.

A sociéte anonyme (SA) may be organised in:

• a one-tier structure, where the main management body is the board of directors; or
• a two-tier structure, where the management responsibilities are shared between the supervisory board and the management board.

In a one-tier structure, the board of directors may also resolve to delegate almost all or parts of their management functions to a chief executive officer, a management committee or a day-to-day manager, if so provided in the articles of association. The one-tier structure is the default structure if no choice is made. In Luxembourg, directors may be individuals as well as legal entities.

In a one-tier structure, the board of directors comprises at least three members if there is more than one shareholder. The X Principles recommend a maximum number of 16 board members.

In a two-tier structure, the management board is vested with the widest management powers, unless matters are reserved by law or the articles of association to the supervisory board or the general shareholders’ meeting. The management board comprises at least three members. This number may be reduced to one manager if the company’s share capital is less than €500,000. The supervisory board must be composed of at least three members and must monitor the actions of the management board and provide advice, but refrain from interfering or influencing the management.

The X Principles require the board of directors of a Luxembourg issuer to establish special committees necessary for the proper execution of its remit. Notably, the X Principles recommend, on a ‘comply or explain’ basis, the establishment of an audit committee, nomination committee, remuneration committee and corporate social responsibility committee, as well as the involvement of non-executive and independent directors in such committees. Public interest entities must have an audit committee.

The X Principles require the appointment of an appropriate number of independent directors. Their number shall reflect the nature of the company’s business and the structure of its shareholder base, and may not be less than two.

The company may define and publish their specific independence criteria. However, the independence criteria recommended by the X Principles are aligned to the European Commission Recommendation of 15 February 2005 on the role of non-executive directors of listed companies and on board committees. These recommendations apply a substance over form approach and include a non-exhaustive list of criteria, such as:

• no previous or current employment, business or family relationship;
• no management activities in the last five years; and
• a tenure of less than 12 years.

The X Principles require the board to be composed of competent, honest and qualified persons and recommend, on a ‘comply or explain’ basis, to take account of diversity criteria – including criteria relating to professional experience, geographical origin and the appropriate representation of both genders – aside from overall skill-based criteria.

In a one-tier structure, directors are appointed by resolution of the general shareholders’ meeting. In a two-tier structure, the members of the supervisory board are appointed by resolution of the general shareholders’ meeting and the members of the management board are appointed by the supervisory board, unless the articles of association provide otherwise.

There are no mandatory selection criteria for board members of commercial companies generally. However, ineligible are minors, wards and persons who have been barred by court order following serious misconduct in connection with bankruptcy.

In a one-tier structure, directors are removed by decision of the general shareholders’ meeting. In a two-tier structure, members of the management board are removed by decision of the supervisory board and, where provided for in the articles of association, by the general shareholders’ meeting.

The directors of an SA are appointed for a term which may not exceed six years. However, they may be re-elected after this period. The X Principles recommend a maximum term of 12 years for independent directors.

The X Principles recommend the appointment of board members who provide complementary experience and knowledge that is useful to the company though their diverse backgrounds. The composition of the board shall take into account the specific features of the company and its activities – notably, the company’s business lines and geographical diversity.

The primary responsibility of the board of directors (one-tier structure) and the management board (two-tier structure) is the careful, diligent and wise management of the company. The supervisory board (two-tier structure) is responsible for the permanent supervision of the management exercised by the management board.

The board of directors or the management board has the most extensive powers to pursue the object of the company, with the exception of those powers reserved by law or the articles of association to the general shareholders’ meeting or, where applicable, the supervisory board.

(a) Strategic planning?

The main responsibility for the company’s strategic planning lies with the board of directors or the management board. The X Principles require the board of directors of Luxembourg issuers to specifically decide on the values and objectives of the company, its strategy and the key policies to be implemented.

(b) Risk management?

The X Principles require the board of directors of Luxembourg issuers to decide on the level of risk acceptable to the company and to establish the main categories of risk faced by the company (eg, financial, strategic, operational, legal and reputational risks). The X Principles further require the board of directors to consider non-financial risks and to integrate corporate social responsibility aspects in their business strategy.

(c) Major and related-party transactions?

Any material transaction between an issuer and a related party is subject to the prior approval of the board of directors/management board.

(d) Conflicts of interest?

Directors shall avoid any conflict of interest. Under the Companies Law, a conflict of interest arises where a director has a direct or indirect financial interest that conflicts with that of the company.

The chairman of the board has certain responsibilities relating to the procedure of board meetings. Independent directors and non-executive directors, if any, shall not be responsible for the management of the company; while executive board members may also execute management functions in the company. In practice, board members – both independent and executive – often have different areas of expertise, but share the same responsibilities with regard to their function as board members.

Directors’ duties are generally owed to the company. The main duties of directors and other members of the management bodies are as follows:

• to manage the company with a certain level of diligence and prudence (en bon père de famille) on a best efforts basis and without the requirement to meet a specific result;
• to ensure that the interests of the company prevail over their personal interests and avoid any conflicts of interest;
• to ensure that they have and maintain the necessary skills, qualities and time capacity; and
• to avoid the disclosure of any confidential information.

Directors and members of the management board and of the supervisory board may be held liable as follows:

• towards the company, if they committed a fault that damaged the company;
• towards the company or third parties, if their conduct was in breach of the applicable law and/or the articles of association. In this case, shareholders may individually act against the directors or members of the management committee if they prove to have been independently prejudiced.
• in accordance with tort regulation; and/or
• in accordance with the provisions of the Criminal Code or the criminal provisions of the Companies Law.

The articles of association may limit the powers of the board of directors or supervisory board/management board and reserve specific matters to the general shareholders’ meeting. In addition, the following rights ensure that shareholders have a certain level of control with respect to the company’s management and operation:

• to appoint the auditor(s) of the company;
• to approve the annual resolution on the grant of discharge to the board of directors (one-tier structure) or the supervisory board and management board (two-tier structure) on the basis of the company’s annual accounts. Shareholders holding at least 10% of the votes at the general shareholders’ meeting and having resolved on a discharge may bring a liability action on behalf of the company;
• to decide on:
• • any changes to the corporate object or the articles of association;
  • capital increases and reductions;
  • the redemption of shares;
  • the exclusion of shareholders’ preferential subscription rights; and
  • the creation of authorised share capital; and
• to approve resolutions on mergers, divisions as well as the liquidation of the company.

Shareholders exercise their rights at the general shareholders’ meeting. General meetings are convened by the board of directors or the supervisory board/management board. Shareholders holding 10% of the share capital of the company may request that a general meeting be convened.

The general shareholders’ meeting appoints the members of the board of directors (one-tier structure) or the members of the supervisory board (two-tier structure), and may remove them from office at any time.

In Luxembourg, shareholders are liable only up to the amount of their participation in the share capital and generally do not owe any duties to the company.

Generally, most civil and criminal liabilities are addressed to the management. Shareholders can be liable for the acts or omissions of the company if they appear to have acted as de facto managers – that is, if the relevant shareholder has regularly and independently performed acts or duties normally performed by directors or represented the company. However, this liability is not limited to shareholders, but applies to any person who has de facto managed the company.

Generally, new shares to be subscribed for in cash must be offered on a pre-emptive basis to existing shareholders in the proportion of the capital represented by their shares. This pre-emption right can be limited by resolution of the general shareholders’ meeting. Such resolution can also be passed in advance – for example, in connection with the approval of authorised share capital or employee participation schemes.

Shareholders of issuers must notify the issuer and the Commission de Surveillance du Secteur Financier when their shareholding reaches, exceeds or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 33.33%, 50% and 66.66% of the total shareholding of the company.

The involvement of institutional investors and activist shareholders is encouraged by policy makers and is considered a fundamental requirement to achieve improved corporate governance within corporations.

In 2019, Luxembourg transposed the Shareholder Rights Directive (EU) 2017/828 (‘SRD II’) into national law. Under SRD II, institutional investors must:

• develop and disclose their engagement policy; and
• publicly disclose how their equity investment strategy aligns with the profile and duration of their liabilities, and how it contributes to the medium and long-term performance of their assets.

Shareholder activists typically use a variety of legal and commercial tactics. Notably, Luxembourg law provides for certain minority rights, such as the following:

• Shareholders holding at least 5% of an issuer’s subscribed capital may put items on the agenda of the general meeting and table draft resolutions for items included or to be included on the agenda of the general meeting;
• Shareholders owning at least 10% of the share capital or voting rights may request information on management decisions with respect to operations of the company and its subsidiaries, and may apply to have expert(s) appointed in case the management does not respond; and
• Shareholders representing at least one-tenth of the capital may request the convening of a general shareholders’ meeting.

Environmental, social and corporate governance (ESG) matters are increasingly important to shareholders. A particular focus is climate-change related risk planning. In connection with the COVID-19 pandemic, shareholders’ focus has shifted towards mitigating the pandemic’s economic and social effects.

No.

Shareholders’ and policy makers’ increased focus on ESG matters has also led to a greater focus on shareholder engagement. One of the main goals of SRD II is to encourage long-term shareholder engagement and to improve the issuer-shareholder dialogue.

The X Principles require the board of directors/management board of Luxembourg issuers to take into account the interests of all stakeholders in their deliberations. In particular, the board of directors/management board shall consider the interests of employees in connection with a takeover, a cross-border merger and the remuneration of directors.

Companies employing more than 15 employees must designate at least one employee delegate. The number of employee delegates, as well as their participation and information rights concerning the company’s employment policies, increases gradually with the number of employees of the company.

The Shareholder Rights Law requires issuers to define a remuneration policy and publish an annual remuneration report with respect to the remuneration received by the executive management and board members. The X Principles require a fair remuneration policy which is in line with the long-term interests of the company.

The remuneration of the board of directors or the supervisory board shall be determined by the general shareholders’ meeting. The remuneration of the members of the management board is determined by the supervisory board, unless the articles of association provide otherwise. The X Principles further recommend the involvement of a remuneration committee consisting only of non-executive directors.

Issuers must publish a remuneration policy, which clearly explains how the remuneration of directors contributes to the business strategy, the long-term interests and the sustainability of the company. In addition, issuers must provide a clear and understandable annual report in relation to the remuneration granted to the company’s directors in the past financial year.

Under the Luxembourg Labour Code, companies that do not pay equally for equal work can be fined. However, this rule is applicable only to employment contracts and therefore does not address any gender pay gaps at the executive level.

The remuneration policy and the remuneration report must be submitted to the vote of the shareholders. The vote is advisory and non-binding, unless the articles of association provide otherwise. If the general shareholders’ meeting rejects the remuneration policy, the issuer must propose a revised policy at the following general shareholders’ meeting. If the remuneration report is rejected, the issuer must explain in the next report how the vote was taken into account.

The X Principles recommend that the remuneration reflect the level of quality and skills required of the board members and the executive management. It must be structured in such a way as to protect the company against taking excessive risks. Generally, the remuneration shall contribute to the long-term performance of the issuer. Best practices for executive remuneration include:

• a split of fixed and variable remuneration;
• share-based incentives with adequate vesting periods; and
• claw-back provisions.

Under the Transparency Law, issuers must disclose:

• periodic information (eg, annual and half-yearly financial reports); and
• ongoing information (eg, changes in shareholding).

Issuers must include a corporate governance statement in their management report and must submit a remuneration report to the vote of the annual general meeting. Public-interest entities are further required to include a non-financial statement in their management report.

The board of directors or the supervisory board/management board is mainly responsible for disclosure and transparency obligations incumbent on the company.

The auditor must review and report on the annual financial statements of the issuer. Half-yearly reports as well as corporate governance and corporate social responsibility (CSR) reports need not be audited.

The X Principles require Luxembourg issuers to:

• disclose a corporate governance statement in their annual accounts;
• publish a corporate governance charter which describes the main aspects of their corporate governance policy;
• define their CSR policy, along with a recommendation to analyse the sustainability of the company’s activities; and
• provide clear and transparent non-financial support.

Auditors are appointed and removed by the general shareholders’ meeting. Before the end of their term, auditors may be dismissed only for proper grounds.

Auditors must be independent from the audited entity and must not be involved in its decision taking. They must ensure that their independence is not compromised by potential conflicts of interest or business or other relationships concerning the audited entity.

Under EU Regulation 537/2014, auditors are forbidden to provide ‘prohibited non-audit services’ to public interest entities, such as certain tax services, bookkeeping, payroll services and valuation services.

Under EU Regulation 537/2014, applicable to public interest entities, the total fees for non-audit services shall be limited to no more than 70% of the average of the fees paid in the last three consecutive financial years for the statutory audit(s) of the audited entity and, where applicable, its group companies and group.

Luxembourg is a global hub for sustainable finance and has launched a number of initiatives in this respect. In 2016, the Luxembourg Stock Exchange founded the Luxembourg Green Exchange, the first and leading global platform dedicated exclusively to sustainable financial instruments. Following a number of legislative measures within the European Union, the focus is shifting increasingly towards environmental, social and corporate governance (ESG) reporting. Due to Luxembourg’s significant exposure to the green bond market, market participants such as the Luxembourg Stock Exchange can provide practical expert advice on ESG reporting and the transition to a sustainable financial system.

The EU Taxonomy Regulation (2020/852) establishes an EU-wide framework for sustainable investments. It will be directly applicable to public interest entities, which are currently required to publish non-financial reports. As from 1 January 2022, they will have to include in such reports information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation.

Our top tips for effective corporate governance in Luxembourg include the following:

• Set up appropriate governance structures;
• Engage with shareholders and investors;
• Provide clear policies and reporting on the remuneration (to be) received by board members and senior executives; and
• Focus on reporting requirements – substantial changes are expected for non-financial reporting in particular.