Introduction
On 23 January 2025, the Luxembourg Parliament adopted Bill 8053 implementing Directive (EU) 2019/2121 of the European Parliament and of the Council amending Directive (EU) 2017/1132 on cross-border conversions, mergers and demergers, also known as the "Mobility Directive", and approved the introduction of a new legal framework for mergers, demergers and conversions in the Luxembourg law on commercial companies dated 10 August 1915, as amended from time to time (the "1915 Law"), specifically focusing on procedural rules applicable to the cross-border mergers, demergers and conversions within the European Union (respectively, the "EU" and the "Implementation Law"). A request for the exemption of second vote has been introduced. Please note that to enter into force the Implementation Law must be published in the Luxembourg Official Journal (Mémorial A). A motion to reassess its effectiveness after a year has also been introduced.
On the one hand, the Implementation Law maintains with changes (with exception of the conversions) a common regime that governs domestic mergers and demergers, as well as non-EU cross-border mergers, demergers, and conversions which do not fall within the scope of the Mobility Directive (the "Common Regime"). On the other hand, a special regime establishing the concepts of EU cross-border mergers, demergers and conversions is introduced (the "Special Regime").
I – Common Regime
While the provisions relating to the Common Regime for mergers and demergers are essentially in line with the already existing rules of the 1915 Law, to the exception of the new amendments introduced for granting certain flexibility, the rules and procedures governing non-EU cross-border conversions are enshrined. The rules applying to domestic conversions, however, remain unchanged.
A – Common rules for domestic and non-EU cross-border mergers and demergers
The Implementation Law adds the following specific and flexible provisions to the current domestic regime in the 1915 Law:
- the possibility for the shareholders' general meeting approving the transaction, to amend the terms and conditions of the common merger or demerger proposal and/or to make the completion of the merger or demerger subject to a condition precedent or the occurrence of a term;
- the exemption from the requirement to prepare a report of the statutory auditor (réviseur d'entreprises) for any merger or demerger involving companies with a sole shareholder; and
- the date of the publication of the minutes of the general meeting of shareholders of the Luxembourg absorbing or demerging company in the Luxembourg Official Gazette (Recueil Electronique des Sociétés et Associations – the "RESA") as the effective date with regard to the opposability towards third parties.
B – Specific rules for non-EU cross-border mergers and demergers
In addition to the above, the Implementation Law introduces new rules in the 1915 Law applying only to non-EU cross-border mergers and demergers. These are, in particular, as follows:
- the contents of the proposal are less extensive compared to mergers or demergers within the EU; and
- the delay of one month to provide the report of the involved companies' management bodies to the shareholders and employees, is not applicable in case of non-EU cross-border mergers.
C – Non-EU cross-border conversions
The Implementation Law enshrines the previous rules and procedures applicable to any cross-border conversion in case of non-EU cross-border conversions. Unless there are employees and specific assets that could make the process slightly more complex and result in additional formalities, the procedure is relatively simple and swift as only an extraordinary general meeting of the company's shareholders must be held before a Luxembourg notary to approve the conversion. Its validity is conditional on it not leading to the dissolution of the company, which must therefore continue to exist under the legal framework of the receiving country without any interruption in its legal personality.
II – Special Regime
The Implementation Law introduces a new process applicable to EU cross-border mergers, demergers and conversions where a Luxembourg private or public limited liability company (i.e a société anonyme and a société à responsabilité limitée) and a Luxembourg partnership limited by shares (a société en commandite par actions) is:
- (i) an absorbing or an absorbed entity in a cross-border merger with an EU Member State absorbed or absorbing entity, or
- (ii) a demerging or emerging entity in a cross-border demerger with one or more companies incorporated under the laws of Luxembourg or another EU Member State, or
- (iii) contemplating a conversion into a company governed by the laws of another EU Member State, or vice versa.
The specific process and rules for EU cross-border mergers, demergers and conversions involve the following:
A – Proposal
A proposal for the contemplated merger, demerger or conversion setting out the legal framework for such transaction (the "Proposal") must be prepared by the management body(ies). The information that must be included in such Proposal (which must also comply with the requirements of the law of the other involved EU Member State) is listed in the Implementation Law, noting that these are more detailed than those applicable to domestic or non-EU transactions governed by the Common Regime rules.
B – Shareholders and employees report(s)
A report (or two separate reports) must be prepared for the shareholders and the employees by the management body(ies) of the company(ies) and shall be made available at least 6 weeks before the date of the shareholders' general meeting approving the transaction. Such report(s) shall explain and justify the legal and economic aspects of the contemplated transaction and, with respect to the employees, the legal implications for them. The report(s) is/are not required in the following instances:
- for the shareholders, if all the shares are held by a sole shareholder or if all shareholders waive this requirement; and
- for the employees, if the company(ies) and its/their subsidiaries has/have no employees or all employees are members of the management body(ies) of the company(ies) involved or its/their subsidiary(ies).
C – Independent expert report
Unless such report is waived by the shareholders of the company(ies) concerned or if all the shares are held by a sole shareholder, an independent expert must draw up a report on the cross-border transaction for the shareholders for each merging company, which shall be made available one month before the date of the shareholders' general meeting approving the transaction. The independent expert(s) will examine the merger, demerger or conversion Proposal and then determine, in particular, whether:
- the proposed share exchange ratio is fair (in the context of a merger or demerger only); and
- the cash compensation offered to the shareholders (in the event of their exercise of the withdrawal right, detailed below) is equitable.
D – Publication
The Proposal, along with a notice informing the shareholders, creditors, and employees of the merging, demerging or converting company that they may submit comments on the Proposal at least 5 business days before the shareholders' general meeting approving, modifying or rejecting the respective Proposal, must be filed with the Luxembourg Trade and Companies Register (Registre de Commerce et des Sociétés de Luxembourg – the "RCS") and published in the RESA one month before the holding of such shareholders' general meeting approving such Proposal.
E – Creditors opposition period
Within three months following the publication of the Proposal in the RESA, creditors whose claims (i) arose prior to the publication of the Proposal, (ii) are not yet due and (iii) are dissatisfied with the guarantees offered in the Proposal, may oppose the transaction and request a guarantee. This request for a guarantee will however not have a suspensive effect and will be conditional upon the completion of the transaction.
F – Approval of the EU cross-border transaction
The Proposal must be approved by the shareholders' general meeting. As with domestic and non-EU cross-border mergers and demergers, the shareholders will have the opportunity to amend the terms and conditions of the Proposal and/or to make the completion of the transaction subject to a suspensive condition or the occurrence of a term.
G – Shareholder withdrawal right and exchange ratio opposition
Where Luxembourg companies have previously pursued mergers, demergers or conversions, minority shareholders were at the mercy of the majority shareholders. This is no longer the case, as the Implementation Law has introduced the concept of the "opposing shareholder". A shareholder who votes against the approval of the Proposal at the shareholders' general meeting may exercise his/her/its exit rights and claim the compensation specified in the Proposal. This request must be declared to the Luxembourg notary during the shareholders' general meeting and the compensation must be paid within two months of the effectiveness of the transaction. If the shareholder who/which exercised their exit rights considers that the proposed cash compensation is unreasonable, he/she/it has the right to request additional cash compensation before the Luxembourg competent judge. This request must be submitted within one month following the shareholders' general meeting, though it will have no suspensive effect on the transaction in question.
In the context of a merger or demerger only, a shareholder of the company ceasing to exist, or in the case of a demerger, of the demerging company continuing to exist, will receive shares of the absorbing or emerging company. To this end, an exchange ratio must be determined, and the shareholder who has not exercised (or cannot exercise) the exit right described above may challenge the proposed exchange ratio and request an additional cash payment without any increase in the number of shares allotted. Such challenge shall be raised with the Luxembourg competent judge within one month after the shareholders' general meeting has been held. Raising the challenge, however, does not prevent the registration of the relevant transaction.
H – Employee participation
The Implementation Law also provides the possibility for employees to participate in the proposed transaction. The company subject to the merger, demerger, or conversion will therefore need to negotiate the employee participation regime. However, this is part of draft bill of law number 8225, whose entry into force has not yet been voted on.
I – Luxembourg notary's certificates
Another new aspect introduced by the Implementation Law is the requirement for a certificate to be issued by the Luxembourg notary in the event of EU cross-border transactions of any kind. As such, Luxembourg notaries are now responsible for controlling the legitimacy of the transaction.
In the event that the Luxembourg company is the absorbed company, the demerging company, or the entity that is converted into another EU Member State entity, it can take up to 6 months to issue the pre-certificate:
- the Luxembourg notary will have three months for its assessment;
- if the Luxembourg notary has serious doubts that the cross-border transaction has been set up for abusive or fraudulent purposes, leading to or aimed at tax evasion or the circumvention of EU/national law, or for criminal purposes, it may either
(a) refuse to issue the pre-certificate; or
(b) require additional information to be considered or further investigative activities to be carried out. In such a case, the assessment period for the legality of the cross-border transaction may be extended by an additional three months.
Conversely, if the Luxembourg company is the absorbing company, the emerging entity, or the entity converted into a Luxembourg company, the Luxembourg notary will carry out a legality assessment and issue a final certificate.
The pre-certificate issued by the competent authority of the EU Member State participating in the transaction is conclusive evidence of the completion of the required procedures and formalities. The Luxembourg notary may however refuse this pre-certificate and consequently the issuance of the final certificate in the case of a manifest error. Such an error must be rectified, or a satisfactory explanation must be provided, with no specific deadline provided by the Implementation Law.
J – Effectiveness of the EU cross-border transaction
The effective date between the parties and third parties will depend on the type of transaction. Such effective date is determined in accordance with the laws of the other EU Member State when:
- the Luxembourg entity is an absorbed entity in case of cross-border merger;
- one or more companies are incorporated under the laws of Luxembourg in case of cross-border demerger; and
- a Luxembourg entity is converted into an EU Member State entity in the context of a cross-border conversion.
Conversely, the transaction is carried out between the parties (unless the completion of the transaction is subject to a suspensive condition or the occurrence of a term) as soon as the Luxembourg notary has established it following its legality assessment when:
- the Luxembourg entity is the absorbing entity in the context of a cross-border merger; and
- an EU Member State entity is converted into a Luxembourg entity within the context of a cross-border conversion.
Moreover, mergers will be opposable towards third parties as from the publication of the minutes of the general meeting of shareholders of the Luxembourg absorbing company in the RESA.
Conversions will be opposable towards third parties as from the publication in the RESA of the notarial statement to be issued by the Luxembourg notary, confirming that all applicable conditions have been met in Luxembourg and all formalities in the other EU Member State have been completed.
As regards the incorporation of one or more companies under the laws of another EU Member State in the context of a cross-border demerger, such transaction will be effective between the parties and opposable towards third parties as from the publication of the completion of the European cross-border demerger in the RESA.
The Implementation law further introduced a simplified merger mechanism which aims to facilitate the mergers between companies belonging to the same group and which are indirectly held by the same person or entity. The simplified merger consists of lowering the legal hurdles that would be necessary for non-simplified mergers by excluding certain information from the Proposal. For instance, the Proposal is not required to cover the exchange ratio of the shares representing the share capital of the merging companies and, where applicable, the amount of any payment or the amount and terms of any cash payment to be made to the shareholders in accordance with the right of withdrawal, as determined by the management bodies of the merging companies. The necessity to include a report of an auditor falls off as well.
K – Transitional period
The provisions of the Implementation Law will apply to any transaction for which the Proposal is published on the first day of the month following the entry into force of the Implementation Law. A transitional period is also introduced, whereby the rules currently applicable under Luxembourg law will remain in effect for any transaction whose merger, demerger or conversion Proposal is already published in the RESA or foreign trade register, depending on the transaction contemplated, before the first day of the month following the entry into force of the Implementation Law.
Conclusion
The main purpose of the Mobility Directive and, consequently, the Implementation Law was to establish a standardized legal framework within the EU and therefore in Luxembourg and to expand legally secure structuring opportunities with regard to EU cross-border transactions.
The leading idea was to facilitate the guarantee of the European freedom of establishment by making it easier for companies to proceed with EU cross-border restructurings.
In spite of being set out to strengthen the interests of shareholders, creditors and employees as well as simplify and add flexibility to processes, the Mobility Directive and Implementation Law may however in certain instances impact restructurings, increasing both the administrative burden and the process of the transaction concerned. In particular, the harmonization of mergers, demergers and conversions on a EU level, risk of leading additional delays which must be respected by the parties involved in such transactions. In practice, however, companies could seek alternatives to ensure swift, more straightforward and more flexible implementation, through recourse to the simplified liquidation process called the "dissolution without liquidation" for example.
[1] To enter into force the Implementation Law must be published in the Luxembourg Official Journal (Mémorial A).
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.
