Private Mergers and Acquisitions in Luxembourg

In July 2022, Luxembourg published a draft bill proposing a reform to amend the Luxembourg law of 10 August 1915 on commercial companies, as amended (the Company Law). The draft bill intends to implement into Luxembourg law the provisions of Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 (the Directive) amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (together, the Restructurings). The proposed reform aims to take the amendments a step further by updating the Company Law to modernise the legal framework on mergers and divisions, and by introducing a new regime on cross-border conversions.

The Directive outlines one of the overarching goals of the EU as the development of the internal market and sets harmonised rules for cross-border restructurings. The harmonisation of the domestic legal framework applicable to such transactions addresses the underlying issue of legal uncertainty, although it also introduces new – albeit manageable – legal challenges that the European M&A market will soon have to face.

A key policy behind the proposed reform is to further enhance the attractiveness of Luxembourg as a key jurisdiction for global M&A activity, by using all of the flexibility granted to Member States by the Directive to set up a regime that is as favourable to cross-border mobility as possible.

Its primary objective is, as far as possible, to limit the scope of the new complex rules to be introduced into Luxembourg law as a result of the Directive. In this respect, the new legal framework will include two separate regimes: (i) a general regime applicable to both domestic and cross-border restructurings; and (ii) a special regime that will govern only those European cross-border restructurings involving a Luxembourg limited liability company (other than a simplified joint-stock company (SAS)) namely, a public limited liability company (SA), a partnership limited by shares (SCA) and a private limited liability company (S.à r.l.) (the EU Cross-Border Restructurings). Furthermore, certain types of companies, such as undertakings for collective investment in transferable securities (UCITS), European companies (SE), mutual funds, and companies in liquidation where the distribution of assets has started, are excluded from the scope of the special regime.

• This article:
  provides an overview of the key changes to the Luxembourg legal framework for domestic and cross-border restructurings that Luxembourg will soon be offering; and
• explores the impact of the proposed reform on the global M&A market in view of upcoming restructurings, as the new legal framework will apply only to those restructurings published from the first day of the month following the date of entry into force of the new bill.

What’s new?

Regime applicable to domestic and cross-border restructurings

Domestic and cross-border restructurings – including a company from either a Member State or a non-EU country – will be covered by the same legal framework, which will undergo a series of amendments to simplify, to the extent possible, the rules that apply to such transactions to make them more efficient and cost-effective.

1. Opening-up of restructurings involving Luxembourg special limited partnerships

Given their ongoing success under Luxembourg law, the Luxembourg legislator decided to allow special limited partnerships (SCSp) to be included in merger transactions without first being converted into a Luxembourg limited partnership (SCS) under the new regime. A Luxembourg SCSp cannot be involved in such transactions under the current regime as it has no legal personality of its own separate from that of its general partner. This feature should further reinforce interest in this type of company and boost Luxembourg’s attractiveness in the global market.

2. Simplified procedures and formalities with room for flexibility

Welcome progress can be achieved in terms of procedural flexibility as the new procedure outlined in the draft bill is a genuine opportunity for companies to establish certain rules to be followed for the relevant transaction to be valid, in particular:

– Modification of the restructuring plan by the shareholders

Shareholders will have the right to make amendments to the restructuring plan provided that (i) the transaction is cross-border; (ii) it is allowed by the law governing each company involved therein; (iii) all the companies involved approve the restructuring plan in identical terms; and (iv) the relevant amendment has no impact on the situation of third parties, in particular employees and creditors.

 – Exemption from the independent expert report requirement for one-person companies

One-person companies will be exempt from the requirement to obtain an expert report issued by an independent expert. This exemption is in line with the Luxembourg legislator’s intention to limit as many of the obstacles to mergers as possible.

 – Upstream and sidestream mergers

The proposed reform aims to simplify the procedure for upstream and sidestream mergers. Therefore, a merger by absorption carried out by a person who directly or indirectly holds all the shares of the merging companies will also include two simplified forms of merger: (i) upstream merger (whereby a company transfers the entirety of its assets and liabilities to its parent company via dissolution without liquidation); and (ii) sidestream merger (whereby a company transfers the entirety of its assets and liabilities to an existing company, via dissolution without liquidation and without the issue of new shares by such company, provided that the merger is carried out by a person that directly or indirectly holds all of the shares in the merging companies or the shareholders of the merging companies hold shares in the same proportion in all the merging companies).

3. Effective date of the merger

In the case of an EU cross-border merger, the date on which it takes effect will be determined by the law applicable to the company resulting from such merger. Where the cross-border merger involves a company from a non-EU country, the Luxembourg legislator decided for reasons of legal certainty that the effective date of the merger towards third parties will be the date of publication of the minutes of the general meeting of the acquiring company.

Regime applicable to EU cross-border restructurings

1. Flexible control of legality

The proposed reform aims to streamline the rules on the control of legality of cross-border mergers to be carried out by a notary. The objective is to consider divergences between the national laws of the various non-EU countries which are not subject to the harmonised regime set out in the Directive and to adapt the applicable Luxembourg legal framework to this particular circumstance. In this context, the Luxembourg legislator decided that the Luxembourg Trade and Companies Register will accept as evidence of the effectiveness of the merger not only a notification by the registry having jurisdiction over the acquiring company, but also a legal opinion issued by local counsel, such as a notary or law firm. This feature should improve efficiency, as well as promote mergers between Luxembourg companies and those from non-EU countries.

2. Disclosure requirements

In order to protect the shareholders, the proposed reform requires that certain preparatory documents be made available for review by the shareholders either electronically or at the registered office of the company, prior to the general meeting for the approval of the restructuring plan. These documents include, among others,(i) the restructuring plan; (ii) a report issued by the management body of the company; and (iii) a report issued by an independent expert. As this requirement is primarily in the interest of the shareholders, the shareholders will have the right to waive it, except for the restructuring plan, which will need to be published in the Luxembourg Trade and Companies Register at least one month before the date of the general meeting.

3. Protection of creditors

Creditors (i) whose claims arose prior to the publication of the common draft terms of the relevant EU cross-border merger (and such claims were not due at the date of such publication); and (ii) who are not satisfied with the safeguards offered in those common draft terms, will be entitled to bring an action before the court, after giving notice to the debtor company within three months of the publication thereof. The company will have the right to dismiss such claim by paying the creditor, even if the claim has expired. The filing of such claim will not have a suspensive effect on the transaction.

4. Protection of minority shareholders

The Luxembourg legislator intends to ensure that the minority shareholder protection mechanism does not go beyond the minimum necessary to provide adequate protection. In view of the intention to limit the right of withdrawal, the minority shareholder will be allowed to exercise their right of withdrawal only during the general meeting in relation to the approval of the common draft terms of merger and only by voting against the merger and expressing the wish to transfer their shares in exchange for compensation as set out in the common draft terms. The shareholder reserves the right to challenge the amount of such compensation before the court within one month following the relevant general meeting approving the transaction. The filing of such claim will not have a suspensive effect on the transaction.