Introduction
In the aftermath of World War II, the Grand Duchy of Luxembourg ("Luxembourg") has seen significant and consistent economic growth due mostly to its political stability, social tranquillity, and central location in Europe.
In addition, despite being a small nation, Luxembourg, as one of the founding member states of the European Union (EU), has actively participated in its formation, allowing it to be at the forefront of numerous European reforms, particularly in the financial and economic sectors
Combined with a business-friendly attitude, Luxembourg became a leading financial centre in the world. Luxembourg is the largest financial centre for investment funds in Europe and the second largest in the world (second only to the United States).
Moreover, Luxembourg is the country of choice for private equity firms to establish their investment platform for acquisitions.
Luxembourg's prominent position as a financial centre and hub for private equity firms provides the nation with a unique opportunity to monitor the most recent trends and advancements in M&A activity.
Market Activity Overview
As an internationally oriented economy, Luxembourg has not been immune to the global slowdown in M&A deal activity.
In an economic climate where high interest rates have increased the financing costs of any acquisition, particularly for private equity firms that heavily rely on financial leverage, Luxembourg has generally witnessed a slowdown in its M&A activity.
Nonetheless, the Luxembourg M&A market experienced notable acquisitions, especially in the finance sector. Without being exhaustive, we might briefly mention the following acquisitions:
- the acquisition by Deutsche Börse of all the outstanding shares of the leading digitised fund distribution platform FundsDLT;
- the acquisition by General Atlantic of Actis;
- the acquisition by BTG Pactual of FIS PrivatBank S.A.; and
- the acquisition by Cinven of a majority stake in Alter Domus.
In terms of deal structuring, with the advent of new market conditions, parties tend to structure their deals so as to minimise the amount of cash to be disbursed. Thus, vendor loan notes are being used relatively often, and there has been a resurgence in the use of earn-out clauses. Completion accounts are also being used more frequently to bridge the valuation gap between buyer and seller.
Legal Developments and Their Impact on the Corporate and M&A Environment
Clarifications to the 1915 Law
The law of 10 August 1915 on commercial companies (the "1915 Law") has been built on the difficult balance of two fundamental principles: the freedom given to the shareholders and the protection of third parties. Faithful to this long tradition, the 1915 Law was subject to a major reform in 2016 (the "2016 Reform") to modernise it.
Despite the great efforts made by the drafters of the draft bill of the 2016 Reform, a certain number of errors and inconsistencies were revealed by the practice thereafter. It appears necessary to rectify them.
The bill of law No 8007 (the "8007 Bill") was introduced to the Parliament on 6 May 2022, with the aim of clarifying the inconsistencies, correcting the clerical errors or omissions, and updating the definitions and references to laws that have changed or were repealed since the 2016 Reform.
The 8007 Bill was adopted by the law of 7 August 2023 (the "Clarification Law") which became effective on 22 August 2023.
A key focus in the M&A context is the clarification brought by the recent Clarification Law to the pre-approval procedure existing for private limited liability companies (SARLs) in the event of a transfer of shares to a third party.
Article 710-12 of the 1915 Law provides that any transfer of shares of a SARL to a third party is subject to the prior approval of shareholders representing at least three-quarters of the shares or half of the shares if the articles of association of the company allow it.
If the transfer is approved, the transfer is completed. If the transfer is refused within the three months following the date of refusal, the other shareholders can acquire the shares of the transferor, or the company may also reduce its share capital through the repurchase and cancellation of the shares of the transferor. If, at the expiration of such a period of three months, no action has been taken by the company or the shareholders, the transferor will be in a position to transfer his/ her shares to the original third party.
Article 710-12 being of public order, it is not possible to circumvent such pre-approval. Consequently, practitioners are under the obligation to carefully check the compliance of such a requirement before any acquisition of shares of a Luxembourg SARL; otherwise, the validity of such an acquisition may be called into question.
The former Article 710-12 referred to the refusal of the company to consent to such a transfer. Such wording could cause confusion since it could lead one to believe that in addition to the approval of the shareholders, the approval of the management body of the company was required. The Clarification Law removed the reference to the company and the current Article 710-12 now only refers to the consent being refused.
Another clarification introduced by the Clarification Law is at the level of the repurchase of the shares in the event of a refusal. The mention that such repurchase requires the consent of the transferor has also been removed. Indeed, the transferor, by prohibiting the company from repurchasing its shares within the three-month period fixed by the law, could be in a position to transfer them to the original third party despite the refusal of the shareholders.
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Originally published by Chambers and Partners.
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