Distributions to investors
Redemption of shares or units
Asset valuation and publication requirements
Besides its long-standing position as a European leader in the investment fund industry, Luxembourg has developed an increasingly important place in the private equity industry in recent years. Its attractiveness is the result of a combination of factors which have contributed to its success as a premier international financial centre, including an investor-friendly environment; flexible, contract-based company law provisions; and the responsiveness of the Luxembourg legislature to practitioners' needs. In addition, Luxembourg offers a number of highly suitable private equity investment vehicles, in particular:
- the société de participations financières (SOPARFI), a commercial corporate vehicle;
- the société d'investissement en capital à risque (SICAR), a company for collective venture capital investment; and
- the specialised investment fund (SIF).
The SOPARFI is a commercial corporate vehicle which is not subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF), the financial sector supervisory authority. It is governed by the Law on Commercial Companies 1915, as amended, and may be used for investments in qualifying financial participations. Although not specifically designed for private equity, it is a time-efficient vehicle for private equity purposes. It is not subject to risk-spreading requirements; nor is it restricted to a specific type of investment.
The SICAR was introduced by the Law on Investment Companies in Risk Capital (June 15 2004), as amended. Unless the law specifically derogates therefrom, a SICAR is also subject to the Law on Commercial Companies. This vehicle is specifically designed for private equity, as it aims at directly or indirectly contributing assets to entities with a view to their launch, development or listing on a stock exchange. It is not subject to risk-spreading requirements.
The institutional investor fund, which dates back to 1991, was replaced by the SIF by the Law on Specialised Investment Funds (February 13 2007). Unless the law specifically derogates therefrom, a SIF is also subject to the Law on Commercial Companies. Like the SOPARFI, the SIF is not specifically designed for, or restricted to, private equity. However, it offers great flexibility, which makes it an attractive private equity investment vehicle.
|Legal form||Company or partnership forms only; no contractual form||Company or partnership forms only; no contractual form||Company, partnership or contractual form|
|Investment restrictions|| || || |
|Flexible financing||Fixed share capital with some possible flexibility; flexible financing policy||Variable or fixed share capital with lightened requirements; flexible financing, distribution and exit policy||Variable or fixed share capital with lightened requirements; flexible financing, distribution and exit policy|
|Accounts and auditing|| || || |
|Tax status||Taxable status, but conditional exemption of dividends, liquidation proceeds and capital gains derived from qualifying participations under participation exemption, and entitlement to double tax treaty benefits.||Taxable status, but exemption on profits derived from risk capital securities and entitlement to double tax treaty benefits (subject to recognition by other contracting state)||Tax-exempt status and entitlement to certain double tax treaties|
The most common Luxembourg corporate forms used for private equity purposes are:
- the société en commandite par actions (SCA), comparable to a corporate partnership limited by shares;
- the société anonyme (SA), comparable to a public limited company; and
- the société à responsabilité limitée (Srl), comparable to a private limited company.
The société en commandite simple (SCS), comparable to a limited partnership, is occasionally used to structure private equity transactions. Two more rarely used forms are the société en nom collectif (SNC), comparable to an unlimited partnership, and the société civile, comparable to a commercial civil partnership.
The contractual form of the fonds commun de placement (FCP) or common fund may also be used.
A SOPARFI's sole corporate purpose is to hold and manage financial participations in other undertakings. No other investment restrictions or risk-spreading requirements apply.
A SICAR must invest its funds in securities representing risk capital. 'Investment in risk capital' is defined in the Law on Investment Companies in Risk Capital as the direct or indirect contribution of assets to entities in view of their launch, development or listing on a stock exchange. The law stipulates two conditions:
- The risk relating to the SICAR's investments must be high; and
- The SICAR must aim to contribute to the development of the entities in which it invests.
The SICAR's exit strategy is also a significant factor - it must aim to exit its investments after a certain number of years (to be assessed on a case-by-case basis).
In the absence of a risk-spreading requirement, a SICAR may limit its investment to a single target entity or area. A SICAR may invest in other investment vehicles and indirectly in real estate through other entities, provided that it complies with the investment in risk capital requirement.
A SIF is not subject to restrictions on the sector in which it invests its funds. Therefore, it may focus on private equity, but may also combine private equity investments with investments in listed companies or derivatives (among other things).
A SIF must aim to spread the risks of its investments. If investing in private equity, it must target several entities. The fulfilment of this requirement is assessed on a case-by-case basis. Like a SICAR, a SIF may invest in a fund of funds and in real estate.
The SOPARFI regime does not impose investor eligibility restrictions; therefore, SOPARFIs are not restricted to sophisticated investors. However, only sophisticated investors may invest in a SICAR or a SIF. The three categories of eligible investor are identical for SICARs and SIFs: institutional investors, professional investors and well-informed investors.
'Institutional investors' are defined as firms and organisations that, by their nature and purpose, are involved in the management of substantial funds and assets, such as:
- banks and financial sector professionals;
- insurance and reinsurance undertakings;
- social security institutions;
- pension funds; and
- large industrial and financial groups and dedicated structures established by such entities.
Professional investors are entities which require authorisation or regulation in order to operate in the financial markets (eg, credit institutions, insurance companies and commodity derivatives dealers). Large undertakings qualify as professional investors if they meet two of the following criteria on a company basis:
- a balance sheet total of €20 million;
- net turnover of €40 million; and
- own funds of €2 million.
This category also includes certain state or international bodies or institutions and other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.
Well-informed investors are investors which, although they do not qualify as institutional or professional investors, provide evidence that they are sufficiently sophisticated to understand and bear the risks associated with the nature of the SICAR or SIF's investments. In addition to confirming in writing that this status criterion is met, such an investor must invest a minimum of €125,000 or obtain an assessment (by one of the financial sector entities listed in the specific laws on SIFs and SICARs) that certifies the investor's expertise and experience in adequately appraising an investment in a SIF (or in risk capital, in the case of a SICAR).
Exception for managing persons
The eligible investor requirements do not apply to managing persons and other persons that take part in the management of a SIF or SICAR.
SOPARFIs are not subject to prior authorisation from the CSSF. They may therefore be established very quickly.
A SICAR may not start its activities until it is authorised by the CSSF. However, a SOPARFI may be initially established in order to seize investment opportunities, thus avoiding time constraints related to the authorisation process, before being converted into a SICAR. Once authorised, the SICAR is registered on an official list.
Authorisation for a SICAR or SIF is granted only if it can demonstrate that its head office is located in Luxembourg, and if the CSSF approves:
- its constitutive documents (ie, the prospectus or placement memorandum, articles of incorporation or partnership agreement);
- its directors or managers;
- its choice of depositary and the auditor; and
- its agreements with its service providers.
The directors or managers of a SICAR or SIF are the members of the statutory organ of the vehicle in question (or of the management company of a SIF, if it is structured as an FCP). They must be of good repute and have sufficient experience of performing their functions.
A SIF may begin its activities without prior authorisation from the CSSF, provided that it applies for authorisation within one month of establishment. A SIF may therefore be launched very quickly. If it is structured as a FCP, the management company of the SIF must be authorised by the CSSF before the SIF starts its activities. Once authorised, the SIF is registered on an official list.
In the case of SOFARPI financing, SAs or SCAs must have a minimum share capital of €31,000, on incorporation, the minimum share capital for Srls is €12,500. No other minimum share capital amount is required, except as dictated by the incorporation of the company in question. No minimum share capital applies to SCSs, SNCs or sociétés civiles, either on or after incorporation. The securities of SOPARFIs that are incorporated as SAs or SCAs may be publicly traded. Although a SOPARFI cannot be established as an umbrella structure, it may issue tracking shares reflecting the performance of its different investment programmes.
Depending on their legal form, SOPARFIs, SICARs and SIFs may be financed through a variety of equity, debt and hybrid instruments (including (convertible) preferred equity certificates). Depending on their legal form, SOPARFIs, SICARs and SIFs may also issue beneficiary units, the rights of which are defined in the articles of incorporation.
In addition to the minimum share capital requirements on incorporation, the subscribed share capital of a SICAR, increased by any share premium, must reach €1 million no later than 12 months following authorisation of the CSSF; and the subscribed share capital of a SIF, increased by any share premium, must reach €1.25 million before the same deadline. The net assets of a SIF structured as an FCP must reach €1.25 million before the same deadline.
The securities of SICARs and SIFs in the form of SAs or SCAs may be publicly traded, provided that the requirements relating to eligible investors are fulfilled. A SICAR or SIF may be established as an umbrella structure with segregated portfolios of assets and liabilities.
SOPARFIs established as SAs, SCAs or Srls must allocate 5% of their annual net profits to a statutory non-distributable reserve until such reserve amounts to 10% of its share capital.
Distributions by way of annual dividends in a SOPARFI are subject to the approval of the shareholders or partners; distributions by way of interim dividends throughout the year are possible in SOPARFIs established as SAs, SCAs or Srls if certain formal requirements are met.
Distributions may be made only within the limit of the distributable profits, the statutory definition of which depends on the legal form adopted by the SOPARFI.
Distributions by way of annual dividends and interim dividends throughout the year are free of restrictions, except those set forth in the SICAR's articles of incorporation. Distributions may be made only to the extent that the €1 million minimum share capital limit is respected. SICARs and SIFs with variable share capital are not required to establish a statutory reserve.
Distributions by way of annual dividends in a SIF established as a company or a partnership are subject to the approval of the shareholders or partners.
Distributions by way of interim dividends in a SIF with variable share capital are subject to no restrictions other than those set forth in its articles of incorporation, and are contingent on certain formalities in a SIF with fixed share capital in the form of an SA or SCA.
Distributions in a SIF with variable share capital may be made only to the extent that the minimum share capital of €1.25 million is respected.
Distributions in a SIF with fixed share capital may be made only to the extent that the SIF has distributable profits.
Where the SIF is structured as an FCP, distributions are not subject to any restrictions other than those set forth in the management regulations, provided that the minimum net asset amount of €1.25 million is respected.
Shares in SOPARFIs established as SAs or SCAs may not be redeemed without shareholder approval. Shares may be redeemed, and not cancelled, by way of capital reduction if they:
- comply with specific restrictions (including the condition that only fully paid-up shares can be redeemed without exceeding 10% of the subscribed capital); or
- qualify as preferred redeemable shares, as such shares are issued in accordance with the terms and conditions set forth in the company's articles of incorporation
Shares may be redeemed and cancelled by means of a capital reduction or partial liquidation under certain conditions (ie, among other restrictions, approval of the shareholders under the requirements applicable to amendments of the articles of incorporation and protective measures in favour of creditors.
Shares in SOPARFIs established as Srls may be redeemed only if they are immediately cancelled by way of a capital reduction approved by the shareholders under the requirements applicable to amendments to the articles of incorporation.
Shares in SOPARFIs established as SCSs, SNCs or sociétés civiles may be redeemed only with the approval of all partners, unless the partnership agreement provides otherwise, and may be cancelled only by means of a capital reduction.
Redemptions of shares of a SICAR or SIF with variable share capital are subject to no restrictions other than those set forth in their articles of incorporation, provided that the minimum share capital of €1 million (in the case of a SICAR) or €1.25 million (in case of a SIF) is respected, and the redeemed shares are cancelled by way of a capital reduction.
Redemptions of units of a SIF that is structured as an FCP are subject to no restrictions other than those set forth in its management regulations, provided that the minimum net assets amount of €1.25 million is respected (ie, if the redeemed units are cancelled).
Redemptions of shares in a SIF with fixed share capital are subject to the restrictions applicable to a SOPARFI, which thus depend on the legal form of the SIF with fixed share capital.
Asset valuation and publication requirements
A SOPARFI's assets must be valued at cost. They must or may be written down, depending on whether it is foreseeable that the loss in value is durable. They may not be written up.
SOPARFIs are not required to publish a prospectus. SOPARFIs established as SAs, SCAs and Srls must issue and submit to the shareholders for approval an annual report for each financial year within six months of the end of the financial year to which it relates. SOPARFIs established as SCSs, SNCs and sociétés civiles are not subject to reporting requirements.
SOPARFIs are not required to publish semi-annual reports and may be exempt from preparing consolidated financial statements if the necessary conditions are met.
A SICAR's assets must be valued on a fair-value basis in accordance with its articles of incorporation. Unless otherwise provided for in its articles of incorporation or management regulations, a SIF's assets must be valued on the same basis in accordance with its articles of incorporation or management regulations.
A SICAR or SIF must provide a prospectus. There is no requirement in terms of minimum content or specific layout, but sufficient information must be included to allow investors to make an informed assessment of the proposed investment and the related risks. The essential elements of the prospectus must be up to date when new securities are issued.
SICARs and SIFs must issue a report for each financial year within six months of the end of the year to which it relates. They are not required to publish semi-annual reports or prepare consolidated financial statements.
SOPARFIs are not subject to CSSF supervision and are not required to entrust the custody of their assets to a depositary. However, their operations and annual financial statements must be supervised by one or more statutory auditors (in the case of SAs), a supervisory board (in the case of SCAs) and one or more statutory auditors (in the case of Srls with more than 25 shareholders). No statutory auditor is required in SOPARFIs established as SCSs, SNCs or sociétés civiles. In addition, an independent auditor must be appointed to replace the statutory auditors in SOPARFIs established as SAs, SCAs or Srls if certain thresholds are exceeded (in terms of total balance sheet, turnover or number of employees).
SICARs and SIFs remain subject to permanent supervision by the CSSF until their liquidation. Amendments to their constitutive documents (ie, prospectus or placement memorandum and articles of incorporation or partnership agreement), appointments of new directors or managers and changes in management company (for a SIF structured as an FCP) or depositary are subject to the CSSF's prior approval.
A depositary that is located in Luxembourg and qualifies as a credit institution must be entrusted with oversight of the SICAR or SIF's assets.
A Luxembourg independent auditor must audit the accounting information in the SICAR or SIF's annual reports. The auditor's report and qualifications must be included in full in the entity's annual report. In addition, the auditor has duties of notification to the CSSF in certain circumstances and must undertake extensive supervision at the latter's request.
For further information on this topic please contact Gilles Dusemon or Pierre Beissel at Arendt & Medernach by telephone (+352 40 787 81), fax (+352 40 780 4) or email ([email protected] or [email protected]).