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Trends and climate
What is the current state of the M&A market in your jurisdiction?
The past 12 months have been an extremely busy period for M&A in Luxembourg, with even more activity than in the previous year. Investors maintained their trust in investing in Luxembourg and, combined with the end of the financial crisis and Brexit, this has resulted in many M&A deals being conducted.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
Yes, Brexit and its anticipated consequences has affected the M&A market over the past 12 months.
Are any sectors experiencing significant M&A activity?
Yes, intellectual property, information technology and real estate are experiencing significant M&A activity.
Are there any proposals for legal reform in your jurisdiction?
At present, there appear to be no proposals for legal reforms to M&A in Luxembourg.
What legislation governs M&A in your jurisdiction?
M&A transactions in Luxembourg are regulated by the Takeover Bids Law of May 19 2006, as amended periodically, which transposed the EU Takeover Directive (2004/25/EC) into domestic law.
The Takeover Bids Law applies to takeover bids for the securities of companies governed by the laws of EU or EEA member states where all or some of those securities are admitted to trading on a regulated market in one or more member states.
Connected laws may also be relevant with respect to M&A transactions and in particular the Squeeze-out Law of July 21 2012 on the mandatory squeeze-out and sell-out of the securities of companies admitted or previously admitted to trading on a regulated market or having been offered to the public.
Finally, alternative means of acquisition, including various merger procedures, are provided for listed and non-listed companies by the Law Concerning Commercial Companies of August 10 1915, as amended periodically.
How is the M&A market regulated?
The Financial Sector Supervisory Commission (CSSF) supervises bids under the Takeover Bids Law.
The CSSF supervises a bid where:
- the offeree company has its registered office in Luxembourg; and
- the securities of that company are admitted to trading on a regulated market in Luxembourg.
If these connecting factors are spread over several EU or EEA member states, the Takeover Bids Law provides further jurisdiction and applicable laws regarding matters such as the consideration offered in the case of a bid – in particular, whether the price will be dealt with in accordance with the rules of the competent authority of another member state. However, in matters relating to company law and the percentage of voting rights which confers control in particular, the applicable rules and the competent authority will be those of the member state in which the offeree company has its registered office.
Are there specific rules for particular sectors?
The Takeover Bids Law will not apply to takeover bids for securities issued by companies that operate on the principle of risk-spreading – the object of which is the collective investment of capital provided by the public – or to takeover bids for securities issued by EU or EEA member states’ central banks.
Further, certain sectors or types of company may be subject to specific regulatory controls or approvals, including, but not limited to, insurers.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
M&A transactions usually follow a mandatory or voluntary takeover bid procedure as governed by the Takeover Bids Law.
Companies subject to the Takeover Bids Law or the Squeeze-Out Law may also be acquired through alternative means and Luxembourg provides for a full range of instruments, mainly governed by the Law Concerning Commercial Companies, as amended periodically.
In particular, Luxembourg provides for a full range of domestic or cross-border merger procedures – in particular, merger by acquisition. Since 2007 Luxembourg has acquired broad and solid experience in cross-border mergers.
Due diligence requirements
What due diligence is necessary for buyers?
Legal and financial due diligence is recommended.
What information is available to buyers?
The Takeover Bids Law of May 19 2006, which transposed the EU Takeover Directive (2004/25/EC) into domestic law, provides that companies governed by the laws of an EU or EEA member state where all or some of the securities are admitted to trading on a regulated market in one or more member state must publish detailed information pertaining to the following matters without limitation:
- the structure of their share capital;
- restrictions on the transfer of securities;
- significant direct or indirect shareholdings;
- holders of securities with special control rights;
- any restrictions on voting rights;
- any shareholders’ agreement known by the company;
- applicable rules governing the appraisement of board members and the amendment of the articles of association;
- management powers relating in particular to the issuance and redemption of securities; and
- any significant agreements to which the company is a party and which take effect that are altered or terminated on a change of control of the company following a takeover bid.
However, such publication is not required where the nature of such agreements is such that their disclosure would be seriously prejudicial to the company.
Further, certain pieces of information are disclosed to the public pursuant to the Companies Law (eg, the articles of association, the annual or periodic financial reports or management information).
What information can and cannot be disclosed when dealing with a public company?
Please refer to the answers above.
How is stakebuilding regulated?
Pursuant to the transparency regulations applicable in Luxembourg to listed companies that have chosen Luxembourg as their home EU member state, shareholders or issuers must notify the Financial Sector Supervisory Commission (CSSF) where the voting rights attached to a shareholder’s shares reach, exceed or fall below certain thresholds (eg, 5%, 10%, 15%, 20%, 25%, 33.33%, 50% and 66.66%).
The Takeover Bids Law requires the parties to a bid to provide the supervisory authorities in their home EU or EEA member state (at any time on request) with all of the information in their possession concerning the bid that the supervisory authority requires to discharge its functions. Further, the offeror is required to communicate to the CSSF and disclose the number of securities – specifying the number of inherent voting rights – for which its bid has been accepted or which belong to it.
What preliminary agreements are commonly drafted?
A confidentiality agreement and a letter of intent.
What documents are required?
The following documents are required:
- an offer document – this document will include certain mandatory mentions provided by the Takeover Bids Law of May 19 2006;
- the decision to make the bid and the offer document;
- disclosures from the bidder to the Financial Sector Supervisory Commission (CSSF) with respect to securities acquired during the acceptance period; and
- share purchase agreements for the transfer of securities
Which side normally prepares the first drafts?
The offeree company’s counsel normally prepares the first draft, but there is no strict rule in that regard.
What are the substantive clauses that comprise an acquisition agreement?
An acquisition agreements comprises:
- the number and details of securities (including the rights and obligations attached thereto) which are offered or acquired);
- the related representations, warranties and undertakings;
- indemnification provisions;
- the purchase price;
- the governing law and jurisdiction; and
- the notification and acceptance of the sale and transfer of securities by the target.
What provisions are made for deal protection?
Provisions made for deal protection include:
- undertakings and indemnification provisions; and
- confidentiality measures.
What documents are normally executed at signing and closing?
Share purchase and transfer agreements for the transfer of securities and a shareholders’ agreement if applicable are normally executed at signing and closing.
Are there formalities for the execution of documents by foreign companies?
No, not from a legal point of view. The documents could also be signed as counterparts.
Are digital signatures binding and enforceable?
Yes, however, this is not yet a common way to proceed with this kind of transaction. In general, the parties proceed using PDF copies of the executed documents.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Yes, however, this is not yet a common way to proceed with this kind of transaction. In general, the parties proceed using PDF copies of the executed documents.
What provisions and/or restrictions are there for foreign ownership?
There are no particular restrictions on foreign ownership.
Valuation and consideration
How are companies valued?
Companies are usually valued by an independent expert, which provides sufficient comfort for the relevant parties.
What types of consideration can be offered?
By way of consideration, the offeror may offer securities, cash or a combination of both. However, when the consideration offered by the offeror does not consist of liquid securities admitted to trading on a regulated market, it will include a cash alternative. In any event, the offeror will at least offer a cash consideration as an alternative where, over a 12-month period before the bid, it has purchased cash securities with 5% or more of the voting rights in the offeree company.
What issues must be considered when preparing a company for sale?
The first issue to be considered by the bidder is the organisation of its financing. Further, one of the other main hurdles consists in the approval of the offer document by the Financial Sector Supervisory Commission (CSSF).
Another milestone for a successful takeover bid is to achieve sufficient support from the offeree company, its shareholders and board of directors.
Finally, if needed, obtaining a decision by the authorities responsible for ensuring free competition would also be a crucial step.
What tips would you give when negotiating a deal?
An essential step is to ensure significant cooperation with the target so as to ensure a smooth closing.
Are hostile takeovers permitted and what are the possible strategies for the target?
Yes, there is no particular legal impediment for a hostile bid in Luxembourg. However, in practice, it is always preferable to cooperate with the target’s board of directors, in particular to authorise a smooth due diligence process.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Warranties usually cover various facts regarding securities (eg, legal and beneficial ownership, free of charges and liens, as well as the binding effect and enforceability of the relevant agreement and lack of conflict with other agreements). Parties may sometimes agree on fines in case of a deal break. The indemnities deal with the sharing of costs and fees relating to the transaction and also govern the parties’ indemnification in case of a contractual breach of obligations and incurred damages.
Limitations and remedies
Are there limitations on warranties?
No, there are no particular limitations.
What are the remedies for a breach of warranty?
Parties may first envisage to settle the issue themselves on a voluntary basis (eg, by resolving the breach or providing an alternative remedy) or settle the dispute pursuant to the contractual provisions – usually an arbitration or in the worst case scenario a judicial proceeding. There is also a general obligation to act in good faith, it being understood that acting in bad faith may result in damages to be settled pursuant to the Civil Code. In the case of a breach, the parties may also set up an indemnity, the amount of which can be reduced by the court.
Are there time limits or restrictions for bringing claims under warranties?
Time limits and restrictions are usually established in contractual agreements.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Ordinary cumulated corporate income tax in Luxembourg is 27.08% for 2017 (ie, 20.33% corporate income tax and 6.75% municipal business tax for companies located in Luxembourg City). This rate will be 26.01% as of 2018.
In principle, capital gains realised on the disposal of shareholding interests are subject to tax; nonetheless, Luxembourg tax law provides for a full tax exemption under the participation exemption regime. The following conditions must be met for a capital gain to be eligible:
- The selling Luxembourg company must hold for at least 12 months an interest representing at least 10% of the share capital of the disposed company or an acquisition cost of at least €6 million.
- The participant company must be a Luxembourg company subject to the ordinary tax regime or is an EU-resident company listed in the EU Parent Subsidiaries Directive (2011/96/EU) or an extra-EU company subject to corporate income tax comparable to a Luxembourg company.
If the seller is a foreign company and the participation is held in a Luxembourg company, the capital gain realised could be exempt from taxation in Luxembourg under local domestic rules or in accordance with the relevant double tax treaty. Taxable capital gains should be limited to cases where the foreign investor holds a participation of at least 10% of the participant Luxembourg company and the disposal occurs within six months from the acquisition and no double tax treaty provisions apply to the specific case.
Registration duty M&A transactions involving a change of a company’ bylaws or capital are generally subject to fixed negligible amounts of registration duty.
The transfer of credits is free form registration duty as of January 1 2017 (previously, 0.24% duty applied).
The transfer of immovable properties are subject to registration duty of 6% to 9%. An additional 1% transcription duty is also due. In some cases the transfer of immovable properties results in the application of value added tax (VAT) instead of registration duty.
VAT M&A transactions involving the transfer of shares are not subject to VAT (or registration duty). Further, the transfer of a business or the branch of a business may occur without being subject to VAT.
Financial transaction tax Luxembourg imposes no financial transaction tax and at present there appear to be no plans to introduce this tax.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
In addition to the participation exemption rules, tax relief is available for mergers, demergers, the exchange of shareholdings and contributions under the domestic tax rules implementing the EU Merger Regulation (139/2004/EC). When applicable, these rules secure the tax neutrality of this kind of transaction.
Tax neutrality can apply, provided that the relevant conditions for domestic and cross-border transactions are met.
Further, the exit tax regime permits a deferral of payment of corporate tax due on capital gains realised as part of an M&A transaction involving the transfer abroad of entities or businesses. This regime has been recently extended, under certain conditions, to transactions involving transfers outside the European Union.
What are the common methods used to mitigate tax liability?
Considering the specificities of the Luxembourg market, M&A transactions mainly involve holding companies. In this case, the participation exemption is the most common way to mitigate tax liabilities.
What fees are likely to be involved?
The most likely fees are break fees, legal fees and auditors’ fees, as there is no particular provision in Luxembourg in this respect.
Management and directors
What are the rules on management buy-outs?
There are no specific legal rules on management buy-outs.
What duties do directors have in relation to M&A?
The board of directors must always act in the best corporate interest of the relevant company. The directors must ensure that they have no personal conflicts of interest when deliberating and voting on the relevant board resolutions.
Consultation and transfer
How are employees involved in the process?
The offer document must include the offeror’s intentions with respect to safeguarding the jobs of the offeree company’s employees and management, including:
- any material change in employment conditions; and
- the offeror’s strategic plans and their likely repercussions on employment and details of the companies’ places of business.
The Takeover Bids Law of May 19 2006, which transposed the EU Takeover Directive (2004/25/EC), contains no particular restriction on agreements with employees. However, employees could cumulatively be holders of securities in listed companies and in such cases the general principle of equal treatment of all holders of securities will apply.
What rules govern the transfer of employees to a buyer?
Pursuant to the Takeover Bids Law, as regards the information to be provided to the offeree company’s employees, the applicable rules and the competent authority will be those of the EU member state in which the offeree company has its registered office.
As soon as the bid has been made public, the boards of the offeree company and the offeror will inform their respective employee representatives or, where there are no such representatives, to the employees themselves.
When the offer document is made public, the boards of the offeree company and of the offeror will communicate the latter to their respective employee representatives or, where there are no such representatives, to the employees themselves.
The offeree company’s employees representatives, or where there are no such representatives, the board will involve the employees in its analysis which will result in an opinion on the bid. The board will inform and require the advice of the employee representatives, or where there are no employee representatives, the employees themselves, in particular regarding the effects of the bid on the company’s interests and employment. Where the board receives in good time a separate opinion from the employee representatives on the effects of the bid on employment, that opinion will be appended to the bid document.
A term of imprisonment from eight days to five years and a fine of €251 to €125,000 will apply to persons who fail to provide the offer document to the employee representatives or, where there are no such representatives, to the employees themselves.
What are the rules in relation to company pension rights in the event of an acquisition?
An acquisition will not trigger per se any modification of a company’s pension plans that remain valid. The company’s pension rights will not be affected.
Other relevant considerations
What legislation governs competition issues relating to M&A?
The Law dated October 23 2011, as amended.
Are any anti-bribery provisions in force?
Under the Criminal Code, passive and active bribery committed by a natural person may lead to imprisonment and/or a fine. Legal entities are liable for extortion, bribery (public or commercial), trading influence and corruption offences. The Criminal Code and the Law of November 12 2004, as amended, seek to fight against money laundering and terrorism. The Law of February 13 2011 against corruption may apply.
What happens if the company being bought is in receivership or bankrupt?
This should be avoided through due diligence and representations and warranties in the contractual documentation. If not, Luxembourg insolvency rules may apply, including hardening periods, which means that transactions entered into during the six months and 10 days preceding the bankruptcy declared by the Luxembourg court and involving the bankrupt company may be declared null and void.