What are the primary sources of laws and regulations relating to shareholder activism and engagement? Who makes and enforces them?
Luxembourg’s main statutes on corporate governance include the Act of 10 August 1915 on Commercial Companies (the Companies Act), which was revamped in 2016 to modernise Luxembourg corporate law, the Market Abuse Regulation and the Act of 24 May 2011 (the Shareholder Act).
Shareholder rights and governance in Luxembourg are statute-based, consisting primarily of the Civil Code, the Companies Act and, for listed companies, the Shareholder Act and the rules and regulations of the Luxembourg Stock Exchange (LuxSE).
The Shareholder Act came into force on 1 July 2011. It implemented Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies, aiming to increase shareholders’ activism and setting out a number of shareholders’ rights. It has been amended by the Act of 1 August 2019, transposing the Second Shareholders’ Rights Directive (EU) 2017/828 into Luxembourg Law. The amended Shareholder Act sets out rules on, inter alia, say on pay, identification of shareholders, transmission of information and transparency of institutional investors, asset managers and proxy advisers.
As a supplement to the general statutory law, the LuxSE’s 10 Principles of Corporate Governance, as modified in October 2009 and revised in March 2013 (third edition) and December 2017, provide guidelines on best practice in corporate governance for all companies listed on the LuxSE. Luxembourg companies listed abroad often find inspiration in these LuxSE. The rules and regulations of the LuxSE have been substantially updated in January 2020 to take into account recent developments, in particular the Act of 16 July 2019 on prospectuses for securities.
Moreover, in 2018, Luxembourg implemented Directive 2014/65/EU on markets in financial instruments, aiming at increasing transparency, better protecting investors, reinforcing confidence, addressing unregulated areas, and ensuring that supervisors are granted adequate powers to fulfil their tasks. In addition, as of the entry into force of the EU Regulation on Markets in Financial Instruments, the provisions of the regulation are directly applicable in Luxembourg.
Companies whose shares are admitted to trading on a regulated market in a member state of the European Union, including Luxembourg, may also be subject to the Act dated 19 May 2006 on Takeover Bids, as amended (the Takeover Bid Act). The Takeover Bid Act notably provides for minority shareholder protection, the rules of mandatory offers and disclosure requirements.
In 2008, the Transparency Directive (Directive 2004/109/EC) was transposed into Luxembourg legislation through the Act of 11 January 2008, as amended.
A breach of certain statutory provisions of the Companies Act and, for listed companies, the Shareholder Act qualifies as a criminal offence, although prosecution is rare.Shareholder activism
How frequent are activist campaigns in your jurisdiction and what are the chances of success?
There are very few publicly available examples of shareholder activism in Luxembourg-listed companies. The most prominent example was the takeover of Arcelor by Mittal, which was only finally made possible following the pressure of the shareholders. This concrete example, however, is already almost 15 years old, since the takeover took place in 2006. A more recent example is Deer Park Road’s investment in a Luxembourg-based company in 2017.
Furthermore, Deminor, a firm that is actively engaged in shareholder activism by representing minority shareholders and enforcing their claims accordingly, refers to a couple of Luxembourg companies on its website. Their names are redacted for obvious disclosure reasons, which makes it almost impossible to identify the companies concerned, but it is quite likely that they already have or will target Luxembourg-listed companies.
On a side note, Luxembourg hosts a number of funds that invest in companies worldwide and are active as shareholders in these entities. As an example, Active Ownership is a fund, based in Luxembourg, that managed to replace certain members in the supervisory board of STADA and recently became the most important shareholder in Agfa.
How is shareholder activism generally viewed in your jurisdiction by the legislature, regulators, institutional and retail shareholders and the general public? Are some industries more or less prone to shareholder activism? Why?
Luxembourg and EU company law reforms introduced new or strengthened shareholder rights around the turn of the 21st century. There is a trend in Luxembourg law for more transparency, accountability and increased shareholder rights, especially in listed companies. In this context, the transposition of the Shareholder Rights Directive (EU) 2017/828 into Luxembourg Law by the Act of 1 August 2019 must be mentioned. In addition, minority shareholders have additional rights further to the changes to the Companies Act in 2016.
It is hard to predict whether these changes will lead in practice to more public campaigns led by activist shareholders. It is certain that boards will, however, have to take into account the potential involvement and action from their shareholders, including minority shareholders.
In Luxembourg, no particular industry is more or less prone to shareholder activism. Activist campaigns against ‘national champions’ tend to face more backlash from the general public and politicians.
What are the typical characteristics of shareholder activists in your jurisdiction?
Deminor, a firm that is actively engaged in shareholder activism by representing minority shareholders and enforcing their claims accordingly, refers to a couple of Luxembourg companies on its website. Their names are redacted for obvious disclosure reasons, which makes it almost impossible to identify the companies concerned, but it is quite likely that they already have or will target Luxembourg-listed companies.
What are the main operational governance and sociopolitical areas that shareholder activism focuses on? Do any factors tend to attract shareholder activist attention?
Activist campaigns would typically be focused on a company sale or break-up, bumpitrage or return of capital. Long-term institutional investors tend to focus more on environmental, social and governance topics and executive compensation or say on pay.
Factors that tend to attract activists’ attention include announced or potential M&A events, low leverage or strong cash positions, as well as perceived corporate governance issues, underperformance and inflated executive pay.
Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
Depending on the type of activist, its goals and the company’s takeover defences, activists may use a number of different tactics to pursue their objectives, such as:
- privately engaging through informal discussions or ‘dear board’ letters (the starting point of most activist campaigns and the preferred tool of most institutional investors);
- publicly criticising a company’s strategy, governance or performance or calling for a sale, break-up, return of capital or increased offer price (bumpitrage);
- short-selling stock and starting a public campaign to drive down stock prices;
- stakebuilding to build up pressure on the boards and signal seriousness;
- partnering with a hostile bidder;
- participating in and voting at general meetings;
- orchestrating a ‘vote no’ campaign;
- making a shareholders’ proposal or requesting an extrardinary general meeting be convened; and
- initiating litigation
What are the general processes and guidelines for shareholders’ proposals?
Shareholders representing individually or collectively at least 5 per cent of a Luxembourg company’s capital request for listed entities falling within the scope of the Shareholder Act or 10 per cent for other entities, as the case may be, have the right to amend a notice to the shareholder meeting and add additional items to the agenda. The company may refuse to put an item on the agenda as a voting item (rather than a discussion item), if it concerns a matter that falls outside the power of the general meeting. In addition, shareholders representing 10 per cent of a company’s share capital may force the board to postpone a general meeting of shareholders for a period of up to four weeks.
May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?
Even if director nomination is typically made via the company’s nomination committee, any shareholder holding at least 5 per cent for listed entities falling within the scope of the Shareholder Act or 10 per cent for the other entities, as the case may be, has the right to amend a notice to the shareholders' meeting and add the nomination of a director for election.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
Shareholders representing individually or collectively at least 10 per cent of a Luxembourg company’s capital (or a lower percentage as prescribed in the company’s articles) may request of the board that a general meeting be convened. The request must set out in detail the matters to be discussed. If the board has not taken the steps necessary to hold a general meeting within one month (if the company’s shares are not listed on a regulated market within the European Economic Area) of the request, the requesting shareholders may be authorised by the district court in preliminary relief proceedings to convene a general meeting provided that they have a reasonable interest in holding the meeting.
No written resolutions can be taken.Litigation
What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?
Shareholders can seek nullification of corporate resolutions (arguing, for instance, that the resolution is contrary to the company’s interest) or bring wrongful act claims against companies or its directors (arguing that a particular conduct of the company or its directors constituted a tort against the claimant).
Derivative actions do not exist under Luxembourg law. The law does not provide for class actions.
During the annual general meeting, the shareholders can question the board on all aspects of the company’s management, accounting and so forth throughout the year, and may withhold the granting of discharge.
The right of shareholders to ask questions during the meeting and to receive answers to their questions is legally enshrined.
Under the Shareholder Act, in addition to the right to ask questions orally during a meeting, shareholders may have the right to pose written questions about the items on the agenda before the meeting is held. If provided for in a company’s articles of association, questions may be asked as soon as the convening notice for the general meeting is published. The company’s articles of association will furthermore provide the cut-off time by which the company should have received the written questions.
Apart from several specific circumstances (eg, in the case of confidential information), the company must answer any questions addressed to it. Should several questions relate to the same topic, the company may publish a detailed questions and answers document on its website, in which case the chair should draw the shareholders’ attention to the publication.
The Companies Act also allows shareholders to submit questions to management outside a meeting. Any shareholder representing at least 10 per cent of the company’s share capital or voting rights, or both, can ask the board of directors or management body questions about the management and operations of the company or one of its affiliates, without the need for extraordinary circumstances. If the company’s board or management body fails to answer these questions within one month, the shareholders may petition, as in summary proceedings, the president of the district court responsible for commercial matters to appoint one or more independent experts to draw up a report on the issues to which the questions relate.
Certain matters must also be reported to the shareholders, such as any director’s conflict of interest relating to voting on a resolution.
Although the concept of discovery does not exist under Luxembourg law, a party with a legitimate interest may submit a motion to the court demanding the production of specified documents pertaining to a legal relationship to which the requesting party or its legal predecessor is a party.
Shareholders’ dutiesFiduciary duties
Do shareholder activists owe fiduciary duties to the company?
Under Luxembourg law, shareholders may, in principle, give priority to their own interests.Compensation
May directors accept compensation from shareholders who appoint them?
There is no Luxembourg law that prohibits a director of a Luxembourg company from accepting compensation from a shareholder who nominated or appointed him or her. Irrespective of whether a director is nominated, appointed or compensated by a specific shareholder, Luxembourg corporate law requires all directors to be guided by the corporate interests of the company and its business in performing their duties and to consider with due care the interests of all stakeholders. If any such compensation creates, in respect of a particular board matter, a direct or indirect personal interest for the director that conflicts with the interests of the company and its business, the director may not participate in the deliberations and decision-making of the board on such matter.Mandatory bids
Are shareholders acting in concert subject to any mandatory bid requirements in your jurisdiction? When are shareholders deemed to be acting in concert?
The Luxembourg mandatory offer rules only apply to Luxembourg public companies whose shares or depositary receipts for shares are listed on a regulated market within the Eureopan Economic Area. Pursuant to the CSSF and subject to limited exemptions, a mandatory offer requirement is triggered if a person, or a group of persons acting in concert, obtains the ability to exercise at least 33.3 per cent of all outstanding voting rights in a company (predominant control).
Concert parties refers to natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express or tacit, and either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid.Disclosure rules
Must shareholders disclose significant shareholdings? If so, when? Must such disclosure include the shareholder’s intentions?
Pursuant to the Transparency Act, any person who acquires or disposes of shares or voting rights of a Luxembourg company whose shares are listed on a regulated market within the European Economic Area, must forthwith (generally, the next trading day) notify the issuer of the proportion of voting rights of the issuer held by the shareholder as a result of the acquisition or disposal where that proportion reaches, exceeds or falls below the thresholds of 5, 10, 15, 20, 25, 33.3, 50 and 66.6 per cent. It is not needed to include the shareholders’ intentions.
At a few listed Luxembourg companies, the articles of association impose additional notification obligations on shareholders.
Do the disclosure requirements apply to derivative instruments, acting in concert or short positions?
Depositary receipts for shares are taken into account for purposes of calculating the percentage of capital interest and voting rights.
For purposes of calculating the percentage of capital interest and voting rights held by a person, shares and voting rights held by the person’s controlled entity, by a third party for the person’s account or by a third party with whom the person has concluded an agreement to pursue a sustained joint voting policy, are taken into account.
Do insider trading rules apply to activist activity?
Yes, the insider rules apply with respect to Luxembourg companies whose shares or other financial instruments are listed on a regulated market within the European Economic Area. No person may:
- engage or attempt to engage in insider dealing;
- recommend that another person engage, or induce another person to engage, in insider dealing;
- unlawfully disclose inside information; or
- engage, or attempt to engage, in market manipulation.
Company response strategiesFiduciary duties
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
Luxembourg corporate law requires all directors to be guided by the corporate interests of the company and its business in performing their duties. If the company has a business, the interests of the company generally are particularly defined by the interest of promoting the sustainable success of the company’s business (ie, a focus on long-term value creation). Boards must weigh all relevant aspects and circumstances and must consider with due care the interests of all stakeholders, including shareholders, employees, creditors and business partners. Boards have a lot of discretion on how to weigh the various stakeholders’ interests against each other, although the duty of care may require boards to prevent unnecessary or disproportionate harm to the interests of specific stakeholders. The board is responsible for determining and implementing the strategy of the company.
Responding to an unsolicited approach or activist proposal seeking to change the company’s strategy (including by means of efforts to change the board composition) forms part of the company’s strategy and, as such, falls within the domain of the board. There is no shift of fiduciary duties: the directors must continue to act in the best interests of the company and its business with a view to long-term value creation, taking into account the interests of all stakeholders. Boards should ensure that they have all relevant information to make an informed decision, and the proposal should be carefully reviewed, without bias, and assessed against all available alternatives. Shareholders do not have to be consulted prior to the company’s response; the board is (retrospectively) accountable to the shareholders.Preparation
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
Although the absolute number of activist campaigns in Luxembourg is limited, no company is immune to activism, and preparedness is key. While recommended advance preparations depend on the specifics of the company, a few useful preparations are:
- continuously monitoring market activity, financial performance (particularly relative to peers) and the company’s industry and competitors;
- setting up a small defence team of key directors and officers plus legal counsel, an investment banker and a public relations firm that meets periodically;
- ‘thinking like an activist’, routinely assessing the company’s strengths and weaknesses and its takeover defences and exploring available strategic alternatives (consider red teaming);
- building relationships and credibility with shareholders and other stakeholders before activists emerge and maintaining regular contact with major shareholders, the marketplace generally and key stakeholders; and
- communicating clearly and consistently on environmental, social and governance or corporate social responsibility matters, the company’s long-term strategy, its implementation and the progress in achieving it.
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
Some listed Luxembourg companies have adopted one or more structural takeover defences, often in their articles of association. Examples include:
- priority shares with certain control rights; and
- listing of depositary receipts for shares rather than the shares itself.
In addition, Luxembourg companies may use a variety of other tactics, such as:
- engaging with shareholders and other stakeholders (eg, convince major shareholders with compelling long-term plans, mobilise employees and customers);
- exploring strategic transactions that make the company a less desirable target;
- issuing new shares (under existing authorisations) or selling treasury shares to a friendly third party (white knight); and
- issuing bonds with a mandatory redemption at a higher value in case of a change of control.
Do companies receive daily or periodic reports of proxy votes during the voting period?
It depends on the listing venue. Luxembourg companies with a US listing often (choose to) receive regular updates on the vote tally, especially in contested situations, consistent with market practice in the United States. Historically, this has been less so at Luxembourg companies with an EU listing.Settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
Private settlements with activists are not common in Luxembourg but do occur from time to time.
Shareholder communication and engagementShareholder engagement
Is it common to have organised shareholder engagement efforts as a matter of course? What do outreach efforts typically entail?
Organised shareholder engagement outside of general meetings and earnings calls – through investor days, road shows, presentations at conferences or bilateral contacts – has increased in recent years but tends to vary considerably from company to company. Larger issuers, in particular, tend to organise structured shareholder engagement. Engagement efforts tend to be elevated when the company is faced with a crisis or shareholder discontent (eg, an unsolicited approach or activist campaign, a negative recommendation from proxy advisory firms or poor voting results on say on pay or discharge of directors).
Are directors commonly involved in shareholder engagement efforts?
Depending on the company and the topic and shareholder concerned, shareholder engagement efforts may be led by a company’s investor relations department or one or more managing or executive directors – in particular, the CEO or CFO. Non-executive or supervisory directors are less frequently involved in shareholder engagement, though non-executive or supervisory directors may lead conversations with investors regarding the performance or remuneration of managing or executive directors.Disclosure
Must companies disclose shareholder engagement efforts or how shareholders may communicate directly with the board? Must companies avoid selective or unequal disclosure? When companies disclose shareholder engagement efforts, what form does the disclosure take?
Certain listed Luxembourg companies have published a policy on bilateral contacts. Companies are not required to disclose shareholder engagement efforts. It is recommended that presentations to institutional or other investors and press conferences be announced in advance, that all shareholders be allowed to follow these meetings and presentations in real time and that the presentations be posted on the company’s website after the meeting.
Selective disclosures by a Luxembourg company whose shares are listed on a regulated market within the European Economic Area, must comply with the requirements under the Transparency Act. In addition, Luxembourg companies must ensure equal treatment of all shareholders who are in the same position.Communication with shareholders
What are the primary rules relating to communications to obtain support from other shareholders? How do companies solicit votes from shareholders? Are there systems enabling the company to identify or facilitating direct communication with its shareholders?
For listed companies, according to the Luxembourg Stock Exchange's 10 Principles of Corporate Governance, companies should ‘establish a policy of active communication with the shareholders’ and allow shareholder dialogue with the board and the executive management. In addition, one of the main objectives of the amended Shareholder Act 2019 is to give listed companies the right to identify their shareholders and, in the end, improve the communication between the companies and their shareholders. Intermediaries, even those in third countries, are required to provide the company with information on shareholders’ identities to communicate with them directly with a view to facilitating the exercise of shareholder rights and shareholder engagement with the company.
The explanatory notes to the agenda for a general meeting set out the company’s position with respect to the agenda items. The meeting materials are posted on the company’s website. Other public communications often take the form of press releases. Listed Luxembourg companies may decide to engage proxy solicitation firms or investor relations specialists to actively reach out to shareholders (in particular, Luxembourg companies with a US listing do so in line with US market practice).
Notified major shareholdings (more than 5 per cent) can be found in the online registers. The statutory provisions on identification of shareholders must be amended to bring them in line with the amended Shareholder Act.Access to the share register
Must companies, generally or at a shareholder’s request, provide a list of registered shareholders or a list of beneficial ownership, or submit to their shareholders information prepared by a requesting shareholder? How may this request be resisted?
The Act of 13 January 2019 established a Luxembourg register of beneficial owners (the RBE Act). The RBE Act applies to entities registered with the Luxembourg Trade and Companies Register, including civil and commercial companies, branches of foreign companies, Luxembourg common investment funds, and other types of investment funds, such as the undertakings for the collective investment in transferable securities, risk capital investment companies, reserved alternative investment funds and specialised investment funds. There is, nevertheless, an exception for companies whose securities are admitted to trading on a qualifying regulated market (qualifying listed entities). The register is, except with regard to sensitive information such as the private address, accessible to everyone.
If a shareholder so requests, the (management) board must provide the shareholder, free of charge, with an extract of the information in the company’s share register concerning the shares registered in the shareholder’s name. Luxembourg companies are not required to provide access to or a copy of the full shareholders’ register.
If an identification has occurred and shareholders holding 5 per cent of the issued share capital have been identified, the company must disseminate to its shareholders (and publish on its website) any information prepared by the requesting shareholders that relates to an agenda item for the general meeting. The company may refuse the request if the information:
- is received less than five days prior to the meeting;
- sends, or may send, an incorrect or misleading signal regarding the company; or
- is of such a nature that the company cannot reasonably be required to disseminate it (criticism of the company’s policy or affairs is in itself no valid ground for refusal).
Update and trendsRecent activist campaigns
Discuss any noteworthy recent, high-profile shareholder activist campaigns in your jurisdiction. What are the current hot topics in shareholder activism and engagement?
In line with the developments in EU law, there is a trend in Luxembourg law for more transparency, accountability and increased shareholder rights, especially in listed companies. Time will tell whether the changes in Luxembourg law, in particular the amended Shareholder Act, will lead to more public campaigns led by activist shareholders. It is certain that boards will, however, have to be aware of potential involvement and action from their shareholders, including minority shareholders.