1. What’s happening?
The law of 10 August 1915 on commercial companies (the Companies Act) has been amended by the law of 10 August 2016 (the Reform Law), introducing major changes aimed at modernising the corporate legal framework governing companies in Luxembourg. We refer to our newsletter dated 10 August 2016 for the key takeaways of this new regime.
Article 5 of the Reform Law provides that companies incorporated prior to the adoption of the Reform Law need to amend their articles of association in order to reflect the new Companies Act within a period of 24 months following the entry into force of the Reform Law (i.e. by 22 August 2018), failing which the provisions of the articles of association that are in breach of the new Companies Act would be deemed to be null and void (réputées non écrites) and the mandatory provisions resulting from the Reform Law will apply.
2. What is the impact?
For the majority of companies, we do not expect the end of the Reform Law transition period to have a significant impact.
The key purpose of the Reform Law is to introduce a series of new innovative structuring options offering additional flexibility and to clarify the legal framework applicable to companies in Luxembourg. As such, the failure to amend existing articles of association will, in most cases, only result in the inability to benefit from some of the new provisions and the former more restrictive/burdensome rules will continue to apply.
Except in specific situations (for example, with respect to interim dividends for private limited liability companies (S.à r.l.)), a failure to amend the articles should generally not result in a breach of the Reform Law or have a more serious impact. The consequence of having “old” articles would “merely” be that the incorrect articles can be ignored by the parties and that the default provision of the Reform Law automatically applies. Special attention needs to be given to joint venture, co-investment vehicles and structures that are subject to “compliance with laws” covenants.
The key provisions to be considered are the following:
(A) For public limited liability companies (S.A.)
Free choice of the date of the annual general shareholders’ meeting
The Reform Law has abolished the requirement that annual general shareholders’ meetings be held at the time and at a venue specified in the articles of association. The Companies Act now only requires that these meetings be held in Luxembourg (at a date which is not later than six months after the end of the financial year) and an amendment to the articles of association is necessary to benefit from this increased flexibility.
Convening notices must now be published only once at least fifteen days before a general shareholders’ meeting takes place, whereas under the former applicable rules, two publications were required.
Moreover, where all the shares are in registered form, registered shareholders may be convened by any means of communication, such as express mail or email, and not only by registered mail as is currently the case. In this case, the minimum convening notice period has been reduced from fifteen to eight days.
In particular in situations with multiple shareholders that do not agree to waive convening requirements, it could be useful to amend the articles of association to take advantage of the reduced formalities.
Transfer approval clauses
New article 430-1(2) recognises the validity of transfer restrictions and provides specific guidelines for the pre-emption mechanics.
Any clause of the articles of association providing for a more restrictive approval process would not be applicable following 22 August 2018, and an update of the relevant clauses is recommended.
Change of majorities
A unanimous vote is no longer required for changing the nationality of the company. The decision can now be taken by a majority of 66.7% of votes cast. Any company wishing to apply this lower threshold would need to amend its articles of association (if they currently impose a unanimous decision).
(B) For private limited companies (S.à r.l.)
Subject to recognition of such procedure in the articles of association of the company, the board of managers may take decisions by circular resolutions without a physical meeting.
New conflicts of interest rules
The same conflicts of interest rules with respect to the board of directors of the SA now also apply to the S.à r.l.
Change of the approval clause (clause d’agrément) mechanism in relation to transfers of shares to third parties
In the event that a transfer of shares to a non-shareholder has not been approved by the general shareholders’ meeting of the company in accordance with the mandatory approval clause under article 710-12 of the Companies Act, the Companies Act now provides for a framework for an orderly exit.
Ability to distribute interim dividends
The Reform Law has formally introduced a regime in relation to the distribution of interim dividends for the S.à r.l., introducing several conditions attached to such regime. Among such conditions, interim dividends can only be declared by the board of managers (i) provided that the articles of association of the Luxembourg entity explicitly authorise the managers of the company to do so and (ii) an interim account statement is prepared by the board of managers and verified, as the case may be, by an internal or independent auditor (to the extent such auditor has been appointed).
It stems from the above that articles of association of an S.à r.l. which (i) do not include this specific provision or (ii) provide for an interim dividend clause which is in breach of the conditions set out in the Reform Law would not allow for a valid interim dividend distribution after 22 August 2018. We would therefore recommend amending the articles of association to cater for this new regime.
Revised majority requirements
The Reform Law provides for more flexible voting majorities at extraordinary general shareholders’ meetings (which are required for any amendment to the articles of association and any change of nationality, for example) with a default majority of 75% of the share capital and no longer any requirement as regards a majority in number of shareholders.
Where there is more than one share class and a proposed resolution at a general shareholders’ meeting would change the respective rights of such share classes, the resolution must, in order to be valid, fulfil the statutory conditions as to quorum and majority with respect to each such class.
The authorised capital mechanism is expressly recognised for the S.à r.l. Where the articles of the company provide so, the board of managers may, under some conditions, issue shares to existing shareholders or third parties approved by existing shareholders, without the need for a shareholders’ meeting.
The Companies Act now provides for the possibility for an S.à r.l. to issue redeemable shares under the terms and conditions set out in the articles of association of the company.
3. What do you need to do?
Companies should carefully review the provisions of their articles of association, shareholders agreements, joint-ventures and management participation arrangements to assess the impact (if any) of the Reform Law and the end of the grandfathering period.
It goes without saying that any (non-mandatory) changes to be implemented to benefit from the additional options provided by the Reform Law could be implemented at any time at a later stage (and, in particular, if the company needs in any event to amend its articles of association in the context of a transaction or restructuring operation).
In the event an amendment of the articles of association is deemed necessary or desirable, such amendment must, in principle, be documented by an extraordinary general shareholders’ meeting (EGM) to be held in the presence of a notary. However if such amendment is required by the mere fact that the articles of association refer to a repealed provision of the Companies Act or to a provision the number of which has been changed by the Reform Law, the management body may directly proceed with the necessary amendments and such amendment will then be recorded in a notarial acknowledgment deed without the need for a formal EGM.