The law of April 6 2013 on dematerialised securities entered into force on April 19 2013. It introduces a legal regime for dematerialised securities, inspired by existing regimes in Belgium, Switzerland and France. The law amends:
- the law of April 5 1993 on the financial sector (the Financial Sector Act);
- the law of August 10 1915 on commercial companies (the Companies Act);
- the law of August 1 2001 on the circulation of securities and other fungible instruments (the Securities Circulation Act);
- the law of September 3 1996 on the involuntary dispossession of bearer securities;
- the laws of December 20 2002 and December 17 2010 on undertakings for collective investment;
- the law of March 22 2004 on securitisation; and
- the law of February 13 2007 on specialised investment funds.
For many years it was generally understood that the possibility existed to create 'book-entry' securities, but only on a strictly contractual basis and therefore enforceable solely against the parties to the contract. Under such a regime, a major inconvenience is that the original form of the securities continues to exist alongside the created book-entry securities. Such a contractual alternative will remain available pursuant to the implementation of the new law. Moreover, as far as the transfer of securities in book-entry form is concerned, the principles set out in the Securities Circulation Act are maintained and confirmed by the new law to be applicable to all securities circulating in book-entry form, including with respect to any questions relating to the transfer of dematerialised securities (unless specifically derogated by the new law).
The new law allows securities to be issued in or converted into dematerialised form. Dematerialised securities exist only by means of a book entry in an issuance account and in a securities account, and circulate by book-entry transfers with no other physical materialisation. However, the two existing legal forms of security – registered and bearer – are maintained as possible forms of securities. Unlike in other jurisdictions, the bearer form has thus not been abolished in light of the introduction of the dematerialised securities regime.
The scope of the new law is broad and applies to nearly all securities issuers, to the extent that the securities to be dematerialised are fungible. The law covers only securities governed by Luxembourg law. For equity securities, the issuer itself must be a Luxembourg company established under the form of a société par actions (stock company) to fall under the scope of the new law. For debt securities, Luxembourg law must govern those debt securities and the terms and conditions applicable to them in order for the securities to fall under the scope of the new law. As the issuer of equity securities must be a Luxembourg société par actions (stock company), only equity securities issued by a company incorporated in the form of either a société anonyme (public limited liability company) or a société en commandite par actions (partnership limited by shares) can exist in dematerialised form, to the exclusion of equity securities issued by a company incorporated under the form of a société à responsabilité limitée (private limited liability company). However, the law specifically allows investment funds and securitisation funds to issue dematerialised securities if their articles of association or management regulations provide for such a possibility. Commercial paper and shares of pension savings companies with variable capital (SEPCAV) are ineligible for dematerialisation.
Either a securities settlement system (as currently operated by LuxCSD, Clearstream Banking or VP Lux) or a central account provider will be required for the dematerialisation process. The choice between these two rests in principle with the company's management body, but should be discussed sufficiently in advance with the envisaged entity, as certain costs as well as a request to complete a 'know your client' test with the entity may be preconditions for acceptance. Accordingly, in a company incorporated under the form of a société anonyme (public limited liability company) with a one-tier management body, the board of directors will in principle make this choice. There is, however, one restriction: a securities settlement system will be mandatory for dematerialised securities that are listed (or intended to be listed) on a regulated market (within the meaning of the EU Markets in Financial Instruments Directive (2004/39/EC)). Issuers intending to list their securities in future might therefore find it in their best interests to choose a securities settlement system at the beginning of the dematerialisation process. Both the securities settlement system and the central account provider (as the authorised entity) may hold the 'issuance account', which is a specific and mandatory mechanism created by the law for the dematerialisation process.
While the determination of the terms and conditions applicable to debt securities and the appointment of an authorised entity are left to the issuer's management body, the first issuance of dematerialised equity securities also requires that specific steps be taken by the shareholders. The issuer's articles of association must provide that the company may issue dematerialised securities and specify the conditions applicable to them – including (where applicable) the conditions regarding the conversion of existing equity securities into dematerialised form.
Conversion of existing securities
Conversion of existing equity or debt securities can be mandatory or optional, and both equity and debt securities can be converted. Mandatory conversions will be decided by an ad hoc meeting of shareholders to amend the issuing company's articles, which involves all equity holders of the same type of securities (all shares of the same category will accordingly be either mandatorily or optionally convertible). Several publications are required and incentive measures are provided for in case the shareholders do not comply in time.
With respect to debt securities, the decision to convert will be taken by the general meeting of debt securities holders, which will amend the terms and conditions of the relevant debt securities documentation and provide for the applicable conditions and delays. Publication in the Luxembourg Trade and Companies Register is also required.
In both cases, the delay to convert begins on the date of the meeting of the securities holders, not on the date of effective publication. The minimum period to complete a mandatory conversion is two years. The law provides no maximum delay to convert; however, after eight years, incentive measures may be used, such as the suspension of voting rights attached to the securities (which is automatic if the delay to convert has expired) or the suspension of distributions until dematerialisation is complete, with no interest to be paid by the issuer.
It is also possible to establish in the articles of association – namely, in the management regulations or the terms and conditions of the securities – that after a period of eight years from the conversion decision, the issuer may sell the non-converted securities and hold the dematerialised securities in a securities account, at a price determined by law, depending on the type of securities involved. However, such a forced sale is optional and the final decision remains with the board. In any case, publications are required before such a sale can be made.
For the issuance of dematerialised securities – both new issuances and conversions – the law creates a new type of account, the issuance account, to be held exclusively by either a securities settlement system or a central account provider. A single issuance account for the same type of securities (ie, equity securities of the same category or debt securities of the same issuance, currency and nominal value) will act as the pivotal element of the dematerialisation process and facilitate the creation and close monitoring of the dematerialised securities in circulation, while preventing artificial creation or duplication of securities.
The issuance account created specifically for a single type of securities ensures the centralisation of the issued securities and helps to maintain control over the securities effectively created or converted. For each issuance of dematerialised securities, there exists a single and specific issuance account representing the specific issuance and establishing the number of existing securities. The securities exist in dematerialised form only when registered in the issuance account. The issuance account benefits from specific protections, such as immunity from seizure, blocking or opposition, unless requested by the authorised entity itself. The protection of securities accounts is less extensive, even though the new law confirms the prohibition of upper-tier attachment as set out in the Unidroit Convention.
Once securities have been dematerialised and centralised in the issuance account, they are allocated to several securities accounts held within an authorised entity for various entities (usually banks) acting as intermediaries. The issuance account is not a securities account and the intermediary's entitlement to the securities is exercised only by allocation of a given amount of securities and their registration at the level of the intermediary's relevant securities account. Once allocated to a securities account, the securities may circulate by book-entry transfer from one securities account to another securities account using the process laid out in the Securities Circulation Act. The legal framework for this transfer will indeed be the same as that described in the Securities Circulation Act, unless specifically derogated by the new law.
Dematerialisation does not prevent financial collateral arrangements from being entered into. If a pledge is granted over securities to be converted, the parliamentary works provide that the decision to convert and the person entitled to make the decision should be determined by agreement of the parties involved. However, for mandatory conversions of pledged shares decided in the absence of a specific agreement between the parties with respect to the conversion, the law remains silent on the possibility of the pledgor to convert the shares, especially if the time period set for conversion will soon expire.
With respect to the exercise of rights attached to the dematerialised securities (either debt or equity), the law extends the rule of the 'record date' as it already applies to the exercise of rights attached to shares of listed companies.
The law introduces a new regulated entity status entitled to hold the issuance account alongside the securities settlement systems – the central account provider. However, the choice of a securities settlement system will be mandatory where the securities to be issued or converted into dematerialised form are listed (or intended to be listed).
The central account provider can potentially be a Luxembourg credit institution or a branch of a credit institution licensed in another EU member state. However, such an institution must obtain a specific licence from the minister of finance to act as a central account provider with the primary task of holding issuance accounts, which makes the need for this new 'status' questionable. Third-country entities or EU credit institutions without branches in Luxembourg are ineligible and the universal banking licence (as provided under the Financial Sector Act) does not cover the central account provider's activities. Given that the issuance account related to listed securities must be held with a securities settlement system and the transfer of an issuance account from one authorised entity to another – although theoretically possible under the law – may be cumbersome and protracted, the issuer should carefully consider the initial choice as to the authorised entity to hold the issuance account.
The new law constitutes a considerable step forward in the establishment of a safe and modern legal framework that facilitates the international transfer of securities. The law adheres closely to national and international rules in an attempt to harmonise the existing securities legislation. The announced draft of a securities law proposal by the European Commission might have an impact on some provisions of the law once the proposal has been finalised and adopted, but in the meantime the law allows financial players to prepare for upcoming EU-wide changes.
For further information on this topic please contact Josée Weydert, Isabelle Lux or Sophie Rezki at NautaDutilh Avocats Luxembourg by telephone (+352 26 12 29 1), fax (+352 26 68 43 31) or email (email@example.com, firstname.lastname@example.org or email@example.com).
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