Structure and process, legal regulation and consents

Structure

How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?

The acquisition and disposal of privately owned companies are usually effected by way of the execution of a share purchase agreement between the seller and the buyer in the presence of the company whose shares are being sold (for formality purposes).

In most cases, a typical private equity transaction starts with a bidding process whereby the sellers (which are either the historical shareholders of the sold company, or a private equity house) require a financial adviser to organise an auction. Auctions typically work as follows.

 

Due diligence

The legal part of the deal sees the seller organising a vendor due diligence (VDD), which is accessible to the bidders (usually there are between three and six contenders) and their respective legal and tax advisers. The bidders have a limited period to review the VDD and the supporting documents, which are available in a virtual data room. The outcome of their review is typically summarised in a due diligence report on a 'key issues only’ basis (a red flag report).

Within the framework of their review, questions can be raised to the seller’s counsel by the buyer’s counsel. Occasionally, an expert session is organised to allow the buyer’s counsel (legal and financial) to address their questions directly to the management of the target company. The due diligence period usually lasts three to four weeks (such period can be longer if the company to be purchased belongs to a group that operates in multiple jurisdictions, for instance).

In Luxembourg, the entities under review are mostly holding companies not carrying industrial or commercial activities locally; hence, the due diligence is often limited to corporate, finance and tax aspects (and possibly, as the case may be, labour law, IP or real estate aspects). To limit due diligence costs, it is increasingly common to shorten the time to conduct the due diligence (one or two weeks). In such a case, the report is simplified (red flag report only, with the materiality threshold fixed at a certain amount to limit the issues raised).

 

Offer

Subject to the due diligence being satisfactory to the buyer, the buyer will submit a binding offer to the seller. If the offer is acceptable, the process eliminates some of the bidders, and usually the process continues with two or a maximum of three bidders.

 

Review of the transaction documents

The acceptance of the proposed offer by the seller opens a second phase where the seller provides the potential buyers with the transaction documents. Usually, this includes the share purchase agreement and, as the case may be, the shareholders’ agreement if the seller intends to keep a stake in the target company or the management is reinvesting as well). Legal counsel to the buyers provide their comments on the documentation (such comments should remain as limited as possible in order to be elected at the end of the process). This phase usually lasts two to three weeks.

 

Signing

At the end of the process, the transaction documents are executed with the elected buyer. As Luxembourg is a key jurisdiction used for the structuring of investments, the buyer often incorporates a special purpose vehicle in Luxembourg prior to signing, such vehicle being the actual buyer of the target company. The transaction documents usually set a date for the closing of the transaction (a couple of months after signing). The period between signing and closing is usually used to clear antitrust or regulatory issues, or both.

 

Closing

At the end of the above-mentioned period, the final transaction documents are executed, the purchase price is paid and the transfer formalities are performed. The transaction documents usually consist of a share purchase agreement and, as the case may be, a shareholders’ agreement (if the management is involved in the process). Specific agreements such as a management incentive plan can be executed as well. It is also the case that financial documents such as bank loans and relevant collateral agreements are executed at closing if bank financing is necessary for the transaction. The legal documentation necessary to acquire a Luxembourg target is executed under private seal and does not require any notarisation or apostille.

Legal regulation

Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?

Commercial companies are governed by the Law of 10 August 1915, as amended from time to time (the Law). The transfer of instruments issued by commercial companies is set out in various provisions of the Law. Relevant articles of the Luxembourg Civil Code are also applicable to private equity transactions.

The Law does not require Luxembourg law to govern the transaction documents and, in practice, given that Luxembourg is a throughout jurisdiction (ie, a jurisdiction through which the investment or the purchase is made by way of an investment or acquisition vehicle), the transaction documents are usually governed by foreign laws (mostly English or US law). In such case, the transaction documents are reviewed by Luxembourg counsel to ensure that the terms thereof comply with the Luxembourg mandatory rules and, when the target is a Luxembourg entity, with the Luxembourg transfer formalities.

Legal title

What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?

A buyer of instruments issued by a company (or of assets) will typically acquire the full property of said instruments (or assets) by operation of law. According to the general principles of contracts, a sale is binding (and the property is transferred) upon the agreement between the buyer and the seller on the sold assets and on the purchase price. The transfer formalities (update of the share register, registration with the register of companies as the case may be) exist only for the purpose of enforceability towards third parties.

Luxembourg has several pieces of legislation allowing, in various manners, the recognition of a separation of legal and beneficial ownership (similar to trusts, private foundations or fiducie). In addition, it is possible to divide the ownership of a share (or of an asset, mostly real estate) between the bare ownership and the usufruct. The holder of the bare ownership remains the actual legal owner, whereas the owner of the usufruct benefits from the revenues generated by the share (dividends) or asset (leases, for instance).

Multiple sellers

Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?

Normally each seller must agree to the sale of its shares. In practice, minority shareholders grant powers of attorney to the majority shareholders to represent them for the purpose of the transaction (to avoid multiple signatories for the transaction documents). In private equity transactions, when there are minority shareholders, they are usually subject to drag-along provisions set out in a shareholders’ agreement or the company’s articles of association, or both.

According to article 710-12 of the Law, if the shares of a private limited liability company are sold to a third party, the existing shareholders must approve the new shareholder by a majority of 75 per cent of the shares in issue (or 50 per cent if the articles of association of the company provide so).

The Law does not allow the squeezing-out of reluctant (minority) sellers, unless so agreed in an agreement or the articles of association, or both (or except in the particular case of takeover bids, which are governed by the Luxembourg law of 19 May 2006, which is rarely used in Luxembourg).

Exclusion of assets or liabilities

Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?

There is a general rule of contractual freedom allowing the buyer and the seller to define the sold assets and liabilities and the excluded assets and liabilities.

Notifications or approvals, or both can be necessary depending on the assets and liabilities sold (for instance, creditor approval in the case of assignment of a contract).

Consents

Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?

There are no regulations forbidding foreign ownership of companies, business or assets as a matter of principle. However, a stringent regulation, meant to prevent money laundering and the financing of criminal activities (such as terrorism), applies to professionals involved in private equity transactions (banks, notaries, legal and tax advisers, etc). All professionals are required by law to identify the ultimate beneficiaries of a transaction and the origin of the funds used.

Regarding internal governmental regulations, internal merger control does not exist in Luxembourg. Hence, no governmental authorisation is to be sought prior to pursuing a transaction likely to have effects on competition on the Luxembourg market. EU regulations will apply if the relevant thresholds are met.

Real estate transactions can be subject to expropriation for national interest considerations.

If the sold entities are vehicles regulated by the Luxembourg Commission of Surveillance of the Financial Sector (CSSF), notifications or approvals, or both might be necessary.

Are any other third-party consents commonly required?

Shareholders’ consent can be necessary either by effect of the law (if the shares are transferred to a third party and issued by a private limited liability company) or by effect of contractual arrangements (such as shareholders’ agreements).

The assignment of contracts or debts usually requires the approval of the other party or the creditor.

If the sold assets are encumbered, the consent of the beneficiary of the security will be required.

Change of control provisions are usually included in bank loans, requiring the lenders’ consent prior to transferring the financed company or asset.

Regulatory filings

Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?

The transfer of shares of a private limited liability company will require, in addition to the update of the shareholders’ register, a filing with the Luxembourg Register of Commerce and Companies. No fees are due in that respect.

In cases where the sold entities are regulated by the CSSF, specific regulatory notifications or filings may be necessary.