General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Most financing transactions in Luxembourg are made by inbound foreign professional and institutional financing and banking investors. Transactions tend, therefore, to be governed by the law that is most familiar to the financing parties, which is generally their domestic law (eg, their law of incorporation, English, New York, German or French law). However, most of the contractual agreements relating to the Luxembourg security packages to the extent they relate to Luxembourg securities (acquisition-agreement security packages such as pledges) are governed by Luxembourg law.
Luxembourg law is very liberal and expressly states the principle of freedom of contract, including the choice of law and election of forum (articles 1123 and 1134, paragraph 1 of the Civil Code indirectly). Freedom of contract is, however, limited by mandatory rules and rules of public policy (article 6 of the Civil Code).
The principle jura novit curia does not apply to foreign law. The judge does not automatically raise the conflict of law rule, which is not mandatory in contractual matters. He or she will apply the conflict of law rule when parties have not opted for a governing law. The parties invoking the foreign law must prove the content of the foreign law, which, for the Luxembourg courts, is a matter of fact.
Choice of law
Luxembourg courts will uphold the choice of law made by the parties to the acquisition agreements. However, Luxembourg courts may exclude application of a provision of the law chosen by the parties if, and to the extent, that the result of that application would be manifestly incompatible with fundamental principles of public policy of the Luxembourg forum or they are required to take into account overriding mandatory provisions of a law.
Rules of choice of law for countries of the EU are determined by the Rome I Regulation ((EC) No. 593/2008) on the law applicable to contractual obligations. Where there has been no choice of law, the applicable law will be determined in accordance with the rule specified for the particular type of contract. Where the contract cannot be categorised as being one of the specified types or where its elements fall within more than one of the specified types, it should be governed by the law of the country where the party required to effect the characteristic performance of the contract has his or her habitual residence. In the case of a contract consisting of a bundle of rights and obligations capable of being categorised as falling within more than one of the specified types of contract, the characteristic performance of the contract will be determined with regard to its centre of gravity.
In the absence of choice, where the applicable law cannot be determined either on the basis of the fact that the contract can be categorised as one of the specified types, or as being the law of the country of habitual residence of the party required to effect the characteristic performance of the contract, the contract should be governed by the law of the country with which it is most closely connected. To determine that country, account will be taken, inter alia, of whether the contract in question has a very close relationship with another contract or contracts.
Enforceability of a judgment
When a judgment has been rendered in a non-EU member state and if no international treaty applies, that judgment will be recognised and enforced in Luxembourg after a review by the Luxembourg Court of First Instance that the conditions set out in article 678 of the Luxembourg Code of Civil Procedure are fulfilled (ie, the usual conditions relating to public policy constraints, the observance by the court of the rights of defence, etc).
When the judgment has been rendered in any EU member state, except Denmark, Regulation (EU) No. 1215/2012 (the recast Brussels Regulation), will apply. Similar provisions are provided by the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters signed in Lugano on 30 October 2007 between the European Union member states and three European Free Trade Association countries: Iceland, Norway and Switzerland. The recast Brussels Regulation provides that a judgment delivered in a EU member state, which is enforceable in that member state, shall be enforceable in any other member state without any declaration of enforceability being required (article 39). Pursuant to article 42(1) of the recast Brussels Regulation, a party who wishes to enforce a judgment delivered in another member state shall provide the competent enforcement authority with:
- a copy of the judgment that satisfies the conditions necessary to establish its authenticity; and
- a certificate issued by the court of origin in the form provided in Annex I of this regulation.
Notwithstanding the above, the new regulation still provides for grounds to refuse enforcement of a judgment (article 46 et seq of the recast Brussels Regulation). These grounds are the same as those for the refusal of recognition of a judgment (article 45 of the recast Brussels Regulation):
- if the enforcement is manifestly contrary to the public policy of Luxembourg;
- where the judgment was delivered in default of appearance, if the defendant was not served with the document that instituted the proceedings or with an equivalent document in sufficient time and in such a way as to enable him or her to arrange for his or her defence;
- if the judgment is irreconcilable with a judgment given between the same parties in Luxembourg;
- if the judgment is irreconcilable with an earlier judgment given in another member state or in a third state involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in Luxembourg; or
- if the judgment conflicts with the rules governing the jurisdiction when the policyholder, the insured, a beneficiary of the insurance contract, the injured party, the consumer or the employees was the defendant (articles 10 to 23 of the recast Brussels Regulation), and the rules governing the exclusive jurisdiction (article 24 of the same).
Further, Regulation (EC) No. 805/2004 of 21 April 2004 (as amended), creating a European enforcement order for uncontested claims, provides for the abolition of exequatur for judgments on uncontested claims.
A judgment that has been certified as a European enforcement order in another EU member state, other than Denmark, will be recognised and enforced in Luxembourg without the need for a declaration of enforceability and without any possibility of opposing its recognition.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
There are no restrictions on acquisitions made by foreign entities. In addition, there are no restrictions on cross-border lending. EU credit institutions may provide credit through either a branch or in accordance with rules relating to freedom of provision of services as long as this activity is regulated by the regulatory authorities of their home country. The exercise of this activity on Luxembourg territory is not subject to authorisation by the Luxembourg financial sector supervisory commission.
Intra-group financing is also not subject to regulatory supervision. Other funding can be freely made to Luxembourg entities as long as their activity does not qualify as an activity of the financial sector; namely, the activity is not carried out in a professional and usual way on Luxembourg territory or the funding entity is subject in its territory of origin to a supervision equivalent to that existing in Luxembourg.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
Large acquisition financing in Luxembourg mainly consists of debt and equity-tainted debt instruments (including hybrid debt instruments such as preferred equity certificates, convertible preferred equity certificates, convertible and redeemable bonds), bank loans (straight loans, syndicated loans, etc) and mezzanine loans (by shareholders or other junior lenders). Almost all financing transactions include senior debt (for the largest amount) and junior debt (provided by shareholders, sponsors or other banks). Luxembourg is particularly attractive for setting up acquisition special purpose vehicles (SPVs) to the extent its regulatory environment offers to investors a wide panel of financing and debt instruments likely to optimise the tax efficiency of the acquisition transactions.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
Takeover bids are governed by the Law dated 19 May 2006 on takeover bids (as amended), implementing Directive 2004/25/EC on takeover bids into Luxembourg law. Pursuant to this law, an offeror must announce a bid only after ensuring that he or she can fulfil in full any cash consideration, if it is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration.
Preconditions to the bid are not permitted unless they involve official authorisations or regulatory clearances relating to the bid. This entails that the bid must not normally be made subject to any financing conditions or preconditions (other than regulatory clearances), and that certain funds must be available to implement the bid.
There is no concept of ‘certain funds’ in Luxembourg law and regulations. However, many Anglo-Saxon private equity funds are active in Luxembourg and they tend to adopt the City Code ‘certain funds’ requirement in private treaty transactions. Although not legislatively mandated in this context, and so more flexible, it tends to be enforced to the point where the vendor’s counsel will carefully scrutinise the bidder’s debt funding term sheets for hidden ‘outs’. However, this is not a fixed concept and there is plenty of scope to negotiate the important details. In general, critical finance conditions are negotiated and resolved in the early stages of the bid process.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
There are no legal restrictions on the borrower’s use of proceeds from loans or debt securities. However, general prohibition of financial assistance may impose restrictions to the extent the advancing of money or granting of loans providing financial means to enable a third party to purchase existing shares of a public limited liability company (société anonyme) is prohibited. The prohibition has been somewhat relaxed through a whitewash procedure (see question 15) but it still stands. Any funding made for purposes of illegal activities are of course prohibited.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
Most of the lending agreement will typically follow Anglo-Saxon formats and tend to favour the lenders. Provisions in agreements can indemnify lenders and agents against all liabilities, losses, costs or expenses arising out of the negotiation, execution, delivery, performance, administration or enforcement of the transaction documents, including pursuant to any proceedings or in connection with the borrower’s use of proceeds of such financing. Indemnities typically cover reasonable fees and expenses of legal counsel but are sometimes limited to one principal legal counsel for all such parties and one local counsel in each relevant jurisdiction. Lenders and agents are generally not indemnified to the extent that any such losses or liabilities are caused by their own gross negligence, bad faith or wilful misconduct (and, sometimes, if caused by a material breach by them of the loan agreement) and many contracts will provide that such finding must be made in a final and non-appealable determination by a court of competent jurisdiction.
Holders of securities initially issued to underwriters or initial purchasers are not indemnified by their issuers, except for taxes for which a ‘gross up’ is payable, as discussed in question 7. Issuers of securities typically indemnify underwriters and initial purchasers against certain liabilities, including liabilities under securities laws, or agree to contribute to payments such parties may be required to make in respect of those liabilities. Trustees and collateral agents are typically indemnified by the issuer for any loss, liability, damage, claim or expense incurred by them without negligence or bad faith and wilful misconduct (or such similar provision as the parties may negotiate) on their part arising out of or in connection with the administration of the indenture or collateral documents under which the securities are governed and their duties thereunder.