Luxembourg on its way to reforming rules with respect to conversions mergers and divisions

The Luxembourg legislator is currently implementing into Luxembourg law bill of law N° 8053 after lodging it with the Luxembourg Parliament on 27 July 2022. Recently, the opinion of the Luxembourg Chamber of Commerce dated 11 November 2022 was published in this respect.

The main purpose of the draft law is to update the legal procedures with respect to mergers and divisions set out in the Luxembourg law of 10 August 1915 on commercial companies, as amended (the “Company Law”) and to introduce a new regime regarding cross-border conversions.

The draft law will implement into Luxembourg law the provisions set out in Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 as regards cross-border conversions, mergers and divisions (the "Mobility Directive") which amends Directive (EU) 2017/1132 of 14 June 2017 relating to certain aspects of company law (the latter as amended by the Mobility Directive the "Companies Directive"). The Companies Directive contains both a general set of provisions with respect to the establishment and functioning of limited liability companies in the European Union and a more specific framework as regards conversions, mergers and divisions of such limited liability companies, this latter framework being defined as the "EU Restructuring Rules").

The implementation of the EU Restructuring Rules must be achieved by 31 January 2023 and apply to mergers, divisions and cross-border conversions (each a "Restructuring").

As regards ongoing restructurings, the new law will only apply to Restructurings for which the relevant restructuring plan is published from the first day of the month following the date on which the new law comes into effect going forward (article 40 of the bill of law). Consequently, as far as Restructurings published prior to that date are concerned, the current restructuring rules under the Company Law will remain applicable to any remaining steps.

The draft law provides for the distinction between two separate legal regimes. This means that the Company Law will contain (i) a general regime applying to internal and cross-border Restructurings that do not fall within the scope of the EU Restructuring Rules (the “General Regime”) and (ii) a special regime regarding Restructurings that do fall within the scope of the EU Restructuring Rules (the “Special Regime”). These are, depending on the type of Restructuring and topic, sociétés anonymes, société en commandite par actions and sociétés à responsabilité limitée.

Generally speaking, the General Regime will consist of the current procedures set out in the Company Law to which certain amendments, the objective of which it is to render the legal rules more flexibly and to provide for a series of clarifications, will be made.

The Special Regime will not apply, among others, to UCITS and companies in liquidation that have started the distribution of their assets. Furthermore, credit institutions and investment firms do not fall under the Special Regime either.

As a general rule it is worth noting that any aspects of a given Restructuring that are not explicitly regulated by the Special Regime are subject to the provisions of General Regime.

General Regime

Among others, the following aspects will be features of the General Regime:

• Internal and cross-border merger and demerger operations will be extended to special limited partnerships ("SCSp") in order to further promote their attractiveness. Currently, SCSp are excluded from these operations on account of the lack of legal personality;
• General meetings may decide to modify the restructuring plan and make the effectiveness of the Restructuring subject to certain conditions or time limits;
• Companies that only have one shareholder are exempted from the requirement to obtain an expert report on the restructuring plan;
• The companies involved in the Restructuring will apply their respective rules as far as publications of the implementation of the restructuring in public registers are concerned.

General Regime with respect to Mergers

One interesting point which is worth focusing upon is the extension of the definition of mergers by absorption in order for it to also apply to upstream mergers (by way of which a company transfers by way of dissolution without liquidation the entirety of its assets and liabilities to its parent company) and side-step or side-stream mergers (by way of which a company transfers by way of dissolution without liquidation the entirety of its assets and liabilities to an existing company without the issue of new shares by such existing company under the condition that one person is the direct or indirect shareholder of all shares in the merging companies or that the shareholders of the merging companies hold their shares in the same proportion in all of the merging companies).

The extension of the definition of mergers by absorption to upstream mergers should mean that it will become slightly more onerous to proceed to simplified liquidations where the remaining assets and liabilities are taken over by the parent company. On the other hand, upstream and side-stream mergers will, however, be subject to a simplified merger procedure.

Effectiveness of Mergers

Furthermore, with respect to the coming into effect of such mergers the following should be noted:

As has been the case so far the merger will take effect between the merging companies on the date that the relevant merger approval decisions have been taken by the merging companies.

However, mergers other than cross-border mergers will only take effect against third parties upon the publication of the minutes of the extraordinary general meeting of the absorbing company that approves the merger or, should no such general meeting take place, upon the publication of a certificate by a notary attesting to the satisfaction of all relevant merger requirements.

With respect to cross-border mergers the date of effectiveness of such merger will be determined by application of the legislation of the country which will govern the company resulting from the merger.

Special Regime

As mentioned, the Special Regime is only applicable to companies which have been set up under the form of a société anonyme (S.A.), a société à responsabilité limitée (S.à r.l.) or a société en commandite par actions (S.C.A.) as foreseen by the relevant annexes in the Companies Directive.

As regards this Special Regime it should be worthwhile to have a closer look at the main disclosure requirements and the rights shareholders and creditors of the companies involved in the Restructuring will be able to resort to. Furthermore, it is worth noting that Luxembourg notaries will play a prominent role in the new processes.

Disclosure requirements

• Restructuring Plan

The companies involved in the Restructuring have to agree on a common restructuring plan for the envisaged transaction covering certain points set forth in the Company Law and which must be published in the Luxembourg Trade and Companies Register at least one month before the date of the general meetings which are to approve the Restructuring.

• Publication of a notice

Furthermore, at least one month before the date of the general meetings which are to approve the Restructuring the companies involved must also publish a notice addressed to the shareholders, creditors and representatives of employees (or if none, the employees) informing them of their right to provide comments on the restructuring plan at least 5 days before the relevant general meetings.

• Board Report(s)

In addition, the relevant administrative or management bodies of the companies involved in the Restructuring must draft a report which is to be addressed to their shareholders and their employees containing certain information. This report can be drafted either as a joint report (i.e. addressed to both the shareholders and the employees, albeit in two separate sections) or as two separate reports.

Such board report(s) is/are to be made available in electronic form to the shareholders and representatives of employees (or if none, the employees) at least six weeks before the relevant general meeting.

Any opinion on such report received from representatives of employees or employees need to be forwarded to the shareholders of the relevant company and annexed to the board report.

In this respect, it is worth noting that the board report or section of the board report which is addressed to the shareholders is not mandatory (i) for companies having a sole shareholder or (ii) if all shareholders have waived this requirement.

Furthermore, the board report or section of the board report which is addressed to employees is not mandatory if the relevant company or any of its subsidiaries has no workers other than those that belong to its management or administrative body.

The entire board report(s) can be dispensed with if (i) all shareholders have waived the requirement and (ii) the section for employees is not mandatory.

• Expert Report

A report drawn up by an independent expert needs to be made available to shareholders at least one month before the relevant general meeting.

Such expert's report can, however, be dispensed with either if all shareholders of each company participating in the restructuring have so decided or in case a company has a sole shareholder.

In addition to the above the bill of law also foresees provisions pursuant to which specific preparatory documents for the relevant general meeting must be made available to shareholders. These comprise, inter alia, the restructuring plan, annual accounts as well as, where applicable specific accounting statements.

Shareholder protection

Shareholders are intended to have the right to declare that they would like to transfer their entire shareholding, or part of it , if foreseen by the structure of to the restructuring plan, in return for the compensation which is set out in the restructuring plan. This declaration may be provided during the relevant general meeting and take place before a notary.

Subsequently, such shareholders will then have the right to receive the compensation within two months after the restructuring has become effective. However, the such legal challenges shall not anyhow suspend or have an impact on the restructuring.

Creditor protection

Creditors will be entitled to ask to be given additional adequate safeguards other than the ones set out in the restructuring plan provided their claims have arisen before the publication of the restructuring plan.

Such claim must be carried out within a period of three months subsequent to the publication of the restructuring plan

Involvement of Luxembourg notary

As mentioned above, Luxembourg notaries will become an important part of the Restructuring processes. In this respect, the Luxembourg notary will have to ascertain whether all the procedures and formalities required by Luxembourg law for the implementation of the Restructuring have been complied with and issue a preliminary certificate. For the purposes of the verification, the notary is provided with all relevant documents and is required to carry out the analysis within three months of receipt of such documents (such period may be prolonged). In particular, the notary must check on a case-by-case basis whether the Restructuring has been set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of EU or national law for criminal purposes. In such a case the preliminary certificate cannot be issued.

The preliminary certificate is filed with the Luxembourg Trade and Companies Register and transmitted by it to any relevant non-Luxembourg register(s) of the companies that take part in the Restructuring.

Furthermore, the Luxembourg notary must analyse and confirm that all steps with respect to the restructuring have been carried out in accordance with Luxembourg law requirements provided the company resulting from the restructuring is subject to Luxembourg law. In order to effect such analysis the notary is able to rely on the preliminary certificate concluding that all required pre-restructuring obligations have been fulfilled in all other relevant EU member states.

The above overview is only intended to provide a first insight into the new framework and is not purported to be a conclusive description of all the new rules. We will be following any further developments on this legislative project and update you accordingly.

In the meantime should you wish to discuss any aspect of the new rules please do not hesitate to reach out to our Ashurst Luxembourg corporate law specialists.

Authors: Isabelle Lentz, Partner; Paul Witte, Counsel; Laurence Latuillerie, Senior Associate