Joint Ventures 2024 Comparisons

While it would be inaccurate to claim that inflation, interest rate fluctuations, geopolitical tensions like the war in Ukraine and ongoing Middle Eastern conflicts, or shifting market demands have not impacted Luxembourg-based joint ventures, the jurisdiction remains appealing for JV structuring. This is largely due to its political and economic stability, as well as its reliable, business-friendly, and flexible legal framework.

In recent years, family offices have increasingly invested alongside commercial partners or institutional investors, such as private equity firms, through joint ventures. These JVs are frequently used to acquire assets located outside Luxembourg, with the involved parties often situated internationally. Luxembourg serves as a compromise, a “safe haven”, for incorporating the holding structure that will ultimately own assets across the European Union or even globally.

The trend in these segments clearly leans towards controlling and sharing both financial and corporate risks while ensuring the distribution of profits to co-investors. In uncertain times, JVs have proven to be a strategic option for parties to pool resources and expertise, leveraging their combined strengths, funds, and shared risks to pursue specific projects or opportunities.

In Luxembourg, several industries and sectors have seen heightened JV activity, notably in the financial services, renewable energy, real estate, healthcare and life sciences, logistics and supply chain the technology and fintech sectors. Luxembourg is a leading financial and tech hub for innovation in financial technology. The country’s strategic support for the space technology sector has also attracted numerous private space companies and tech firms.

This increase in JV activity can be attributed to the factors described in 1.1. Recent Changes, particularly the stable but very flexible legal environment of the Grand-Duchy of Luxembourg.

JVs are not legally defined under Luxembourg laws. A JV is an arrangement between at least two parties reflecting their willingness to share a venture, for either joint commercial or joint investment purposes, by gathering their resources and sharing the risks implied by the project.

While JVs are not required to take any prescribed legal form, the two types of JVs typically used in Luxembourg are the corporate JVs – which implies in most cases the incorporation of a separate JV vehicle by the participants (should an operational company not already have been incorporated by one participant to the JV) and the contractual JVs, based on a single contractual arrangement whereby participants define the scope of their collaboration and related rights and obligations in an agreement.

Contractual JVs are recommended for short-term collaboration focused on a specific project. In a contractual JV, the participants remain liable for the JV liabilities, but do not have to bear the costs incurred by the incorporation and day-to-day administrative management of a common JV vehicle. Although not all aspects of Luxembourg law applicable to agreements can be mentioned here, it is worth mentioning that there are no compulsory formalities required in relation to contractual JVs. The joint venture agreement is structured as an agreement and executed by the parties thereto. There is no requirement to have it enacted by a notary, to adopt any specific form, and there is no stamp or registration duty. The agreement may be written in English without requiring translation into any of Luxembourg’s national languages.

As to the content of the agreement, the principle of freedom of contract largely applies, subject to non-conflict with public policy rules. In relation to any Luxembourg law-governed agreement, an overriding duty of good faith always applies between the parties in their performance of the provisions of the agreement itself, but also in pre-contractual discussions and in any enforcement of the agreement that may be required.

While a corporate JV involves some costs and complexity, for instance in compliance and governance, it offers limited liability to participants, an established governance structure, and capital-raising capabilities for future business growth.

A successful JV requires a high level of collaboration and co-operation, which may explain the dominance of corporate JVs in Luxembourg.

The forms of JV vehicles most commonly adopted for corporate JVs in Luxembourg are the following:

• private limited liability company (société à responsabilité limitée – S.à r.l.);
• public limited liability company (société anonyme – SA);
• simplified joint stock company (société par actions simplifiée – SAS);
• partnership limited by shares (société en commandite par actions – SCA); and
• limited or special limited partnership (société en commandite simple – SCS, or société en commandite spéciale – SCSp).

It is specified that for the SCA, SCS and SCSp, the JV participants are limited partners with limited liability and the general partner has unlimited liability.

In Luxembourg, the choice of the most appropriate legal form for the JV vehicle depends on several factors, notably the possibility offered by the selected structure to provide for tailor-made solutions regarding the decision-making structure of the JV, management preferences, capital needs, pooling of profit and losses, transfers of shares, and its accounting and tax treatment.

If the JV is not established to conduct a regulated activity or to issue securities to the public, then the S.à r.l. is typically the preferred vehicle for a JV as it offers greater flexibility and is not subject to extensive statutory requirements. As per the law on commercial companies dated 10 August 1915, as amended (LCC), the S.à r.l has a share capital of at least EUR12,000, is managed by a single manager or a board of managers, cannot make public offers (either of shares or debt securities) and the transfer of shares in an S.à r.l. to non-shareholders requires the approval of the existing shareholders holding at least 75% of the issued share capital by a formal shareholder resolution – it being specified that the articles of associations can provide for a lower threshold which, however, cannot be less than 50%. Given the importance attributed to the individual identity of the shareholders, it is not permissible to adopt such resolutions of approval at the inception of the joint venture without knowing the identity of the proposed future transferees. The JV agreement could, however, include a provision whereby all shareholders at the time of execution of the JV agreement commit to vote in favour of such a resolution. Voting arrangements are, subject to certain conditions, valid under Luxembourg laws. Finally, it is worth mentioning that the identities of the shareholders of an S.à r.l. are mandatorily disclosed publicly at the Trade and Companies Register (Registre de Commerce et des Sociétés – RCS).

While often overlooked in practice, the SAS, introduced in Luxembourg in 2016, presents a compelling alternative to the S.à r.l. It provides a high level of confidentiality to shareholders, with their identities and shareholdings remaining undisclosed at the RCS. Moreover, except for mandatory or public order provisions, it permits extensive customisation, particularly concerning management structures, voting features (such as shares with multiple voting rights), and profit and loss sharing through the issuance of preference or ratchet shares..

The SCA, SCS and SCSp legal structures are typically favoured for investment-focused JVs (involving silent investment partners) where some participants prefer not to be as deeply involved in the management decisions as they would be in a different legal structure and as such, prefer to have a limited partner position.

From a regulatory perspective, when established for investment purposes, it has to be confirmed that the JV vehicle does not qualify as an alternative investment fund subject to the EU alternative investment fund managers directive (AIFMD). If the JV vehicle has characteristics that place it within the scope of alternative investment funds as defined in the AIFMD, the regulatory requirements applicable to the investment vehicle and its manager will be significantly different from those applicable to an unregulated JV vehicle.

In Luxembourg, the main set of rules applicable to the JV vehicle are the provisions of the Luxembourg civil law rules and the LCC. However, depending on the nature of the JV set-up and the sectors in which it operates, and especially if the JV vehicle qualifies as an investment fund, public authorities will need to be involved, such as the Luxembourg Financial Supervisory Authority (Commission de Surveillance du Secteur Financier – CSSF) or the Luxembourg Insurance Commission (Commissariat aux Assurances).

If a JV is structured as an alternative investment fund (AIF) in Luxembourg, it falls into the regulatory framework established by the AIFM Law and the AIFMD. This requires, inter alia, seeking authorisation from and registration with the CSSF, and adhering to, inter alia, investment restrictions and transparency requirements.

According to the Law of 2 September 2011, which regulates access to various professions, any economic activity carried out on a regular basis, with few exceptions, necessitates obtaining a prior business permit from the Ministry of Economy. This permit must be held by a natural person on behalf of the relevant company. The said person must satisfy the following conditions:

• professional integrity;
• the necessary professional qualification relevant to the planned activity:
• establishment in Luxembourg; the business permit is only granted if there is a physical presence in Luxembourg that includes infrastructure suitable for the nature and scale of the concerned activity;
• effective and permanent management of the business by the business permit holder, who must:
1. be physically present in the establishment at all times to ensure effective day-to-day management of the business; and
2. be effectively connected to the business (as an owner or legal representative of the business); and
• compliance with tax and business obligations; the permit holder must not have evaded business and tax obligations (including withholding tax) in their previous or current business activities, whether these activities were carried out in their own name or through a company run by said permit holder.

The key AML legislation applicable in Luxembourg is the law of 12 November 2004 on the fight against money laundering and terrorist financing (the “AML Law”), as last amended on 29 July 2022.

The AML Law implements the Fourth European AML Directive (EU 2015/849) as amended by the Fifth European AML Directive (EU 2018/843), and establishes the obligation for entities and individuals listed in Article 2 of the AML Law to (i) implement customer due diligence measures (Know Your Customer); (ii) ensure an adequate internal organisation with respect to AML-FT; and (iii) maintain transactional records as well as report any suspicious transactions or activities to the Luxembourg Financial Intelligence Unit (FIU) (Cellule de Renseignement Financier).

A further European AML package, to be partly applicable from early 2025, was adopted on 19 June 2024 by the European Parliament. This package includes the introduction of the Sixth European AML Directive, a proposed AML regulation introducing stricter due diligence requirements, beneficial ownership transparency and monitoring of transactions, and provides for the establishment of a new European AML authority (the Authority for Anti-Money Laundering and Countering the Financing of Terrorism – AMLA).

In Luxembourg, restrictions on co-operation with JV partners arise from both EU regulations and national legislation. At the European level, as a member state of the EU, Luxembourg is subject to the EU sanctions regulations. At the national level, the Law of 14 July 2023 on Foreign Direct Investment (the “FDI Law”), implementing Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019, establishes a national screening mechanism with respect to foreign direct investments that could impact national security or public order. With some exceptions, the FDI Law requires that direct investments made by foreign investors – ie, natural persons or legal entities residing outside the European Economic Area, seeking to gain control over a Luxembourg entity, be reviewed by the Ministry of the Economy if they involve critical sectors within Luxembourg, such as energy, transport, water, health, communications, data processing and storage, aerospace, defence, finance, media and business, as well as the trade of dual-use goods or which could affect national security. The FDI Law entered into force on 1 September 2023.

Beyond sanctions and national security considerations, there are additional regulatory and legal frameworks that may impose restrictions on JVs, including sector-specific regulations, competition law and other compliance requirements.

JVs in Luxembourg are currently not subject to a national ex ante merger control regime. Hence, to date, the antitrust regulation applicable to the setting up of JVs, if the latter qualify as a concentration, is the EU Merger Regulation on the control of concentrations between undertakings (Regulation (EC) No 139/2004) (the “EU Merger Regulation”). The EU Merger Regulation provides for an obligation to notify the European Commission should the thresholds set therein be met by the JV.

At the national level, should the JVs fall outside the scope of the EU Merger Regulation, no mandatory obligation to notify the Luxembourg national competition authority (NCA) currently exists. As per applicable Luxembourg laws, the NCA can only perform an ex post intervention with the aim of ensuring the proper functioning of the EU internal market.

Luxembourg is in the process of reshaping its competition framework, with the proposed enactment of the draft bill of law No 8296, which establishes a national ex ante merger control regime. This would require JVs to be notified to the NCA before being created in case they could affect competition in Luxembourg. The thresholds contemplated to trigger the NCA review will concern parties involved in the concentration if they have a combined total turnover generated in Luxembourg of more than EUR60 million and at least two of the parties involved in the concentration have an individual turnover generated in Luxembourg that exceeds EUR15 million. The NCA will have the authority to examine a concentration that falls below the abovementioned thresholds if it deems that such concentration could affect competition in the Luxembourg market. This new regime will undoubtedly impact the timeline for implementing a JV in Luxembourg, adding another layer of regulatory scrutiny alongside any notification that may be required under the FDI Law.

The mere fact that a listed company (ie, whose securities are admitted to trading on a European regulated market), MTF or OTF, participates in a JV in Luxembourg, will not lead to the applicability of specific rules in Luxembourg in addition to or different from the EU capital market directives and regulations applying to listed companies in general.

Since the entry into force of the Law of 13 January 2019 establishing the Beneficial Owner Register, as amended, (the “RBE Law”), all legal entities registered with the RCS are required to disclose and submit information about their ultimate beneficial owner(s) (UBO(s)) to the Register of Beneficial Owners (Registre des bénéficiaires effectifs – RBE). Such information must be updated within one month of any change. To date, the RBE is only accessible by “professionals” as defined in Article 2 of the AML Law for the purposes of their AML/KYC obligations and by entities registered with the RCS with respect to their own information. 

Under Luxembourg laws, a UBO is any natural person who, ultimately, directly, or indirectly, owns or controls a legal entity (including by means of bearer shares), by a percentage of more than 25% of the shares, voting rights or an interest in the capital, or by other means. If, after all possible means, no UBO can be identified (and there are no grounds for suspicion), the natural person holding the position of principal executive officer of a legal entity is considered the UBO.

Apart from the entry into force of the FDI Law, and the ex ante merger control regime provided by the bill of law No 8692, there have been no significant court decisions or legal developments in the past three years relating to JVs or business collaboration.

Setting up a JV entails a multi-phase process for the participants. The negotiating phase of a JV will effectively involve (i) the completion of a due diligence questionnaire focusing not only on the JV itself, its rationale or commercial goals, but also on the JV participants; (ii) the execution of a mutual non-disclosure agreement (NDA); (iii) the execution of a head of terms document which is crucial as it sets forth the main commercial and legal terms the participants have agreed upon during the negotiation; and (iv) in most cases, the execution of an exclusivity agreement prohibiting the parties from entering into negotiation with others for a restricted period of time.

At a pre-JV agreement stage, the following provisions would be expected to be contemplated and settled in the terms sheet:

• the purpose and scope of the JV;
• the financial contributions of each participant and further funding opportunities;
• the decision-making structure;
• the management structure;
• the transferability of shares and any restriction rights in relation thereto;
• profit sharing arrangements;
• contemplated dispute resolution mechanisms;
• exit mechanism; and
• termination of the JV.

Information about the JV will have been disclosed between the participants to the JV when the heads of terms is signed. For regulatory requirements around disclosing the JV, please refer to 3.3 Restrictions and National Security Considerations and 3.4 Competition Considerations.

Setting up a JV under Luxembourg law requires careful planning, and several steps must be complied with:

• Drafting the JV agreement: This crucial document will comprehensively outline the rights and obligations of the parties to the JV.
• Drafting the articles of association (or limited partnership agreement) of the JV vehicle: As publicly available (except for the limited partnership agreements which are only published partially), some parties prefer not to mirror the provisions of the JV agreement in the articles of association. This will be negotiated on a case-by-case basis.
• Incorporation of the JV vehicle under the chosen form: Generally, the incorporation of a company must be enacted before a Luxembourg notary, except for SCS and SCSp which can also be incorporated under private seal.
• Registration of the newly incorporated JV vehicle: The RCS articles, or extract of the limited partnership agreement in the case of SCS and SCSp, will be publicly accessible.
• Complying with any regulatory requirements: Depending on the nature of the JV’s activities, it may be necessary to comply with specific regulatory requirements. These could include merger control regulations, FDI rules, or obtaining relevant business permits, as applicable.

Regardless of the form of the JV vehicle, the terms the parties agreed upon for the JV will be set out in detail in the JV agreement. In Luxembourg, JV participants can agree that the JV agreement will not be subject to Luxembourg law if the provisions of the chosen foreign law do not contravene public order provisions under Luxembourg law. As is often the case, parties to a JV may be based in different jurisdictions and will prefer to apply a law that is more familiar to them.

The main terms that a JV agreement would be expected to address include the following:

• scope of the JV, roles and responsibilities of each party;
• share capital modification and related anti-dilution aspects;
• funding obligations of the participants;
• management structure;
• reserved matters;
• deadlocks and dispute resolution mechanism(s);
• restrictions on share transfers, restriction to ensure the maintenance of the share capital and the withdrawal of certain of its shareholders under certain circumstances (drag-along/tag-along clauses);
• term of the JV;
• termination possibilities;
• plan for future change;
• exit provisions;
• put and/or call options;
• allocation of profits;
• distribution of assets;
• intellectual property rights; and
• confidentiality and non-disclosure obligations.

Structuring the decision-making process within a JV is undeniably one of the most critical aspects to be discussed and carefully considered during its establishment. While the LCC provides a default framework, certain contractual mechanisms can play a vital role in shaping and refining the decision-making process within the JV, ensuring it aligns with the specific needs and objectives of the parties involved.

The following clauses can be inserted in the JV agreement or in its articles (where necessary):

• clauses relating to the allocation of the directors’ mandates; such clauses will enable the JV partners to have a certain degree of representation at the management level by ensuring that the former have one or more of their representatives on the board of directors or managers (the “Board”) of the JV vehicle;
• clauses allowing different categories of board members to be created – eg, class A and B, with different powers to act on behalf of the JV vehicle;
• a clause allowing the adjustment of the quorum and majority rules in decision-making bodies, enabling stricter rules in this respect than the ones provided for by the LCC (except for public order provisions);
• observer appointment clauses; in some cases, the JV partners will prefer to have an observer appointed instead of a director with voting prerogatives (an observer may receive all the documentation related to a particular meeting of the board and will be able to attend any board meetings); and
• specific consent clauses; in a classic JV vehicle, decisions by the board on strategic matters can require the approval of all, a majority, or a supermajority of the partners of the JV (the so-called reserved matters).

The funding of JV vehicles generally involves a blend of equity and debt – depending on the financial resources of the JV participants; the latter will make contributions in cash or in kind directly to the JV share capital or grant shareholders loans to the JV vehicle.

The JV agreement can provide for a future funding obligation to support the JV vehicle, notably with respect to capital requirements, working capital, ongoing operations, or financing of a project. Adjustment clauses in terms of default by one partner can help resolve situations where such a funding obligation cannot be satisfied by a partner.

Equity funding can lead to a change in the ownership of the JV vehicle and could effectively trigger a dilutive effect on the shareholding of existing participants. Several mechanisms, such as preferential subscription rights, anti-dilution clauses, issuance of instruments such as warrants and options do exist under Luxembourg law to ensure that a JV partner’s shareholding is not diluted. Another equity funding option is the contribution to the capital account 115 of the JV vehicle without issuance of new shares, which is widely used.

As mentioned in 6.1 Agreement Documentation, one of the most essential issues to be addressed in a JV agreement is the resolution of a deadlock situation.

Provisions relating to confiscation or compulsory purchase of shares are generally valid, as long as they do not deprive shareholders of their shares without payment or deprive them of the right to request the dissolution by court of the JV for cause.

Furthermore, several contractual mechanisms can be contemplated to prevent a deadlock, which can be set forth either in the JV agreement or its articles or in both:

• escalation clauses to senior representatives of the involved parties;
• mediation and negotiation clauses;
• dispute resolution mechanisms (international arbitration or expert determination); and
• exit strategies – put and call options in favour of the dissenting partner, exclusions mechanics provided for in the articles of the JV vehicle.

The set-up of a JV usually further requires the execution of additional documents, each having a specific role to play with respect to the success of the JV, notably:

• NDAs;
• IP licenses covering the use of the IP rights held by one of the partners to the JV by the latter;
• agreements to transfer assets to the JV vehicle as the case may be;
• asset management and service agreements;
• business Plan; and
• policies (eg, KYC, conflicts of interests).

Please refer to 6.2 Decision-Making for an overview of governance organisation proposition and notably, the possibility of the shareholders of the JV vehicle being represented at the board by proposing candidate(s) to be appointed as board member(s) of the JV vehicle.

With respect to weighted voting rights, even though the current Luxembourg legal landscape tends to recognise them as a means to ensure board control, they are not commonly used in Luxembourg. The Luxembourg doctrine strongly advocates for the principle “one vote per person”.

The management body of a JV vehicle is often either the board of managers in case of an S.à r.l, the board of directors in case of a one-tier SA or the management board in case of a two-tier SA, the president in case of an SAS (and any director as the case may be). This management body has the broadest powers to take any actions necessary or useful to realise the corporate object of the JV vehicle, except those expressly reserved by the LCC or the articles of association for the shareholders of the JV vehicles.

The members of the management body of the JV vehicle, which can also be legal entities, must:

• act with loyalty and in good faith for the benefit and in the corporate interests of the JV vehicle, exercising their duties with as much diligence and care as a reasonable person acting in the same circumstances;
• represent the JV vehicle in dealings with third parties;
• avoid any conflicts of interests; and
• exercise their mandate in compliance with, inter alia, the LCC and the articles of association of the JV vehicle.

It is possible to provide for an explicit non-compete obligation of any member of the management body. Should this member be a natural person employed by the JV vehicle, this obligation will need to be compensated financially and be limited in time and space in order not to be considered void by applicable laws.

In terms of delegation of functions, the management body of the JV is authorised to delegate certain of its functions to committees or subcommittees, depending on the legal form chosen for the JV vehicle. When committees or subcommittees are created, it is recommended that each of them has adopted a policy, rules of procedure or common charter relating to their functioning and scope of intervention.

The management body can also delegate the day-to-day management of the JV vehicle and the power to represent it in dealings with third parties to one or more persons who are not necessarily members of the management body. These individuals are referred to as “délégué à la gestion journalière” or day-to-day managers. Nonetheless, the liability for these delegated functions remains with the management body of the JV vehicle, which shall supervise the actions of those in charge of such delegated functions.

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Pursuant to the LCC, a member of the management body of the JV vehicle having, directly or indirectly, an interest of a financial nature conflicting with the those of the JV vehicle, in relation to an operation within the competence of such management body, must disclose such conflict of interest to the other members of the management body and must not participate in the deliberation of or vote on the conflicted matter. Any conflict of interest must be recorded in the minutes or resolutions of the management body’s meeting and a special report in this respect will need to be made to the shareholders of the JV vehicle at the next general meeting of shareholders before any resolution is put to the vote.

As contemplated under 6.2 Decision-Making, it is common that a director/manager of a JV participant is appointed as a director/manager of the JV vehicle, as long as he/she performs his/her duties in the best interests of the JV vehicle and not in the best interests of the JV participant.  According to case law, the mere fact that an individual holds an executive role at a JV participant does not, in itself, establish a conflicting financial interest with the JV vehicle.

From an IP perspective, when setting up a JV corporate entity, three main IP issues needs to be considered.

Corporate Entity

Firstly, ownership of pre-existing IP that each party brings into the JV is to be defined, as well as the terms on which the JV will be allowed to use this IP. Secondly, it is to be determined who will own the IP developed during the course of the JV and who will have the rights to use, license, and commercialise the new IP both during the life of the JV and after its termination. Thirdly, clear terms for the protection of confidential information and trade secrets exchanged between the JV partners are to be established. Finally, the conditions under which the JV can license its IP to third parties, including revenue-sharing arrangements and control over licensing decisions, are to be defined, as well as IP valuation methods, especially in order to assess how IP valuation impacts equity shares in the JV.

Contractual Collaboration

When engaging in contractual collaborations, several key IP issues should be carefully considered to ensure that the rights, obligations, and expectations of all parties are clear and protected. In particular, ownership of pre-existing and newly created IP during the collaboration is to be clearly defined, just as questions of revenue sharing and royalties are to be answered. Liability issues, if the collaboration results in the infringement of third-party IP rights, are to be addressed, along with what happens to the IP after the collaboration ends, including rights to continued use, licensing, and the return or destruction of confidential materials.

JV Agreement

IP issues are usually comprehensively addressed in JV agreements. They cover questions regarding the ownership of pre-existing IP and which usage rights are licensed to the JV and to the other party, the ownership of newly created IP and how to commercialise and exploit it, and what happens to the IP if the collaboration ends.

Moreover, in complex JVs, dispute mechanisms should be included to handle any conflicts over IP ownership, usage, or infringement. Strict NDAs ensure that all IP and proprietary information exchanged remains confidential, helping to build and foster trust within the JV.

When deciding whether to license or assign IP rights, it is important to conduct a thorough evaluation of the IP owner’s long-term objectives, financial requirements, and strategic interests.

Licensing IP rights is ideal when the IP owner wants to retain control over the IP, continue benefiting from the IP, and is interested in long-term revenue streams. Assigning IP rights should be considered when the IP owner seeks immediate capital or wants to transfer the responsibility of managing and exploiting the IP to another party. The assignor, however, loses all control and future revenue potential from the IP.

Even if a JV does not fall under the classification of a fund, ESG factors still warrant careful attention.  Indeed, depending on the business activity of the JV and its shareholders, the structure itself will be subject to greater or lesser ESG obligations and commitments, and the JV contract will at least stipulate certain obligations in this respect (most of the time to comply with the internal policies of certain shareholders).

ESG issues may also have a greater or lesser impact on customer/supplier relations, on internal governance procedures and risk management (including sustainability risks), depending on the JV’s field of activity and where this business is operated. In fact, ESG-focused evaluation criteria are increasingly being used in management incentive packages, further emphasising their growing importance. In summary, JV partners are strongly advised to adopt a comprehensive risk-based approach when establishing and operating a new JV. This entails ensuring appropriate ESG compliance and implementing a robust compliance management system that encompasses the JV, its employees, and shareholders.

If the JV vehicle qualifies as a fund, ESG topics are a must. Indeed, since the entry into force of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial sector (SFDR), the number of ESG and impact funds has been rising. Luxembourg currently stands as the number one green financial centre in the EU. As a result of pressure from both investors and legislators, it appears certain that sustainable finance products will become a major trend in the investment funds industry in general.

Revision of the EU Disclosure Regulation

Last September, the EU Commission launched a consultation on the review of the SFDR, which ended on 22 December 2023. Some extensive changes could be made to the previous version, which has been in force since March 2021. For example, the disclosure obligations at company level in the SFDR could be removed and replaced by the obligations of Directive (EU) 2022/2464 on sustainability reporting by companies (CSRD). Additionally, the current categorisation of financial products into Article 6, 8, or 9 products may be abandoned. Shortcomings in this classification have become apparent in the past, for example from the Article 8-Plus classification created by the market for MiFID marketing. Instead, the European Commission is now considering introducing sustainability disclosure standards for all financial products. On the other hand, it is considering switching to a more differentiated classification system for sustainable products.

ESMA Guidelines on ESG Terms in Fund Names

On 14 May 2024, the European Securities and Markets Authority (ESMA) published its final report on the use of ESG or sustainability-related terms in fund names. Accordingly, the use of ESG or sustainability-related terms in fund names is subject to certain conditions. Fund names incorporating ESG or sustainability-related terms are permissible only if at least 80% of the fund’s investments consider ESG criteria or pursue sustainability objectives. In addition, it is assumed that the exclusion criteria of the Paris-aligned Benchmarks (PAB) are taken into account and that a significant proportion is invested in sustainable investments within the meaning of Article 2(17) of the SFDR in order to reflect the expectations of investors based on the fund name. The guidelines also address, for the first time, the use of transition-related terms and the combination of different terms.

Funds that are subject to supervision by the CSSF, regardless of whether they qualify as an Article 6, 8 or 9 product, must use fund denominations that are consistent with the respective investment objective and investment policy of the fund and with the ESMA Guidelines. The CSSF also expects that future developments on this topic will also be implemented at the European level.

EU Taxonomy Regulation

Since 1 January 2023, non-financial companies have had to provide evidence of the rate of conformity of their business activities with the environmental objectives of the Taxonomy Regulation as part of their reporting. However, this only applies to the environmental objectives of climate protection and adaptation to climate change. From 1 January 2024, the reporting obligation also applies to financial companies when it comes to these two environmental objectives. With regard to the other environmental objectives, however, non-financial companies fall under the reporting requirement as of 1 January 2025 and financial companies as of 1 January 2026. The implementation of the EU Taxonomy is to be facilitated by a communication on the legal interpretation and implementation of the technical screening criteria.

The Main ESG Regulations in Our Jurisdiction

The ESG regulatory framework in Luxembourg is dominated by directly applicable as well as transposed European legislation. Our main references are the SFDR, the SFDR Regulatory Technical Standards (SFDR RTS) and Regulation (EU) 2020/852 (the “Taxonomy Regulation”). This is in addition to specific guidelines provided by the CSSF.

The CSSF’s current priorities with regard to ESG are essentially focused on (i) the integration of sustainability risks by investment fund managers (alternative investment fund managers (AIFMs), management companies and external portfolio managers); (ii) compliance with existing ESG-related requirements; and (iii) consistency of pre-contractual information in offering documents and on websites or as marketing material.

With regard to the consideration of sustainability risks, the CSSF emphasises that the delegation of portfolio management functions in particular has no influence on the investment fund manager obligations to disclose the consideration of sustainability risks. Accordingly, this also includes the obligation to implement an adequate risk management framework.

The CSSF will increasingly focus on verifying compliance, in particular with the ongoing disclosure obligations under Article 11 of the SFDR in connection with Articles 50 and 58 of the SFDR RTS.

Particular attention is also paid to the increased control of the consistency of ESG-related disclosures made in pre-contractual documents (in particular offering documents with SFDR RTS annexes), websites and marketing materials.

JV arrangements can come to an end in several ways that should be outlined in the JV agreement, the most common being:

• a deadlock situation that has not been resolved;
• at the expiry of a determined period, unless agreed otherwise between the participants to the JV;
• upon termination of the object of the JV – indeed, some JVs are only set up for the completion of a specific purpose and once completed, the JV may be terminated;
• by mutual decision of the participants to the JV;
• by any participant to the JV on contractual grounds thoroughly defined in the JV agreement – eg, breaches of certain provisions of the JV agreement, insolvency of a participant, change of control, violation of IP license agreement, failure to meet a funding obligation following an unsuccessful cure period; or
• poor performance of the JV.

A JV vehicle can also be dissolved by the Luxembourg courts in accordance with the LCC.

Contemplating the consequences of the termination of the JV is crucial. The main general matters that should be dealt with in this respect notably concern:

• settlement of liabilities;
• assets allocations;
• employment issues;
• IP issues;
• survival clauses from the JV agreements; and
• de-registration from the RCS if the JV is a registered entity.

The JV agreement can provide that the termination of the JV does not trigger the termination of the JV vehicle. As a separate legal entity, transfer of shares or liquidation of the JV vehicle should also be contemplated.

When contemplating the transfer of the assets owned by the JV to the JV participants, whether they have been originally contributed to the JV vehicle by the JV participants or whether they directly originate from the JV, the following main issues should be addressed:

• Assets valuation: The valuation of the assets to be transferred is generally determined in accordance with the calculation method provided for directly in the JV agreement.
• Contractual restrictions over the assets: Depending on the nature of the assets, it must be ensured that the asset to be transferred is free from any encumbrances or third-party rights that would prevent the transfer (eg, mortgages, pledges over shares, limitation to the transferability of IP rights).
• Nature of the assets: Fulfillment of legal registration requirements may be triggered by the transfer of certain assets (eg, IP rights, real estate).
• Corporate interest: The management body of the JV vehicle must ensure that the transfer of assets contemplated is in the best interests of the JV, either from a corporate perspective or from a business perspective, when assessing the impact of such transfer on the modus operandi of the JV. The decision to transfer assets of the JV to its participants can require the further approval of an ad hoc committee beforehand or the shareholders of the JV vehicle.

The transfer of assets from the JV to its participants is a scenario that is worth contemplating in advance directly in the JV agreement.