Shareholders' Rights & Shareholder Activism 2021

Last Updated September 23, 2021

Luxembourg

Law and Practice

Authors



Baker McKenzie has a dispute resolution team which advises on a wide variety of domestic and international disputes and dispute-avoidance matters for some of the world’s major companies, banks, insurers and public bodies. The firm has seasoned M&A lawyers who provide seamless advice through local expertise, deep sector knowledge, commercial acumen and refined transactional techniques to maximise deal certainty and the desired value and synergies of its clients’ transactions. Working hand-in-hand, the teams strategically address the legal and regulatory implications of a transaction to minimise risk and provide an end-to-end, high-value service. They intervene in all the typical areas in which post-M&A disputes arise, including warranty and indemnity claims, completion and escrow account disputes, earn-out disputes, and claims involving tag-along and drag-along rights. Lawyers frequently advise on other forms of corporate disputes, such as those arising out of shareholder agreements, joint-venture agreements, letters of intent, and minority-shareholder claims.

Main Types of Commercial Companies in Luxembourg

  • Private Limited Liability Company (Société à responsabilité limitée, or Sàrl);
  • Simplified Private Limited Liability Company (Société à responsabilité limitée simplifiée, or SàrlS).
  • Public Limited Liability Company (Société anonyme, or SA);
  • Simplified Public Limited Liability Company (Société par actions simplifiée, or SAS);
  • European Company (Societas Europaea/Société Européenne, or SE);
  • General Partnership (Société en nom collectif, or SNC);
  • Corporate Partnership Limited By Shares (Société en commandite par actions, or SCA);
  • Common Limited Partnership (Société en commandite simple, or SCS);
  • Special Limited Partnership (Société en commandite spéciale, or SCSp).

The most frequently used types are the Sàrl and SA. SCA, SCS and SCSp are also quite often seen, in particular in the fund industry. However, from a corporate-law perspective, An SCA generally follows rules applying to an SA (subject to a few particulars), and an SCS and SCSp are tailor-made vehicles with only a limited legal framework. Accordingly, in this guide, the focus will be on the SA and the Sàrl, and a few precisions will be given for other forms where relevant.

Criteria to Invest in a Luxembourg Company

Generally speaking, foreign investments in Luxembourg companies are not restricted, even if a bill of law is currently in discussion. In particular, from a Luxembourg corporate-law perspective, there are no nationality, residency requirements or qualification criteria to form or invest in a Luxembourg company.

In principle, ordinary shares issued by Luxembourg companies do not provide for differences between information, political or economic rights of shareholders, but it is possible to provide for specific rights attached to certain categories of shares in the articles of association of the company, for instance:

  • preferred shares – those shares would receive preferential economical rights with respect to the distribution of dividend or liquidation proceeds;
  • redeemable shares – the articles of association may provide for the right of the company to redeem its own shares;
  • tracking shares – it is possible to provide for tracking shares for which the right to profits (by way of distribution of a dividend or liquidation proceeds) will be linked to the profit stemming from a specific investment;
  • non-voting shares – they are only possible for an SA, an SCA and an SAS; for other companies, all shareholders are entitled to a vote; for certain decisions (amendment to the rights attached to the non-voting shares, dissolution of the company, etc), the voting right attached to the non-voting shares will be restored;
  • beneficiary shares (parts bénéficiaires) – those shares are not part of the share capital, but are securities issued by a Luxembourg company; they can be issued in exchange for a contribution or for no contribution and the economic and political rights attached to those preference shares may be freely tailor-made (voting right or no voting right, etc).

Under Luxembourg law, the holders of shares of the same category should be treated equally. This principle does not apply to holders of shares belonging to different categories.

With respect to an SCA, an SCS and an SCSp, it is mandatory that, under law, shares be divided between limited partners’ shares and unlimited partners’ shares.

Luxembourg law permits the issue of dematerialised shares. In an SA and an SCA, shares may be in registered form or bearer.

Commercial companies such as SAs and Sàrls are mainly governed by the Law of 10 August 1915 on commercial companies (as amended, the “Company Law”). The Luxembourg Civil Code, some extracts on companies of the Criminal Code, as well as Grand Ducal regulations, are also basic grounds. They set out all the essential rules from the creation to the end (liquidation/dissolution) of a company.

Other essential non-codified statutes add mandatory rules that companies must comply with, for instance, the amended Law of 24 May 2011 regarding the exercise of certain shareholder rights at general meetings of listed companies (as amended by the law of 1 August 2019, the “Shareholders’ Act”). The Shareholders Act's aim was inter alia to increase activism and grant shareholders more powers and rights. Above all, it reinforced their access to information (see 1.7 Access to Documents and Information) and the exercise of their voting rights (see 1.4 Main Shareholders' Rights).

Therefore, the primary source of law when it comes to shareholders' rights is legislation. Yet, case law can also have a major role in the involvement of the shareholders' rights – also considering that certain recent changes in law are directly inspired by regular case law (eg, grounds for cancelling a shareholders’ meeting).

Furthermore, the Rules and Regulations of the Luxembourg Stock Exchange (LuxSE) regulates limited companies. Among these rules, there is the LuxSE's ten principles of Corporate Governance (the LuxSE principles), last amended in December 2017. These principles give information and guidelines to listed companies. Guidelines are only recommendations. However, the general principles set out in the LuxSE Principles are mandatory and every listed company must comply with those. Failing compliance, the "comply or explain" rule shall apply, and companies must then provide an explanation as to why they did not comply with the mandatory rules. They can face penalties if they do not comply and fail to provide a valid explanation.

Under the Company Law, shareholders have three main types of rights:

  • political – the right to participate and vote at the occasion of decision taken by the shareholders of the company;
  • economic – the right to receive distributions of dividends and liquidation proceeds from the company; and
  • information – the right to receive information on the situation of the company, in addition to publicly available information.

As indicated in 1.2 Types or Classes of Shares, those rights are identical for all shareholders, unless they hold shares belonging to different categories and for which the articles of association have provided for specific rights.

The articles of association are normally publicly available. It is possible to provide specific rights to the shareholders in a separate agreement, but it will be enforceable only toward the parties to that agreement.

In addition to those rights provided by the Company Law, specific rights are granted to the shareholders of listed companies by the Shareholders’ Act: additional information, remuneration policy and reports regarding the directors, the ability to vote on related party transactions, etc.

Political Rights

All shares entitle their holders to a voting right proportional to their nominal value on the aggregate amount of the share capital, except for an SA, an SAS and an SCA, when:

  • non-voting shares are created; and
  • the articles of association state that each share grants to its holder one vote, even when the shares issued by the company have different nominal values.

It is possible for the articles of association to state that, for some or all decisions to be taken by the shareholders, the majority requirement will be increased to a certain level (even to the unanimity).

Shareholders may also individually waive their voting right or enter into voting agreements, under certain conditions, and those waivers and voting agreements may be enforceable toward third parties.

Beneficiary shares may be non-voting or have multiple votes.

Economic Rights

The articles of association may vary the economic rights attached to classes of shares within the limit that a shareholder would be (i) excused from sharing any shareholder liability and/or (ii) deprived of any economic right (prohibition of the leonine clauses).

The economic rights attached to beneficiary shares may be freely shaped.

Right to Information

The right to information provided by the Company Law is a minimum and it is not possible to limit this right, it is only possible to create an additional right to information.

The right to information attached to beneficiary shares is determined by the articles of association and, in principle, they are not entitled to any right to information.

Shareholders' agreements are commonly used in Luxembourg and enforceable under Luxembourg law.

These agreements enable the shareholders to set out their rights and obligations and to regulate, among others, the corporate governance of the company, the transfer restrictions of the shares, the profits entitlements, etc.

Except for rules which will be contradictory with mandatory Luxembourg laws and Luxembourg public order such as leonine clauses, there are no limitations on the enforceability of such an agreement.

Contrary to the Articles of Association, shareholders' agreements are confidential and not available to the public. There is no injunction to disclose them. This is the reason why it makes them so appealing for investors and shareholders, since they do not wish to see sensitive company information being openly readable by the public.

Due to their confidentiality, shareholders' agreements cannot be opposed to third parties.

The majority requirements for decisions taken by the shareholders are the following:

  • for an SA:
    1. for the amendment of the articles of association, the general meeting shall not validly deliberate unless at least 50% of the share capital is represented and, in order to be adopted, the resolutions must be carried by two thirds of the votes cast;
    2. no quorum of presence and 50% of the votes cast for any other decision;
  • for an Sàrl:
    1. 75% of the share capital for the amendment of the articles of association; and
    2. 50% of the share capital for any other decision;
  • for all companies:
    1. any increase of the increase of the shareholder's individual commitment requires the unanimity of the shareholders.

In addition, shareholders holding a certain percentage may exercise the following rights, pursuant to the Company Law:

  • shareholder(s) may request the convening of a meeting of the shareholders when they hold at least:
    1. for an SA – 10% or more of the share capital; and
    2. for an Sàrl – 50% or more of the share capital;
  • shareholder(s) holding at least 10% of the share capital may request that one or more additional items be put on the agenda of any general meeting, and may also request the general meeting of the shareholders to be postponed;
  • shareholder(s) holding at least 10% of the share capital of an SA, an SAS or an SCA may bring legal action on behalf of the company against the directors for fault in their management (action ut singuli); and
  • shareholder(s) holding at least 10% of the votes and/or the share capital may ask specific questions to the board regarding specific transactions involving the company and its subsidiaries and, if they are not satisfied by the answers, they may request the appointment of an expert to investigate those transactions.

It is possible for the articles of association to state that, for some or all decisions to be taken by the shareholders, the majority requirement will be increased (but not reduced) to a certain level (even to the unanimity).

All shareholders of an SA are entitled to be provided with the following information before each general meeting:

  • the annual accounts, the list of the members of the board(s) and the list of the company’s auditors;
  • the list of sovereign debt, shares, bonds and other company securities making up the portfolio;
  • the list of shareholders who have not paid up their shares, with an indication of the number of their shares and their domicile;
  • the management report of the board;
  • the auditor’s report; and
  • in the case of amendments of the articles, the text of the proposed amendments and the draft of the restated articles.

The shareholders of an Sàrl are only entitled to receive the financial documents to be approved at the occasion of the annual general meeting of the shareholders approving the annual accounts.

The shareholders may also consult the shareholder register of the company, when the shares are in registered form.

As presented in 1.4 Main Shareholders’ Rights, specific information rights are granted to the shareholders of listed companies.

The shareholders' meeting shall have the widest powers to adopt or ratify any action relating to the company.

In addition, certain matters are reserved by law to the approval of the shareholders, such as the appointment and removal of the board members, appointment or revocation of company auditors, the amendment of the articles of association, the approval of the annual accounts, distribution of the profits of the financial year, and the liquidation.

The approval must be given through resolutions of the shareholders' meeting or to the extent permitted by law by written resolutions of the shareholders.

The articles of association, as always, can go beyond the law and require the approval of the shareholders for additional matters that are not reserved to the shareholders by law.

Shareholders' Right to Call a Meeting of Shareholders

Shareholder(s) may request the convening of a meeting of the shareholders when they hold at least:

  • for an SA – 10% or more of the share capital; and
  • for an Sàrl – 50% or more of the share capital. 

Shareholders' Information before Meetings and Convening Notices

The shareholders are convened in accordance with the articles of association.

Shareholders of an SA are convened by means of notices filed with the register of commerce and companies and published on the Recueil électronique des sociétés et associations and in a newspaper published in Luxembourg at least 15 days before the meeting.

The convening notices shall be communicated to registered shareholders by post at least eight days before the meeting by registered letter, unless the addressees have individually agreed to receive the convening notices by way of another means of communication, such as email.

Shareholders should have all necessary and essential information regarding the subject of the meeting and the agenda before the meeting.

Virtual/Remote Votes/Meetings

The articles of association may allow the holding of shareholders' meetings by way of video conference or by way of telecommunication means permitting the identification of the shareholders. These electronic means shall satisfy technical characteristics which ensure an effective participation in the meeting, the deliberations of which shall be online without interruptions.

In addition, in view of the current exceptional situation related to COVID-19, governmental measures have been taken to maintain the good governance of companies. They shall be applied at least until 31 December 2021. These measures are as follows; it is recommended to use:

  • remote voting in writing or in electronic form, allowing the identification of the persons concerned and provided that the full text of the resolutions or decisions to be taken has been published or communicated to them; or
  • videoconferencing; or
  • any other means of telecommunication allowing the identification of those persons; or
  • written circular resolutions; or
  • an intermediary appointed by the company.

The convening and the agenda of a shareholders’ meeting is normally decided by the board. However, as indicated in 1.6 Rights Dependent upon Percentage of Shares, shareholder(s) may request the convening of a meeting of the shareholders on an agenda of their choice when they hold at least (i) 10% or more of the share capital for an SA and (ii) 50% or more of the share capital for an Sàrl. Otherwise, they have no right to require that a specific issue be considered or resolution be put forward.

The quorum requirements for general assembly of shareholders are the following:

  • for an SA:
    1. in the event of an amendment of the articles of association, shareholders representing at least 50% of the share capital must be present or represented, and if this quorum is not met, a second assembly must be convened and it may be held without any quorum requirement; and
    2. for all other decisions, there is no quorum requirement; and
  • for an Sàrl – shareholders representing at least 50% of the share capital in any case.

The majority requirements for decisions taken by the shareholders are the following:

  • for an SA:
    1. two thirds of the votes for the amendment of the articles of association; and
    2. 50% of the votes for any other decision;
  • for an Sàrl:
    1. 75% of the share capital for the amendment of the articles of association; and
    2. 50% of the share capital for any other decision; and
  • for all companies:
    1. any increase of the increase of the shareholders' individual commitment requires the unanimity of the shareholders.

Shareholders may participate and vote through a video-conference to the shareholders’ general meeting, if provided for in the articles of association.

For an Sàrl, shareholders may also approve resolutions through written resolutions, as long as the company has fewer than 60 shareholders and, for an SA, the sole shareholder may also approve resolutions in writing.

In principle, the management and the administration of a Luxembourg company lies with the management body thereof (eg, the board of directors/board of managers), not with the shareholders. That being said, a shareholder of an SA or of an Sàrl may be appointed respectively as a director or a manager of such a company, while the general partner of an SCA, an SCS and of an SCSp is also very often also appointed as the manager thereof. It is worth noting that there exist some specific provisions applying to an SCS and an SCSp, pursuant to which limited partners may not be involved in the management of such companies; if they fail to comply with this requirement, limited partners may lose the benefit of their limited liability.

Appointment and Revocation of Directors

In principle, members of the management of a company are appointed and revoked by the shareholders, acting collectively (ie, through the general meeting of shareholders) in accordance with the provisions of law and of the company’s articles dealing with those matters. This is subject to a few particulars/limitations, depending on the legal form of the company. For instance:

  • there exists a possibility for the board of directors of an SA to co-opt a member thereof when a seat is vacant (that appointment is to be ratified at the time of the general meeting of shareholders);
  • the management of an Sàrl can only be removed for legitimate reasons (unless otherwise provided for in the company’s articles of association) whereas in an SA, the members of the board of directors can be removed ad nutum by the shareholders (ie, without any reason or explanation).

Also, in the framework of co-investments/joint ventures, specific provisions pursuant to which members of the management body are to be appointed among lists submitted by the shareholders are often seen.

Accordingly, this is to be assessed on a case-by-case basis.

Shareholders' Right to Challenge a Board's Decision

Under Luxembourg law, there is no (per se) right for shareholders to challenge a management decision, at least where that decision is taken in accordance with the law and the company’s articles, and in the interest of the company. However, there exist certain action rights for the shareholders to trigger (directly or indirectly) the management’s liability (eg, in the case of a decision in contrariety with the company’s articles) and the articles may provide that certain management decisions require prior authorisation by the general meeting of shareholders (while any such limitation would generally not be enforceable towards third parties). 

Generally, and where legally required, the auditor (whether a statutory auditor (commissaire) or an independent auditor (réviseur d’entreprises)) is appointed/revoked by the shareholders acting collectively, through the general meeting of shareholders. That being said, there is no prohibition for the management to appoint an auditor by contractual means (eg, while there is no legal requirement for such an appointment).

In an SA, the shareholders do not have to disclose their interest in the company. In principle, the shareholders can be anonymous, as the transfer of shares and identity of the shareholders are not published. However, the identity of the subscriber of new shares issued in an SA through the shareholder meeting shall be recorded in the notarial deed, which is publicly available.

Shareholders of an Sàrl must disclose their interest in the company as part of the company's constitution and/or acquisition of shares. Indeed, the shareholders' identity is published and included in the excerpts of the RCS and the Luxembourg electronic gazette (Recueil Electronique des Sociétés et Associations) relating to the company.

In addition, beneficial owners of Luxembourg companies shall be registered with the Luxembourg beneficial owners register, which is publicly available except in certain circumstances.

In public companies, such as an SA, shares are in principle freely transferable.

Conversely, in an Sàrl, the transfer of shares to third parties requires the approval of the other shareholders representing at least 75% of the share capital (this can be reduced to 50% of the share capital in the articles of association).

Specific transfer restrictions may be included in the articles of association or contractual agreements between the shareholders, such as lock-up provisions, pre-emption rights, right of first offer, right of first refusal, tag-along/drag along rights, etc.

Transfer restrictions are enforceable provided that they are not contrary to Luxembourg mandatory law (eg, inalienability clauses shall be limited in time, and in an SA where the restriction results from an approval clause or a clause providing for a pre-emption right, the application of such clauses may not result in the extension of the non-transferability by more than 12 months from the application for approval or the invitation to exercise the pre-emption right, etc).

Shareholders are entitled to grant security interests such as share pledges over their shares, provided that the legal or statutory transfer restrictions are complied with.

Shareholders in both an Sàrl and an SA are generally entitled to the proceeds remaining after the company has been liquidated (either through a voluntary liquidation or a court liquidation), in proportion to their respective shareholding in the company. However, the articles of association may provide for a different split regarding the entitlement to any such liquidation proceeds.

Shareholders of both an Sàrl and an SA may pass a shareholders’ resolution to liquidate the company that requires a majority of 75% of votes cast (the articles of association may also deviate from this rule and provide for the requirement of a unanimous resolution). The articles of association may also provide for other circumstances under which the company may be liquidated, such as, for example, the failure to reach the company’s purpose or the ending of the term of the company (if provided for in the articles of association), or if the net assets of the company fall under a certain threshold.

Shareholders may also request the liquidation of the company before a court, provided certain legal conditions are satisfied.

In an insolvency situation (faillite), the bankruptcy trustee has control over the management and liquidation of the bankruptcy estate. Creditors, directors and shareholders have, in principle, no control over the trustee’s appointment and its management of the liquidation of the bankruptcy estate.

In a bankruptcy, the order of priority payments during a bankruptcy proceeding is as follows:

Creditors of the bankruptcy: these are bankruptcy expenses (the bankruptcy receiver's fees and/or procedure costs) and have a preferential status over all other claims.

Preferred creditors of the bankrupt estate: preferred creditors include:

  • preferred creditors by law (créanciers privilégiés), such as employees in respect of certain debts owed to them and tax authorities; and
  • creditors with a non-bankruptcy proof of contractual or judicial security (créanciers ayant une sûreté conventionnelle ou judiciaire), ranking behind preferred creditors by law.

Ordinary unsecured creditors (créanciers chirographaires): these are paid pro rata out of the remaining assets, if any.

Shareholders are treated as subordinated creditors unless they have other contractual arrangements in place as creditors (Luxembourg law does not recognise the concept of equitable subordination) and receive any surplus from the liquidation (boni de liquidation), if any, in proportion to their shareholding.

Except for holding physical meetings, there have been no substantial changes to the above-mentioned rules as a result of the COVID-19 pandemic and the resulting economic crisis.

Luxembourg Company Law does not provide for specific provisions in relation to shareholder activism. Doctrine defines “activism” as the behaviour of investors by using their position as shareholders of a given corporation, which may affect the practices within that corporation. This could be a means for shareholders to influence the strategy, the financial performance or the governance of the corporation, after an initial position taken by the management of the company.

The general provisions of Company Law as well as securities law bind companies and activist shareholders. As mentioned in 1.7 Access to Documents and Information, each shareholder, upon request, must be provided with information at the general meeting of shareholders by the board of directors on the company's affairs, to the extent that such information is provided in the Companies Law and is necessary for an assessment of one or several items put on the agenda for that general shareholders' meeting.

The Second Shareholders’ Rights Directive has been implemented in the Luxembourg legislation by the Law of 1 August 2019 (the “Shareholders’ Act” referred to 1.3 Primary Sources of Law and Regulation). This law includes various amendments of the amended law of 24 May 2011 regarding the shareholders’ rights in general meetings of shareholders of listed companies. The new measures enhance and harmonise the corporate governance and increase transparency.

Although shareholders' activist campaigns in Luxembourg are very limited, there is a trend in Luxembourg for more transparency and increased shareholder rights, in particular in listed companies, due to the Shareholders’ Act.

There are few examples of shareholder activism in Luxembourg.

However, it is expected that, in the future, the number of activist campaigns will increase. Indeed, the aim of the Shareholders’ Act is to extend and strengthen shareholders' rights, particularly in listed companies and for minority shareholders. Reinforcing shareholders' engagement could lead to more shareholder activism in Luxembourg in the future.

Luxembourg companies do not face activism as much as, for instance, French companies. However, it should be noted that there are activist funds in Luxembourg. These do not target national companies but often target companies incorporated in other European countries.

For now, there are very few publicly available examples of shareholder activism in Luxembourg, eg, Arcelor in 2006–07, Deer Park Road’s investment in a Luxembourg-based company in 2017.

Common Strategies Used by Activist Shareholders

Depending on the type of industry, the type of shareholder and the goals to be achieved, activists may use different strategies to pursue their objectives.

  • Activist shareholders' may target the company’s governance (eg, change of board members).
  • They may form a coalition between shareholders to reverse the management of the company and implement their new suggestions. This is done without any legal scope, agreement or contract and is often criticised. Some would say that this type of shareholder is part of a "wolf pack".
  • A well-known strategy is event-driven activism. The shareholders' aim is to take advantage and gain profits from operations such as a merger or the sale of a company. There have been multiple examples of this strategy in Europe and in the United States. In Luxembourg, the takeover of Arcelor by Mittal is also a well-known example. 
  • Another strategy is to try to become a member of the board and to initiate a restructuring process within the company. This is also a popular strategy used by activist shareholders worldwide.
  • They may also initiate litigation in order to put pressure on the company’s management and other shareholders.
  • They may use tactics at a general meeting of shareholders.
  • They can partner with aggressive bidders.
  • They can use public critics in order to drive down stock prices.

The COVID-19 Pandemic's Impact on Shareholders' Activism

The COVID-19 pandemic has had no real impact on activism in Luxembourg, as activists are already very much limited in Luxembourg. The Shareholders' Act may have an impact on the increase of shareholder activism in Luxembourg (see 1.3 Primary Sources of Law and Regulation). The effect might have been slowed down by the pandemic, and may increase in the future once the pandemic is over.

In general, Luxembourg activists do not target particular industries or sectors.

Typically, the most active group of shareholders is activist hedge funds.

There is no available data on a percentage or proportion of public activist demands that were met in the last year. According to Activist Insight, 11 companies that were identified as vulnerable across 2020 in reports went on to be targeted.

Companies should identify the issues that may attract activists’ attention and ascertain the measures to minimise the risk of being targeted by an activist shareholder, such as:

  • reviewing governance policies and board composition;
  • maintaining good levels of shareholder engagement and continually communicating company strategy to shareholders;
  • maintaining good levels of corporate governance and identifying any areas of vulnerability that activists may seek to challenge;
  • monitoring the market for shareholder-activist activity;
  • regularly evaluate strategic alternatives; and
  • attract talent in investor relations and communication.

Except for some other forms of companies, an SA and an Sàrl have their own legal personality distinct from their shareholders under the Company Law and civil-law provisions.

There are only very limited circumstances in which a Luxembourg court will look past the principle of separate legal personality (or "pierce the corporate veil") to hold shareholders legally responsible for a company’s conduct.

Relevant examples of situations in which piercing is provided include the following:

  • asset-stripping;
  • priority treatment of affiliated creditors over other creditors, in the knowledge that the latter creditors are then left with no recourse;
  • continuation of loss-inducing business, eg, when a shareholder (continuously) acts recklessly with regard to the creditors of the subsidiary.

Apart from the question of "piercing the corporate veil", it is possible for a shareholder or parent company to be held liable for the activities of the company in circumstances where the shareholder has been acting as a de facto director.

In addition to the remedies that are generally available in tort or contract, certain specific remedies are available to shareholders against the company, such as asking for the winding-up of the company in court, because of persistent disagreement between shareholders.

Shareholders can request the voidance of the company’s corporate resolutions. They can also bring an action for a wrongful act committed by the company.

Shareholders may seek the appointment of a custodian of the assets or a provisional director under urgent proceedings.

Directors/officers are agents of the company appointed by the general meeting of the shareholders, and are consequently liable to the company for the performance of their mandate and for any shortcomings in the performance of their duties.

Under Article 441-9 §2 of the Company Law, all members of the board of directors are jointly and severally liable to the company and third parties. The company and any third party, such as public authorities, creditors, employees or an individual shareholder (including a minority shareholder) of the company, may take legal action based on Article 441-9 of the Company Law.

Also, directors may be held liable for inobservance of the conflict-of-interest procedure if there is a detriment to the Company with a direct causal link to the violation of that procedure. The conflict-of-interest regime provides that “any director who has a direct or indirect financial interest in a [decision or] transaction by the board of directors which conflicts with the company's interests must advise the board of this and ensure that his declaration is recorded in the minutes of the meeting. He may not take part in the relevant deliberations”.

Luxembourg doctrine has clarified the scope of the rule by identifying and defining three cumulative criteria:

  • operations by the board, ie, any action or decision to be taken by the board, which creates rights or obligations on the company;
  • financial interest, ie, a sufficiently material benefit (direct or indirect) susceptible of economic valuation; and
  • opposing, meaning that the material benefit of one is to the detriment of the other, even if that benefit may only be potential.

Under exceptional circumstances and in the event that the company is unable to function properly due to the inability of the directors appointed to manage the company, resulting in the company’s activities being paralysed by the dysfunctioning board of directors, a shareholder may file an application to be made to appoint a temporary director (administrateur provisoire).

Legal remedies for one shareholder against another are mostly based on a violation of a provision included in a shareholder agreement or based on an abuse of majority rights.

Luxembourg case law recognises the notion of “abuse of majority” when a decision of the general meeting of the shareholders has been taken against the corporate interest of the company, to the benefit of the majority shareholder(s) only, and is detrimental to the minority shareholder(s).

If a decision is taken due to the abusive action by a majority shareholder, an application to suspend and subsequently to annul the decision could be made by the minority shareholder.

If the shareholders of the company have a grave disagreement regarding the company and are no longer able to co-operate properly, an application to the court could be made by a shareholder for the dissolution of the company for reasonable grounds (justes motifs) citing the inability of the shareholders to agree on matters concerning the company.

Legal remedies offered to shareholders against auditors are very uncommon. In general, the company has the right to initiate an action against the auditors unless the shareholder has a specific loss that is distinct from the one suffered by the company. A potential action against the company’s auditors will also depend on the nature of the contract that has been entered into between the company and its auditors.

A shareholder may, however, initiate an action against the auditors based on other civil principles (such as the relative effect of contracts, actio Pauliana or tort liability principles).

Derivative actions do not exist under Luxembourg law.

There are many different factors to be assessed by a shareholder in litigation, including the objective to be reached, the length of the proceedings, the cost in litigating, the bad publicity and its effects on the stock price. In general, the factors to be considered need to be carefully considered and assessed with legal counsels before any action is taken.

Depending on the elements of the case, a shareholder may want to use legal action as a point of pressure in order to negotiate with the directors or with other shareholders, potentially in conjunction with other strategies (see 3.2 Legal Remedies against the Company).

Also, the shareholder will have to determine what he or she really wants to achieve before litigating. For example, some of the legal actions are very limited in their purpose and not all available remedies will be appropriate for the shareholder.

Baker McKenzie

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Bonn Steichen & Partners is an independent full-service law firm, based in Luxembourg, that is committed to providing quality legal services to its domestic and international clients in all aspects of Luxembourg business law. Its multilingual lawyers work side by side with clients to help them reach their objectives and to support them with tailor-made legal advice, creating in the process professional relationships based on mutual trust and respect. The team at BSP has developed particular expertise in banking and finance, capital markets, corporate law, dispute resolution, employment law, investment funds, intellectual property, private wealth, real estate and tax. In these practice areas, as in others, the lawyers' know-how and ability to work in cross-practice teams, and to adapt swiftly to new laws and regulations, have enabled them to provide their clients with the timely and integrated legal assistance vital to the success of each client's business.

Legal Scope

In Luxembourg, commercial companies are governed by the law on commercial companies, dated 10 August 1915, as amended (Law 1915). Only the société anonyme (public liability company) (SA) and the société à responsabilité limitée (private limited liability company) (Sàrl), which are the most commonly used forms of commercial companies in Luxembourg, will be covered in this article.

Additionally, given the size of this article, specific shareholders’ rights in companies whose shares are admitted to listing and trading will not be able to be taken into consideration, hence rights deriving from the following laws will not be discussed:

  • the law dated 24 May 2011 on the exercise of certain rights of shareholders of listed companies;
  • the law dated 19 May 2006 on takeover bids;
  • the law of 11 January 2008 on transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market; and
  • the law dated 21 July 2012 on the mandatory squeeze-out and sell-out of securities.

Incorporation

The incorporation of both the SA and the Sàrl takes place by notarial deed, which includes the articles of association of the company (the Articles) before a Luxembourg notary.

Shareholders

An SA or a Sàrl can be incorporated by one or several shareholders, who must deliver to the notary a document evidencing the existence of the funds (in the case of a cash contribution) or the value of the assets (in the case of an in-kind contribution) contributed to the share capital through, among others, a blocking certificate or a valuation report. The minimum share capital for an SA amounts to EUR30,000 and EUR12,000 for a Sàrl. It must be fully paid up for a Sàrl while only paid up to one quarter for an SA. It must be noted that the SA and the Sàrl exist and obtain legal personality directly upon signature of the notarial deed. This means that they may both enter into agreements and operate directly thereafter.

Share Capital

The share capital may be composed of one single class of shares or alternatively may be sub-divided into several classes with different nominal values or without nominal value. Common (ordinary) shares represent a portion of the company’s share capital and entitle its owner to the political and economic rights which are attached thereto. In the absence of the creation of different categories of shares, common shares are issued, thus entitling the shareholders to identical rights (political and economic).

Indeed, in the case of different categories of shares, the rights attached thereto are usually different and are detailed in the Articles and/or in a shareholders' agreement, bearing in mind the question of enforceability towards third parties.

In substance, political rights mean voting rights to be exercised within the general meeting of shareholders and economic rights refer to dividends or proceeds of liquidation. Depending on the corporate form, the Articles may adjust these economic and political rights through the issue of specific shares.

Non-voting Shares

In that respect, since 2016, an SA may issue non-voting shares in exchange for shares with more economic rights, which may not represent more than 50% of the total issued share capital. These specific supplementary economic rights must be set out in the Articles. Nevertheless, non-voting shares regain their voting rights at any general meeting resolving upon any amendments of their rights or with respect to a decrease of the share capital.

Non-voting shareholders shall receive the same documents, convening notices, reports and information that are provided to other shareholders, pursuant to Law 1915.

Profit Units

Furthermore, an SA and a Sàrl may issue profit units which do not represent the share capital of the company. The Articles shall specify the rights attached thereto. The holders thereof are not shareholders of the company and thus do not participate in the social life of the company. However, the holders of profit shares have financial rights (profits and liquidation proceeds).

Tracking Shares

Tracking shares, previously used and applied by practitioners, have been recognised and established in Law 1915 further to the amendment law in 2016. In essence, tracking shares represent a portion of the share capital and have the same rights as those attached to common shares, except for dividend rights, which are linked to the results of various investments or activities of the company.

Distribution of Profits

In compliance with the general principle of contractual freedom, the contracting parties are free to determine the terms and conditions they want to be bound by in the Articles, with regard to distribution of profits. However, it is important to emphasise that pursuant to Article 1855 of the Luxembourg Civil Code “[an] agreement that would give one of the partners all of the profits is null and void”. In other words, the above-mentioned contractual freedom cannot lead to provide for a “lion’s-share clause” in the Articles. Notwithstanding, only the most radical solutions are forbidden. Indeed, the “lion’s-share clause” will be considered as such if it does not leave each shareholder any hope of profit and a corresponding risk. In other words, only the clause that makes profits and losses "illusory" is prohibited.

Transfer of Shares

The acquisition of shares is possible throughout the lifetime of the company, depending on various circumstances as well as the form of company issuing those shares. Becoming a shareholder shall take place either through a share-capital increase or through the acquisition of shares.

Indeed, the company may increase its share capital, which will be carried out by holding an extraordinary general meeting of shareholders before a Luxembourg notary, under the conditions required for the amendment of the Articles or, depending whether it is provided in the Articles, by means of a resolution of the management organ (board of directors). This authorisation must be granted by the general meeting of shareholders in advance and shall be valid for a maximum period of five years; it may be renewed once or on several occasions by the general meeting of shareholders.

Alternatively, a third party may become a shareholder through the acquisition of shares. Usually, the transfer of shares is performed under private seal, but it can be performed by a notarial deed. The transfer will be valid between the parties from the date of the transfer agreement; however, only the record in the shareholders' register establishes the ownership of the shares vis-à-vis third parties and the company. Therefore, the transfer must be notified to the company, in accordance with Article 1690 of the Luxembourg Civil Code. This general rule applies to registered shares; there are, however, specificities regarding bearer or dematerialised shares (which can only be issued by an SA). As far as bearer shares are concerned, the transfer will become effective as of its recording in the shares register held by the depositary. Conversely, without going into the details in this article, dematerialised shares are transferred by book-entry transfer.

Transferability Restriction

Transferability restriction: for an SA, shares shall be freely transferable, unless provided otherwise in the Articles or in a shareholders' agreement. Given the nature of the Sàrl, shares are freely transferable between shareholders but are subject to transfer restriction to third parties, thus requiring the approval of shareholders representing at least 75% of the share capital.

In addition to the aforementioned legal rules, the Articles or shareholders' agreement may provide for restrictions on the free transferability of shares, such as the prior-consent requirement, pre-emption or lock-up clauses, tag-along clauses, and call or put options. These provisions are a matter of contractual freedom and may be more restrictive than Law 1915, provided that they do not result in the absolute inalienability of the shares. Consequently, it is imperative that an exit mechanism for shareholders wishing to dispose of their shares is provided.

Further to the amendment of Law 1915 in 2016, lock-up clauses are valid but must be limited in time. Therefore, since 2016, pre-emptive, approval and lock-up clauses are valid for a maximum 12-month period and shall automatically be reduced to 12 months if contractually fixed to a longer period of time.

Principle of Equal Treatment of Shareholders

Given this explanation and the possibility to have different categories of shares, the question is to know whether shareholders shall be treated equally. As a matter of fact, the principle of equal treatment of shareholders, even though recognised and applied, is not explicitly recognised in Law 1915 per se (except in one article governing share buy-back programmes). In summary, within the same category, shareholders must be treated equally. As a consequence, as previously mentioned, the Articles may themselves provide for different categories of shares, entitling their holders to different rights; this shall not violate the principle of the equal-treatment rule as long as, within each category, the rights are identical.

As previously mentioned, the voting right is closely linked to the status of shareholder and is of paramount importance to express the shareholders’ view within the general meeting of shareholders. It must be noted that, pursuant to Law 1915, the board of directors of an SA has the powers to take any action necessary or useful to realise the corporate purpose of the company, with the exception of the powers reserved by law or by the articles of association to the general meeting of shareholders.

Matters to Be Discussed at the General Meeting of Shareholders

Law 1915 reserves the following matters to the exclusive competence of the general meeting of shareholders:

  • appointment and removal of directors and statutory auditors;
  • approval of the annual financial statements and profits' distribution;
  • amendment of the articles of association;
  • increase and decrease of the share capital, except for the authorised share capital;
  • issuance of securities convertible into shares, except within the scope of the authorised share capital;
  • merger, de-merger;
  • transfers of assets, branch of activity or all assets and liabilities under a regime of de-mergers;
  • change of the company’s corporate denomination, corporate form and nationality;
  • increase of shareholders’ engagements;
  • in the event of a loss of half the corporate capital of the company, the extraordinary general meeting of shareholders must be convened to resolve on the possible dissolution of the company;
  • liquidation of the company.

In addition to these exclusive competences reserved to the general meeting of shareholders, powers of the board of directors may equally be contractually limited by the Articles, conferring thus certain additional decision-making powers, usually falling within the competence of the board of directors, to the general meeting of shareholders. However, any such potential limitation cannot lead to the board of directors being deprived of its essential function, which is the management of the company, by taking any and all actions necessary or useful to realise its corporate purposes.

General Meetings

General meetings may be convened at any time by the management body. The board of directors shall convene the general meeting for an SA. That said, a general meeting may equally be convened by the statutory auditor or one or several shareholders representing at least 10% of the share capital. In such a case, the board of directors must convene the general meeting so that it is held within one month upon written request of the shareholders, indicating the agenda.

For a Sàrl, in the absence of a contrary provision in the Articles, each manager may convene the general meeting without the other managers being able to make an objection. Additionally, shareholders representing more than 50% of the share capital may also convene a general meeting at any time.

Participation Rights

As long as the nature of shareholder is properly evidenced, any shareholders have the right to participate in general meetings of shareholders, irrespective of the number of shares they hold. They can participate by attending meetings in person, or by appointing a proxy.

Right of Information

Shareholders intending to participate in any general meeting have a right of information for the purpose of exercising their voting right duly informed; thus, Law 1915 provides for certain formalities to be performed in due time to that effect. A convening notice must be filed with the Luxembourg register of commerce and companies, as well as being published in the electronic official gazette and in a local newspaper at least 15 days prior to the captioned general meeting.

In the context of an annual general meeting, for instance, which must be held at least once a year for an SA, within six months after the end of the financial year, shareholders may consult certain documents such as the annual account, the management report and the report of the statutory auditor at the registered address of the company; shareholders may even obtain a copy thereof upon request.

Rights to Ask Questions

In the same context as previously mentioned, shareholders participating in a general meeting have a right to ask questions. However, this right is not unlimited. Indeed, questions must be related to the agenda of the general meeting, and the management cannot answer questions that would be detrimental to the company’s interest (such as revealing pending confidential discussions, business secrets, etc) or, more simply, that would breach a confidential obligation. Furthermore, the shareholders cannot abuse their right to ask questions.

From a pragmatic perspective, it is recommended that shareholders intending to ask questions consider posing those questions to the management in advance, so that answers may be prepared for the general meeting; moreover, this could allow duly informed directors to participate in the general meeting, considering that there is no obligation for them to attend.

Inclusion of a Request Statement in the Minutes

The shareholders also have the right to request that a statement (in relation to the items on the agenda) be included in the minutes of the general meeting; this is particularly appropriate in the case of potential litigation to evidence disagreement with certain resolutions that have been adopted by a majority of shareholders. In the same context, shareholders shall be entitled to obtain a copy of the captioned minutes of the general meeting concerned.

Inclusion of a Specific Item in the Agenda

In addition to the aforementioned right to convene a general meeting of shareholders, it must be emphasised that shareholders representing at least 10% of the share capital of the company may also request of the management that a specific item be included in the agenda of the captioned general meeting. This right obviously includes the right to suggest the wording of the new proposed resolution. For practical reasons, any such request must be made at least five days prior to an already convened meeting.

Request Postponement of a General Meeting

Shareholders representing 10% of the share capital of a company may also request that a general meeting be postponed; in such a case, the management must postpone the general meeting by four weeks. The general meeting must be reconvened by the management with the same agenda and no meeting can be held in the meantime with the same agenda items.

Individual Judicial Proceedings

In terms of litigation rights, one or several shareholders are entitled to exercise individual judicial proceedings (ie, actio ut singuli), on the basis of tortious liability, in the event that the litigious actions of the directors had a direct and personal impact on the shareholders. In other words, shareholders who suffered from a direct and personal damage caused by the actions of directors are entitled to exercise the actio ut singuli. Any such judicial proceeding linked to the damage exclusively suffered by the shareholder must remain separate from the damage suffered by the company taken as a whole.

Exercise of Judicial Proceedings

In the case of a potential director’s liability on the basis of any misconduct in the management of the company, the general meeting of the shareholders, acting as a corporate body and representing the company, is entitled to decide to exercise the actio mandati, (ie, judicial proceeding) before the Luxembourg commercial court, on the basis of the contractual liability of that director.

Action against the Board of Directors

In addition to the preceding points, since 2016, an action may be brought against the directors on behalf of the company by one or more (minority) shareholders (or holders of profits' units) who, at the general meeting which decided upon the discharge of those directors (ie, the annual general meeting), owned securities with the right to vote at such a meeting representing at least 10% of the votes attaching to all such securities. This a clear extension of the actio mandati, which was not recognised until 2016, and aims to reinforce the right of minority shareholders to act against the board of directors.

Questions to the Management Body

In the same vein, as far as a right of information is concerned, since 2016, one or more shareholders representing at least 10% of the share capital or 10% of the votes attached to all existing securities, may, either individually or by acting together in any manner whatsoever, ask the management body questions in writing on one or more act(s) of management of the company. In the absence of any answer within a period of one month, these shareholders may apply to the judge presiding in the chamber of the District Court dealing with commercial matters and sitting in matters of urgency to appoint one or more experts instructed to submit a report on the act(s) of management targeted in the written question.

If the captioned application is accepted by the Court, it will determine the scope of the assignment and the powers of the experts.

Suspension of Voting Rights

Shareholders have rights, but also duties, hence the Articles of an SA may provide that the board of directors may suspend the voting rights of each shareholder who is in default of his or her obligations under the Articles or his or her deed of subscription or deed of commitment. The suspension of voting rights is temporary and is imposed on the defaulting shareholder. The purpose of suspending voting rights is to sanction the defaulting shareholder; thus, if the cause justifying the suspension of voting rights disappears because it has been remedied by the defaulting shareholder, the voting rights shall be restored accordingly.

Voluntary Contractual Waiver of Voting Rights

As previously mentioned, the voting right is intrinsically attached to the shares and represents the ultimate way for shareholders to influence the company’s life. However, since 2016, shareholders may resolve to waive their voting rights contractually. Law 1915 recognises the validity and enforceability of such voluntary waivers of voting rights. Consequently, each shareholder, in his or her personal capacity, may undertake not to exercise all or part of his or her voting rights for a limited period of time, or indefinitely. This choice will validly bind the waiving shareholder, as well as the company, upon its notification thereof. It must be emphasised that this waiving right is a personal act, therefore it is not attached to the share in the case of a transfer; in other words, the new shareholder acquiring shares from a waiving shareholder is not bound by that waiver and shall be able to exercise fully his or her voting right attached to the acquired shares.

Rights for Shareholders to Challenge Resolutions

Finally, the aim of this article is to raise the right for shareholders to challenge the resolutions adopted in a general meeting under certain circumstances. Indeed, since 2016, any decision adopted in a general meeting shall be void:

  • where the captioned resolution is flawed as a result of a formal irregularity, if the applicant evidences that this irregularity may have influenced their decision;
  • in the event of a breach of the rules relating to its operation or in the event of deliberation on an issue which was not on the agenda where there is a fraudulent intent;
  • where the adopted decision is flawed by any other abuse of power or misuse of power;
  • in the case of the exercise of voting rights which are suspended pursuant to a legal provision not included in the Law 1915 and where, without those unlawfully exercised voting rights, the quorum and the majority requirements for decisions by a general meeting would not have been met; and, finally
  • for any other reasons provided for in Law 1915.

The captioned nullity must be declared by court order. However, a shareholder who voted in favour of the captioned resolution is barred from pleading the nullity thereof, unless that shareholder’s consent was flawed, or if the person explicitly or implicitly waived their right to avail themselves of that nullity, unless the nullity resulted from a public policy rule.

Considering the need of security and stability, Law 1915 further provides that, where the avoidance is likely to prejudice rights acquired in good faith by a third party towards the company, based on the meeting’s decision, the court may decide that the avoidance is not to have any effect vis-à-vis those rights, subject to the applicant’s right to damages, as the case may be.

In conclusion, this article aims to give a non-exhaustive overview of shareholders’ rights in Luxembourg, given the absence of any specific catalogue thereof in Law 1915. All of the aforementioned subjects should be analysed individually for more specificities and assessment on a case-by-case basis for a tailor-made pragmatic implementation.

Bonn Steichen & Partners

2, rue Peternelchen
Immeuble C2
L-2370 Howald
Luxembourg

+352 26 025 212

+352 26 025 999

padegehet@bsp.lu www.bsp.lu
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Law and Practice

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Baker McKenzie has a dispute resolution team which advises on a wide variety of domestic and international disputes and dispute-avoidance matters for some of the world’s major companies, banks, insurers and public bodies. The firm has seasoned M&A lawyers who provide seamless advice through local expertise, deep sector knowledge, commercial acumen and refined transactional techniques to maximise deal certainty and the desired value and synergies of its clients’ transactions. Working hand-in-hand, the teams strategically address the legal and regulatory implications of a transaction to minimise risk and provide an end-to-end, high-value service. They intervene in all the typical areas in which post-M&A disputes arise, including warranty and indemnity claims, completion and escrow account disputes, earn-out disputes, and claims involving tag-along and drag-along rights. Lawyers frequently advise on other forms of corporate disputes, such as those arising out of shareholder agreements, joint-venture agreements, letters of intent, and minority-shareholder claims.

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Bonn Steichen & Partners is an independent full-service law firm, based in Luxembourg, that is committed to providing quality legal services to its domestic and international clients in all aspects of Luxembourg business law. Its multilingual lawyers work side by side with clients to help them reach their objectives and to support them with tailor-made legal advice, creating in the process professional relationships based on mutual trust and respect. The team at BSP has developed particular expertise in banking and finance, capital markets, corporate law, dispute resolution, employment law, investment funds, intellectual property, private wealth, real estate and tax. In these practice areas, as in others, the lawyers' know-how and ability to work in cross-practice teams, and to adapt swiftly to new laws and regulations, have enabled them to provide their clients with the timely and integrated legal assistance vital to the success of each client's business.

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