This newsletter summarizes the main changes to the rules applicable to Luxembourg public limited liability companies (sociétés anonymes, "S.A.") that can be outlined as follows:

1. Decrease of the minimum share capital;

2. Issuance of shares below par value;

3. Express recognition of lock-up clauses;

4. Express recognition of tracking shares;

5. Additional flexibility to non-voting shares;

6. Issuance of detachable subscription rights;

7. Conversion of convertible bonds;

8. Issuance of bonus shares;

9. Creation of an executive board;

10. Recognition of voting agreements;

11. Change of the nationality of the company - no more unanimous consent;

12. Circular resolutions;

13. Extension of the conflict of interest regime;

14. Recognition of the conventions de portage;

15. Shares burdened with usufruct;

16. Minority shareholder action;

17. Adjournment of general meetings of shareholders;

18. Independent investigation request;

19. Explanatory report;

20. No bondholders consent;

21. Company conversions;

22. New simplified liquidation procedure.

These changes are further analysed in the paragraphs below.

1. Decrease of the minimum share capital (revised Art. 26)

The minimum capital of the S.A. has been rounded down to EUR 30,000.

2. Issuance of shares below par value (revised Art. 26-5, 32(6) and 32(7))

When shares have an (express) nominal value, new shares cannot be issued at a value lower then the nominal value.

When shares have no nominal value, it is now possible to issue new shares below the par value, under specific conditions.

In particular, the convening notice for the shareholders’ meeting resolving on the issuance of new shares must expressly mention that the shares will be issued below par value.

Moreover, the issuance of such shares is mandatorily subject to (i) a report of the board of directors or directoire (on the issuance price of the shares and the financial consequences of such issuance to the shareholders) and (ii) a report of the independent auditor (réviseur d’entreprises), appointed by the board of directors or directoire, to confirm that the financial and accounting information contained in the report of the board of directors or directoire is true and accurate and sufficient. Lack of the report of the independent auditor invalidates the resolution of the general meeting of the shareholders; however it is possible for all shareholders to waive the report.

New shares can also be issued below par value within the “authorised share capital”, provided that the board of directors or directoire was so authorised. In this case, the management report includes the minimum subscription price per issuing share within the authorised capital.

3. Express recognition of lock-up clauses (revised Art. 37(2))

Lock-up clauses (clauses d’inaliénabilité) may be inserted in the articles of association, in deeds of issuance of convertible bonds or in deeds granting subscription rights and they may limit the transferability inter vivos or mortis causa of:

• Any type of share;
• Beneficiary shares;
• Subscription rights or any other security granting the right to the purchase of shares;
• Convertible bonds;
• Bonds with subscription rights;
• Bonds repayable in shares;
• Any other debt instrument convertible into shares.

However, lock-up clauses must be limited in time.

Clauses establishing an approval requirement (clauses d’agrément) and clauses granting pre-emption rights cannot lead to the nontransferability for longer than 12 months. Any clause set for a period longer than 12 months is automatically reduced to 12 months. The articles of association outline the terms and conditions setting the transfer price of the shares, to be otherwise agreed between the parties or determined by the judge.

4. Express recognition of tracking shares (revised Art. 1853 Civil Code)

The possibility to issue different classes of shares to track the performance of different assets or investments is not new to market practice. The Law gave official recognition to such practice for all types of company including the S.A. Different classes of shares have different rights attached, depending on the investment made by the shareholder. The Law specifies that the corporate contract may link different financial rights to the performance of different assets of the company.

5. Additional flexibility to non-voting shares (revised Art. 45 to 47)

Shares with no voting rights will no longer be limited to 50% of the share capital. In the new legal framework, the general meeting of the shareholders determines the maximum amount of shares with no voting rights that can be issued.

Issuing non-voting shares is permitted only if the articles of association include the following rights, as attached to the non-voting shares: right to a dividend (in the event of distribution of profits), right to repayment of the initial contribution and, when necessary, right to the payment of a part of the liquidation proceeds. This new regime allows the free determination of such rights attached thereto without specific limitation. Any conversion between ordinary shares and shares with no voting rights is regulated by the general meeting of the shareholders, which determines the maximum amount of shares to be converted and the conditions of the conversion.

It is worth recalling that non-voting shares keep the voting right when a shareholders’ resolution may potentially impact the rights of the shares with no voting rights, and whenever the general meeting votes on a capital decrease or on the early dissolution of the company.

6. Issuance of detachable subscription rights (revised Art. 32-4)

A company will be able to issue “detachable” subscription rights (droits de souscription), also commonly called "warrants", even if they are not linked to any specific instrument or contract.

7. Conversion of convertible bonds (obligations convertibles) (Art. 32-4)

The conversion of convertible bonds is no longer subject to the rules of contribution in kind and the report of an independent auditor is no longer required. Such conversion is rather considered as a contribution in cash and the bondholder is compensated with a receivable against the company (créance sur la société).

8. Issuance of bonus shares (actions gratuites) (Art. 32-3(5bis))

An S.A. can now issue “bonus shares” to certain beneficiaries, if this is allowed by the articles of association and by means of a resolution of the board of directors or the directoire. The list of possible beneficiaries of bonus shares includes:

• Employees of the company granting the bonus shares (or a specific class of employees);
• Employees of a company whose share capital or voting rights (at least 10%) are held by the company granting the bonus shares (subsidiary);
• Employees of a company holding at least 10% of the share capital or of the voting rights of the company granting the bonus shares (parent company);
• Employees of a company whose share capital or voting rights (at least 50%) are directly or indirectly held by another company holding at least 50% of the share capital of the company granting the bonus shares (sister company);
• Corporate officers (mandataires sociaux) of the company granting the bonus shares.

This can be an interesting provision for the set up of employee incentive plans such as stock grant plans.

9. Executive Board (Comité de direction) & liability regime (revised Art. 60-1)

The articles of association may authorise the board of directors or the directoire to delegate its managing powers to an executive board or to a general director (directeur gé- néral), save for the general policy of the company and any act or activity expressly reserved by the law to the board of directors (or directoire), which cannot be delegated. The executive board may be composed of several persons, directors or not.

In addition, any restriction on the powers of the general director or of the executive board has no effect vis-à-vis third parties even if such restrictions have been published. Where an executive board or a general director is established, the board of directors (or directoire) is responsible for their monitoring. The articles of association may also confer to the general director or to one or several members of the executive board the power to represent the company, whose effects vis-à- vis third parties occur only following the publication procedure in the Recueil Electronique des Sociétés et Associations - RESA.

The liability regime of the directors of the company has been stretched to include the members of the executive board and, partially, the general director. The members of the executive board and the general director (along with the directors of the company) are liable towards the company for their mandate and for any negligence committed while in office. Only members of the executive board (along with the managers of the company) are jointly liable vis-à-vis the company and vis-à- vis third parties for any damage arising from a breach of law or from a breach of the provisions contained in the articles of association.

In addition, the regime of conflict of interest initially designed for the managers of the company is also applicable to the members of the executive board.

10. Voting agreements (pactes d’actionnaires) (revised Art. 67bis)

Voting agreements find some legal basis of recognition under the Law. The legislator has, in fact, recognised that the exercise of voting rights can be subject to agreements between shareholders. However, such agreements are invalid if:

• They go against the law or against corporate interest;
• A shareholder commits to vote in conformity with instructions imposed by the company, by a branch or by the bodies of the company;
• A shareholder commits to approve the resolutions proposed by the bodies of the company

Any vote in the general meeting of the shareholders contravening these provisions is invalid and the vote determines also the invalidity of the resolution unless it was not essential for the adoption of that resolution.

11. Change of the nationality of the company - no more unanimous consent (revised Art. 67-1(1))

A unanimous vote of the shareholders to change the nationality of a company was required under the former regime. The new Law sets the usual majority for amendments to the articles of association to change nationality, which can help the migration of an S.A. which is held by more than one shareholder.

Nevertheless, a unanimous vote is still required in the case of an increase to the initial commitment of the shareholders.

12. Circular resolutions (revised Art. 64(1))

The members of the board of directors of the company (as well as of the supervisory board) may adopt the decisions in the form of circular resolutions (as already widely done in practice), provided that this possibility is included in the articles of association and all directors (or members of the supervisory board) express their written consent.

Decisions made following this procedure are deemed to be made at the registered office of the company (i.e. in Luxembourg).

13. Extension of the conflict of interest regime (revised Art. 60, para. 6)

The Law has defined more precisely an interest “in conflict”: in particular, the conflicting interest has been limited to a patrimonial interest (“intérêt de nature patrimoniale”).

If the abstention of the conflicting director risks creating a deadlock situation within the board of directors, the directors may delegate the decision on a certain topic affected by such abstention to the general shareholders’ meeting.

In addition, the regime of conflict of interest applicable to the members of the board of directors has been extended to include the directors and officers in charge of the daily management of the company. Any such officer with an interest opposed to the corporate interest must abstain from the decisionmaking process. If only one person is in charge of the daily management, he/she must abstain and the board of directors will be in charge of approving the decision. Any conflicting person not abstaining from the decision-process making incurs liability.

14. Conventions de portage (revised Art. 1855 Civil Code)

The Law recognizes the validity of conventions de portage, i.e. agreements providing that the shareholders may set up arrangements for the transfer or the purchase of corporate rights, as long as they do not have the sole aim of jeopardising profit sharing or participation in the losses of the company. These arrangements often ensure a loss-free exit, but their validity was long questioned in the past, as they were considered as a clause léonine. Such arrangements have now been expressly allowed by the latest amendments.

15. Shares burdened with usufruct (revised Art. 1852bis Civil Code)

Among the amendments to the Civil Code introduced by the Law, a new provision governs the exercise of the rights attached to shares burdened with usufruct.

When a share is burdened with usufruct, and the usufruct has been notified to the company and accepted, voting rights belong to the bare-owner, except for the resolutions concerning profits allocation that pertain to the usufructuary. The usufructuary has the right to the profit that the company will potentially allocate.

In the event of redemption of shares by the company, the bare-owner has the right to the amount corresponding to the value of the bare-ownership, while the usufructuary has the right to the amount corresponding to the value of the usufruct.

Nevertheless, the articles of association of the company may dispose otherwise.

16. Minority shareholder action (revised Art. 63bis)

Following the latest amendments, minority shareholders may bring proceedings on behalf on the company against those directors (or the board of directors and the supervisory board) who have acted negligently.

The threshold for starting such a “derivatice action” is 10% of the voting rights in the annual general meeting deciding on the discharge of the directors

17. Adjournment of general meeting of shareholders (revised Art. 67(5))

The threshold of shareholders to request to the board of directors to adjourn a general meeting of shareholders, during the meeting, has decreased from 20% to 10% of the share capital of the company.

18. Independent investigation request (revised Art. 154)

Minority shareholders representing at least 10% of the share capital (or holding 10% of voting rights) have the right to ask questions of the board of directors in written form in relation to the company's management operations.

In the absence of an answer from the board of directors within one month, such minority shareholders may request the president of the district court (seating in commercial matters) in the form of interlocutory proceedings to appoint one or several experts who will be asked to prepare a report on the operations subject to the minority shareholders' question.

19. Explanatory report (revised Art. 100)

If the net asset value of the company is reduced to less that half of the share capital, the board of directors or the directoire must declare and justify the causes of such reduction in a report. The report will remain available for the shareholders’ consultation at the registered office for at least 8 days before the date of the shareholders’ general meeting duly convened by the board of directors or by the directoire. The report must propose whether to continue pursuing the business of the company and which measures must be implemented to redress the financial position of the company.

The report is mandatory and its absence determines the invalidity of the decision adopted by the shareholders’ meeting, unless all shareholders have unanimously waived it.

20. No bondholders’ consent (revised Art. 67-1)

The provision requiring the approval of the general meeting of the bond investors, in the event of an amendment of the articles of association concerning the corporate object (“obligataires”), has been repealed.

Moreover, bond investors’ consent is no longer required in the event of a change of nationality of the company nor in the case of an increase of shareholder commitments. Such repeal will contribute to facilitate and speed up the process of amendment of the companies.

21. Company conversions (Section XVquater)

A newly introduced section of the Law regulates the steps that govern the conversion of a company changing its legal form. These rules do not apply to the conversion of a société européenne into a société anonyme and vice-versa, and additional specific requirements apply to the conversion of a société à responsabilité limitée into a société anonyme if the former has undergone a contribution in kind within the 2 years preceding the conversion of the company and such a contribution was not subject to the evaluation report of an independent expert.

Before proceeding with the conversion, an accounting statement must outline the assets and liabilities of the company at a date not more than 6 months from the date of the general meeting of the shareholders held to decide on the conversion of the company. If the latest annual accounts refer to a financial year ended at a date not more than 6 months from the date of the general meeting of the shareholders, the annual accounts summarize the assets and liabilities of the company and no additional financial statements are needed. However, financial statements (état comptable) are not necessary if all shareholders and security holders disposing of voting rights have unanimously waived them.

The general meeting of the shareholders must approve the conversion of the company following the majority rules established for the amendment of the articles of association. Notwithstanding, if the société anonyme is converted into a société coopérative à responsabilité illimitée, the Law requires the approval of all shareholders.

Following the conversion of the company, the articles of association of the new company are amended according to the same rules of attendance and majority adopted for the conversion of the company.

The conversion of the company is established in the form of a notarial deed under penalty of being declared null and void. The conversion becomes effective vis-à-vis third parties once the amendments have been notified to the Luxembourg Trade and Companies Register and the deed of conversion and the articles of association have been published in the Recueil Electronique des Sociétés et Associations (RESA).

22. New simplified liquidation procedure (revised Art. 1865bis Civil Code)

A new provision of the Law recognizes the case where all shares of the company are held by a sole shareholder and acknowledges that the sole shareholder can proceed any time to the dissolution of the company. In the latter case, the company is dissolved without liquidation by transfer of all assets and liabilities to the sole shareholder. Such effect is automatic unless, within 30 days from the publication of the dissolution decision, the creditors request the president of the district court (tribunal d’arrondissement) to obtain additional securities. The president of the tribunal of the district court may dismiss such request only if the sole shareholder already provides appropriate securities to his creditors or if such securities are not necessary in the light of the financial assets owned by the sole shareholder.

MOLITOR's Corporate & M&A team will be pleased to assist Luxembourg public limited liability companies and their in-house legal teams in the assessment of their compliance with the new rules.