Clarification on the legal conditions to be met and consequences triggered by the vote on discharge
What is a minority action?
The Luxembourg District Court has recently rendered a judgment clarifying, amongst others, the conditions to be met to validly bring a minority action against the management of a Luxembourg company (Jugement du Tribunal d'Arrondissement (XV chambre) n° 2018TALCH15/543 dated April 25, 2018).
This minority action was introduced into Luxembourg company law by the law dated August 10, 2016 and applies only to public limited companies by shares (sociétés anonymes), European companies (sociétés européennes), corporate partnerships limited by shares (sociétés en commandite par actions), co-operative societies organized as public limited companies by shares (sociétés coopératives organisées comme sociétés anonymes), and simplified limited liability companies (sociétés par actions simplifiées). It does not apply to private limited liability companies (sociétés à responsabilité limitée). The minority action allows the minority shareholder(s)/holder(s) of profit units to sue the management and file a claim in the name and on behalf of the company for any harm caused to it by their mismanagement.
Article 444-2 of the law of August 10, 1915 on commercial companies, as amended (the "Law"), states: "An action may be brought against the directors or the members of the management board or the supervisory board, as the case may be, on behalf of the company by minority shareholders or holders of profit units. This minority action may be brought by one or more shareholders or holders of profit units who, at the general meeting which decided upon discharge of such directors or members, owned securities with the right to vote at such meeting representing at least ten per cent of the votes attaching to all such securities."
What are the conditions to validly introduce a minority action?
The Luxembourg District Court appears to have taken the measure of the fact that the provisions on the minority action are recent and that guidance on their application is necessary. Accordingly, the grounds of its judgement contain a very clear and instructive listing of the conditions which have to be met in order to validly introduce a minority action:
- Being the owner(s) of shares/profit units (parts bénéficiaires) having the right to vote on the discharge at the general meeting which decided upon the discharge representing at least ten percent (10%) of the votes attached to all such securities.
- Introducing the action (i) after the holding of the general meeting of shareholders of the company which decided upon the discharge for the relevant financial year (i.e. the year during which the alleged misconduct of the management took place) but (ii) not later than 5 years from the relevant facts or their discovery (if fraudulently concealed).
- Not being a majority shareholder/holder of profit units (parts bénéficiaires).
- Not having voted in favor of the discharge.
Does the discharge protect the management from a minority action?
The Luxembourg District Court had further considered whether the facts dating prior to the entry into force of the law of August 10, 2016 (i.e. August 23, 2016) could also be subject to a minority action and concluded that the minority action could, indeed, apply to such past period unless the relevant conduct of management has already been covered by a valid and definitive discharge.
Just to clarify, such limitation to the applicability of the minority action stems from the general principle of the non-retroactive effect of new provisions of the law and the need to safeguard the legitimate interest of the management which has already received valid discharge under the previous legal regime.
However, in the absence of any such restriction in the text of article 444-2 of the Law, and considering the very logic of the minority action, the sole fact of the granting of a valid discharge to the management by the general meeting of shareholders would not prevent the minority stakeholders (who had not voted in favor of such discharge) from bringing a minority action in respect of acts (or omissions) of the management which occurred after August 23, 2016.
What is a valid discharge?
Finally, the Luxembourg District Court has recalled some well-established principles applicable to the discharge, and, in particular, the fact that a discharge is deemed valid when (i) the decision to grant discharge is subject to a separate deliberation and (ii) the financial statements presented to the shareholders are fair and complete or, in case they are not, where it can be established that the shareholders were aware of the omissions and inaccuracies contained therein and granted the discharge with full knowledge of these facts.
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