Luxembourg
Answer ... A chain of Luxembourg entities is frequently involved in the structure. In recent years, sociétés en commandite spéciale (SCSs) (without legal personality) and sociétés en commandite simple (SCSps) have commonly been used as part of this structuring. These vehicles have become more popular as they allow parties significant flexibility with respect to the transfer of interests and distribution mechanisms. In addition, unlike the more traditional corporate vehicles, whose constitutional documents (articles of association) must be published in full, only a limited number of provisions of the relevant partnership agreement must be published.
This considerable degree of flexibility and confidentiality makes these vehicles attractive when multiple parties are investing; while the société à responsabilité limitée (Sarl) remains the most popular choice for finance entities and acquisition vehicles further down the chain. It is also possible for such minority investments to be for pure debt instruments or convertible instruments such as convertible bonds or warrants that can be converted into equity.
In terms of the actual transaction document and process, it is most common to see privately negotiated sale and purchase agreements, rather than auction sales.
Luxembourg
Answer ... The structures described in question 3.1 are relatively simple to establish and run. The SCS and the SCSp are particularly flexible vehicles and offer a high degree of confidentiality as regards governance and distribution mechanics, as there is no requirement to publish the partnership agreement.
However, as unregulated entities, it is not possible to create segregated portfolios of assets and liabilities (compartments), as it is possible to do with regulated fund vehicles (a detailed examination of which is beyond the scope of this Q&A).
The tax treatment of certain vehicles is also a key consideration in deciding on the specific transaction structure. One significant tax consideration is the fact that the SCS and SCSp, although advantageous for many reasons (as outlined above), are tax transparent and not subject to corporate income tax. Depending on the overall structuring, it may be more appropriate to opt for a taxable entity, such as the socieìteì en commandite par actions (SCA) (a taxable partnership, which, similar to the SCS and SCSp, can also have management through an unlimited liability general partner).
Luxembourg
Answer ... A wide range of funding structures is available under Luxembourg law. Typically, transactions are funded by investors through a variety of different funding instruments, split between equity (ordinary shares, preference shares, parts beneficiaires, warrants) and debt instruments (loans, bonds, preferred equity certificates), with most transactions involving a combination of two or more such instruments.
Bank financing remains a significant aspect of financing private equity transactions, with banks typically securing their loans through pledge agreements (most commonly share, receivable and account pledges).
The Luxembourg Collateral Act of 5 August 2005 (as amended) is widely regarded as being a creditor-friendly statute and is a favourable aspect of the Luxembourg legislative framework for private equity transactions.
It is not unusual for a lender to require that the borrowing entity in a transaction be established as a Luxembourg vehicle, in order to benefit from the creditor protection offered by the Collateral Act.
Luxembourg
Answer ... Debt funding can generally be put in place more quickly and with fewer formalities than equity instruments. It is also easier to facilitate repayment to lenders under debt instruments than it is to distribute monies under equity instruments. However, while ease of implementation and ease of cash repatriation may certainly be a relevant consideration, the decision as to the nature of the funding will also be impacted by tax considerations and the required control structure.
Luxembourg
Answer ... There are, of course, practical complications as a result of having multiple jurisdictions involved in one transaction. Closings must be carefully organised, with particular attention being paid to the timing of wire transfers. However, such practical points are easily addressed with some advance planning.
A more significant attention point from a Luxembourg law perspective is the fact that Luxembourg adopts the ‘real seat’ theory, meaning that – unlike other jurisdictions, such as the Netherlands, Ireland and the United Kingdom, which adopt the incorporation theory – a Luxembourg entity will be considered as a Luxembourg entity and subject to the laws of Luxembourg only to the extent that it has its ‘real seat’ in Luxembourg.
There are many different terms used in connection with this concept – ‘central administration’, ‘principal establishment’, ‘effective management’, ‘domicile’ – with the Luxembourg companies law referring to both ‘central administration’ and ‘domicile’. There is a rebuttable presumption as a matter of law that a company’s central administration is at the address of its registered office. Some of the key criteria in order to establish presence in Luxembourg (from a corporate law perspective) include:
- having corporate records maintained at the registered office of the company;
- holding shareholders’ meetings in Luxembourg; and
- perhaps most significantly, having physical board meetings in Luxembourg, at which significant decisions in the life of the company are taken.
From a tax perspective, the question can be more nuanced, as the level of substance required in Luxembourg depends to a certain extent on the other jurisdictions involved and the risk that they may challenge the substance of the company’s presence in Luxembourg.
This is an important point to be considered on a case-by-case basis.
Luxembourg
Answer ... If multiple investors are involved, it may be preferable to opt for an SCS or SCSp rather than one of the more traditional corporate vehicles.
While the Sarl, société anonyme and SCA are still very commonly used in practice, the new partnership vehicles offer significantly more flexibility in terms of unit transfers, issuances, distribution provisions and so on, which can be particularly helpful when dealing with multiple investors.