Answer ... (a) Commercial/corporate
In general, there are no specific commercial/corporate aspects to consider for targets that do not conduct activities other than holding the shares of underlying group companies. If the target conducts activities subject to a licence, specific rules and regulations will need to be considered, depending on the activity, including with respect to the change of shareholding, which may need to be authorised by the competent regulator.
A bill was introduced in 2020 regarding the screening of foreign direct investment (FDI). The bill is still at a relatively early stage of the legislative process and is subject to amendment; but once adopted, an FDI-related assessment will also need to be taken into consideration for M&A transactions.
(b) Financial
In general, there are no specific financial-related aspects to consider for targets that do not conduct activities other than holding the shares of underlying group companies. If the target conducts activities subject to a licence, specific rules and regulations will need to be considered, depending on the activity, with respect to the way in which the acquisition is financed.
(c) Litigation
In general, there are no specific litigation aspects to consider for targets that are privately held and do not conduct activities other than holding the shares of underlying group companies. Luxembourg is a member state of the European Union and the relevant EU rules and regulations applicable to choice of jurisdiction and enforcement of judgments thus apply in Luxembourg.
If there are pending disputes when the due diligence process is performed, the buyer’s attention should be drawn to the following items:
- the value of the dispute – the potential cost in the event of a negative decision is of the utmost importance (depending on the materiality threshold set for the due diligence); and
- whether the seller has sufficient provisions to cover the costs of the proceedings and a potential payment order, which should be reflected in the target’s annual accounts.
(d) Tax
Generally speaking, the following main points for the acquisition of the shares in targets that do not conduct other activities than holding the shares of the underlying group companies should be considered:
- Ensure that the target has duly and timely filed its corporate tax returns, withholding tax returns and other returns.
- Verify the existence of advance tax agreements, advance pricing agreement(s) and functional currency agreements (if the share capital of the target is denominated in foreign currency), and ensure that the structure implemented is in line with the aforementioned agreement(s).
- Ensure that the aforementioned returns are in line with the Luxembourg tax rules, administrative practice and agreements/request (if any) – in particular, the filing positions adopted for the tax treatment of the shares held in underlying subsidiaries and the applicable thin capitalisation rules.
- Obtain confirmation that the target is not value added tax registered.
- Ensure that all intra-group transactions have occurred at arm’s length and, if applicable, are sustained by Organisation for Economic Co-operation and Development compliant transfer pricing documentation.
- Ensure that the target has paid all taxes due and payable as well as related payments (eg, fines or interest for late payment, if any)
(e) Employment
In general, there are no specific employment aspects to consider for targets that are privately held and do not conduct activities other than holding the shares of underlying group companies. However, if the target conducts activities that require it to have employees, the buyer’s attention should be drawn to several key items:
- If the transaction qualifies as a ‘transfer of undertakings’ within the meaning of EU Regulation 2001/23 and/or the applicable provisions of the Luxembourg Labour Code, the target’s personnel (ie, the employment contracts) will be automatically transferred to the buyer, which will become the new employer. In this case, due diligence will be of the utmost importance, to ensure that all Luxembourg labour law standards and requirements are met.
- If the transaction qualifies as a transfer of undertakings, the target’s employee representative bodies (if any) will also be automatically transferred (fully or partially, depending on the situation) to the buyer.
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In terms of liability, the buyer should remain attentive to the possibility of ‘false senior executives’. Indeed, under the Luxembourg labour law, ‘senior executive’ is a special status to which specific conditions apply; such employees are not subject to the Luxembourg provisions on working time. Sometimes, employers think that certain employees should be categorised as senior executives, but the applicable conditions are not in fact met. In this case, the erroneously categorised senior executives may take legal action in order to:
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- challenge their classification as senior executives; and
- claim the payment of arrears of salary, notably overtime (150% of the employee’s usual wage).
Depending on the situation, this could trigger unforeseen costs.
(f) Intellectual property and IT
The Luxembourg financial sector regulator, the Commission de Surveillance du Secteur Financier (CSSF), has issued circulars on the outsourcing of IT activities in the financial sector. These outsourcing rules apply in addition to the European guidelines and often provide for stricter requirements. Close attention should therefore be paid to the following:
- CSSF Circulars 17/655 and 17/656, which contain specific IT outsourcing requirements for IT system management and operation services, consultancy, development and maintenance services, hosting services and infrastructure ownership;
- CSSF Circular 12/552, recently updated by CSSF Circular 20/759; and
- CSSF Circular 17/654 on IT outsourcing relying on cloud computing infrastructure, which applies in place of CSSF Circulars 17/655 and 17/656 in the event of cloud-based outsourcing (and the specific criteria for application are met).
(g) Data protection
Surveillance in the workplace (eg, monitoring employees’ use of IT tools) is regulated by Article L261-1 of the Labour Code and is possible only under certain conditions. Furthermore, information obligations apply with respect to the employees and employee representative bodies.
(h) Cybersecurity
Financial institutions are subject to notification obligations in the event of incidents that affect the security of their networks and information systems pursuant to the Act of 28 May 2019 implementing the Network and Information Security Directive (2016/1148/EU).
Furthermore, all financial institutions subject to supervision by the CSSF must report on fraud and incidents occasioned by external cyberattacks.
Finally, payment service providers have specific notification and reporting obligations in the event of major operational or security incidents. The European Banking Authority Guidelines on major incident reporting have been adopted and supplemented by CSSF Circular 18/704.
(i) Real estate
Verifications should be made with the Land Registry to confirm title to, and any encumbrances on, real property.