I OVERVIEW OF M&A ACTIVITY
M&A activity remained relatively strong in Luxembourg in 2017 and 2018, despite a global slowdown due to the remaining uncertainties resulting from Britain's decision to leave the European Union and key global elections. Some of the reasons for this are Luxembourg's regulatory and legislative framework, its legal and political stability, and its domestic market, in particular its fund industry and financial sector.
Luxembourg remains the largest investment funds centre in Europe and the second-largest in the world behind the United States. At the close of March 2018, the net assets under management in Luxembourg amounted to €4.149 billion.2 Hence, the investment funds industry continues to play a major role in stabilising the Luxembourg market. Luxembourg continues to be ideally placed to implement tax-efficient M&A transactions, and hence to be a key platform for M&A and private equity activity. One reason for this is that the relevant legislation continues to be adapted and modernised in order to be as attractive and flexible as possible: this includes new forms of companies, namely the special limited partnership and the simplified stock company, which offer additional solutions for economic actors, including those of the private equity world. Funding instruments and methods created and used by practitioners over past decades, such as the use of tracking shares or the issuance of hybrid instruments, have recently been confirmed by the legislator and codified in the law of 10 August 2016 amending the law of 10 August 1915 on commercial companies (the 1915 Law), hence creating additional legal certainty.
Luxembourg remains one of the leading European hubs for vehicles investing directly or indirectly in European real estate. It is also worth noting that a lot of actions are being undertaken by the government to make Luxembourg a leading hub in the areas of information and communication technology, fintech and space technology.
Chinese banks continue to establish their European headquarters in Luxembourg. In general, Asian deal-makers and investors continue to set their sights on European targets in a bid to reduce reliance on their domestic market. North American investors on the other hand may feel more inclined to stay at home, as there may be new opportunities in a less regulated and lower tax US environment, as promised by the new US President.
With a number of promising drivers and deals in place, we anticipate a relatively active M&A market in 2018. Low costs of funding and the continued desire to expand geographic reach and innovation capabilities speak in favour of an active year. On the other side, key global elections, heightened regulatory scrutiny, in particular of Chinese investors, and speculations around Brexit may result in a slowdown in M&A activities. Despite strong concurrent bids from other leading European hubs, investors and companies fleeing Brexit seem to find Luxembourg an adequate alternative, and particularly the insurance sector, which has seen the establishment of many newcomers in the Luxembourg market.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The Luxembourg Civil Code, notably the provisions governing contracts, and the Luxembourg Commercial Code provide the statutory framework and form the legal basis for the purchase and sale of corporate entities in Luxembourg.
Statutory mergers, including cross-border mergers with EU or non-EU entities, demergers, splits and spin-offs, as well as contributions of branches of activities, or of part or all of the assets and liabilities of Luxembourg undertakings, are mainly governed by the 1915 Law, which implemented the EU Cross-Border Mergers Directive.3
In addition, the law of 5 August 2005 on collateral agreements, which provides legal certainty to lenders, is commonly used in M&A transactions irrespective of the location of the target to secure financing. In that context, it should be noted that Luxembourg continues to offer a legal environment more favourable to lenders than any other European jurisdiction.
In the case of an offer for the acquisition of a target whose shares are admitted to trading on a regulated market in one or more Member States, the law of 19 May 2006 transposing the Takeover Law4 will apply in cases where the target is a Luxembourg company or where its shares are admitted to trading on the regulated market of the Luxembourg Stock Exchange (LSE), or both. If the target is a Luxembourg company and its shares are listed on the regulated market of the LSE, all aspects of the offer will be governed by the Takeover Law (even if the shares are additionally listed on other regulated markets in the EU or the EEA). If the target is a Luxembourg company but its shares are listed only on a regulated market in the EU or the EEA outside Luxembourg, a split jurisdiction regime will apply, with the law of the listing jurisdiction being applicable for the offer and Luxembourg law being applicable for corporate law matters, the legality of measures by the target that could defeat the offer as well as information to be provided to employees of the target. With respect to Luxembourg companies, Luxembourg law will also be competent to determine the 'central threshold' from which a mandatory offer will have to be made and exemptions from these obligations as well as sell-out and squeeze-out rules following a successful offer.
If a bidder does not achieve the necessary threshold for a squeeze-out as a result of an offer under the Takeover Law, but reaches that threshold at a later stage, such bidder may be in a position to squeeze-out minority shareholders under the law of 21 July 2012 on mandatory squeeze-out and sell-out of securities of companies currently admitted or previously admitted to dealing on a regulated market in the European Union or having been offered to the public. Conversely, minority shareholders may have the right under that law to cause the majority shareholder to purchase their shares.
Public offerings on the Luxembourg territory and admissions to trading on the Luxembourg regulated market of securities are governed by the Luxembourg prospectus law of 10 July 2005, as amended, implementing the Prospectus Directive (Prospectus Law),5 and the CSSF is the supervisory and regulatory authority competent to oversee these operations.
For companies whose securities are admitted to trading on the regulated market of the LSE, and whose home Member State will be Luxembourg, a certain number of additional Luxembourg laws (mainly deriving from the implementation of relevant European directives) may apply, in particular the Luxembourg law of 11 January 2008, as amended, implementing the Transparency Directive (Transparency Law)6 and the Luxembourg law of 26 December 2016 on market abuse, implementing the Market Abuse Directive II.7
The law of 24 May 2011 on the exercise of certain rights of shareholders in general meetings of listed companies will also apply to Luxembourg companies whose shares are admitted to trading on a regulated market in the EU (Shareholder Rights Law).
The Takeover Law, the Prospectus Law, the Transparency Law and the Shareholder Rights Law are not applicable to Luxembourg or foreign companies whose shares or other securities are admitted to trading on the euro multilateral trading facility (MTF) market of the LSE.
The Market Abuse Regulation8 and relevant implementing and delegated regulations of the European Commission will apply with respect to companies whose securities are admitted to trading on the regulated market or the euro MTF of the LSE.
Moreover, there may be specific legislation to be considered depending on the sector involved in the transaction (e.g., credit institutions, insurance or reinsurance companies, companies operating in the telecommunication business, MiFID firms) and, in particular, prior regulatory approvals or notifications will then be necessary.
Additional regulations will also apply if a purchase, sale or merger of a Luxembourg undertaking involves the transfer of staff.
1 Philippe Hoss and Thierry Kauffman are partners at Elvinger Hoss Prussen.
2 Financial Sector Supervisory Commission (CSSF) press release 18/16 of 2 May 2018.
3 Directive 2005/56/EC.
4 Directive 2004/25/EC.
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Originally published in The Mergers and Acquisitions Review, - Edition 12
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