The Impact of the Law Concerning the European Company on Luxembourg Undertakings for Collective Investment by Mr. Claude Kremer
On 31 August 2006, the law of 25 August 2006 implementing Council Regulation (EC) 2157/2001 of 8 October 2001 on the Statute for a European company (the “Regulation”) has been published in the Luxembourg Official Gazette (hereinafter the “Law”).
The Law introduces the European company - known by its Latin name of “Societas Europaea” (“SE”) - in Luxembourg law but it also modernizes the law of 10 August 1915 governing commercial companies as amended (the “Company Law”) with regard to joint
stock companies (Société Anonyme or “SA”) and, to a more limited extent, with regard to limited partnerships by shares (société en commandite par actions or “SCA”).
The major innovations with regard to the SA include, amongst others, the introduction of a two-tier SA with one management board and one supervisory board and the single-shareholder SA. The Law also slightly amends the law of 20 December 2002 (the “2002 Law”) on undertakings for collective investment (“UCI”) - as well as the law of 30 March
1988 to which certain UCI are still subject - to reflect therein the above mentioned changes.
1) Creation of a European Company The main purpose of the creation of a company at
the European level was to facilitate cross border mergers and cross border transfers of companies through the use of the SE and to create a company, “free from the obstacles arising from the disparity and the limited territorial application of national company law” (Recital 7 of the Regulation). The SE introduced by the Law follows all the rules that apply to the Luxembourg SA but needs to comply with supplementary obligations as follows.
a) Registered office of the SE
The Regulation provides that the SE must have its registered office in the same state than its head office. This obligation purports to solve the issue raised by the ECJ with respect to companies’ citizenship when such companies have their registered office in a different state than their head office. According to the Law, an SE will be considered as a Luxembourg company if both its registered and head offices are in Luxembourg. Moreover, the Law provides that the transfer of the head office of the SE from one state to another occurs without loosing the legal personality. Lawmakers indicated in their preliminary work that
the tax issues in relation to transfer of the head office will be the subject of a separate law.
b) Creation of an SE
An SE can be formed in the following cases:
(i) Public limited-liability companies, formed under the law of a Member State, with registered offices and head offices within the Community may form an SE by means of a merger provided that at least two of them are governed by the law of different Member States.
(ii) Public and private limited-liability companies, formed under the law of a Member State,
with registered offices and head offices within the Community may promote the formation of a holding SE provided that each of at least two of them: - is governed by the law of a different Member State, or - has for at least two years had a subsidiary company
governed by the law of another Member State or a branch situated in another Member State.
(iii) Profitable commercial or professional companies and other legal bodies governed by public or private law, formed under the law of a Member State, with registered offices and head offices within the Community may form a subsidiary SE by subscribing for its shares, provided that each of at least two of them: - is governed by the law of a different Member State, or - has for at least two years had a subsidiary company governed by the law of another Member State or a branch situated in another Member State.
(iv) A public limited-liability company, formed under the law of a Member State, which has its registered office and head office within the Community may be transformed into an SE if for at least two years it has had a subsidiary company governed by the law of another Member State. The Law provides that a project detailing the legal and economic aspects of the creation as well as the consequences of the adoption of the SE status for the shareholders and employees of the existing companies must be approved by the extraordinary general meeting of shareholders of each company participating in the creation of the SE. The minimum capital requirement for an SE is EUR 120.000. Impact on UCI The 2002 Law has been modified in order to allow one type of Luxembourg UCI of the corporate type, the société d’investissement à capital variable (“SICAV”) to be incorporated as an SE.
In particular, according to point (i) hereabove, two or several SICAV established in at least two distinct Member States may be merged by incorporation in an SE. This is the first Luxembourg law which will enable cross-border mergers of UCI. The Law comes within a context of discussions at the European Union level on cross-border mergers between UCI. We may anticipate that the Law will be used by European promoters intending to rationalize the range of their UCI. However, the Law does not foresee the possibility to merge, on a cross-border basis, funds of the contractual type, or fonds communs de placement
(“FCP”). The major impact of the implementation of the SE on UCI seems consequently to be for cross-border mergers of SICAV.
2) Changes made to the Luxembourg
Société Anonyme independently of the qualification thereof as a mere SA or as an
SE. The changes brought by the Law to the Company Law have a direct impact on Luxembourg investment companies as well as on Luxembourg management companies which are established as SA.
a) Two-tier SA with management board and supervisory board
Traditionally, Luxembourg SA type of companies have a one-tier structure and are governed by a board of directors (conseil d’administration) composed of at least three directors to whom no conditions of residence or nationality are imposed. The shareholders of an SA can now choose between the traditional one-tier structure of the SA with a board
of directors, or the new two-tier structure with a management board (directoire) and a supervisory board (conseil de surveillance). The shareholders of an SA have the choice between the two systems at the moment of the incorporation, but they may equally elect to transform an already existing SA with a board of directors into an SA with a management
board and a supervisory board and vice versa. Such change requires a shareholders meeting resolving on the amendment of the articles of incorporation of the SA.
In practice, the new two-tier structure may provide investors with a valuable alternative legal framework. Company founders or promoters may wish to appoint Luxembourg residents as directors of the SA, but would nevertheless prefer to keep a maximum
degree of control over the local management at the same time. In this situation, the appointment of Luxembourg residents as members of the management board and non-Luxembourg resident officers of the company founders or promoter as members of the supervisory board may be an attractive solution.
The articles of incorporation of the SA may provide that certain decisions of t he management board require the prior approval of the supervisory board. Such restrictions to the powers of the management board are, however, inapplicable in the relation between the SA and third parties. The SA is bound towards third parties by the decisions of the management board, even in case the management board failed to obtain the prior approval of the supervisory board required by the articles of incorporation. The members of the management board could be held liable in this case for breach of the articles of incorporation of the SA. Management board.
The SA with the new two-tier governance structure is managed by its management board. The number of its members, which are at least two, is either fixed by the articles of incorporation or by the supervisory board. The Law provides no conditions concerning
the residence or the nationality of such members. The Law provides for two situations in which this management board may consist of less than two persons: (i) if the share capital of the SA amounts to less than EUR 500,000 or (ii) in case of a singleshareholder SA. The members of the management board are appointed by the supervisory board or, if the articles of incorporation provide for it, by the general meeting of shareholders. Members of the management board may be revoked by the supervisory board, and, if the articles of incorporation provide for it, by the general meeting of shareholders.
The management board is vested with the authority to execute all acts necessary in order to achieve the corporate object of the SA, with the exception of the powers explicitly vested in the supervisory board and to the shareholders meeting. At least every three
months, the management board has to provide the supervisory board with a written report on the company’s state of affairs.
The supervisory board of the SA consists in principle of at least three members who are appointed by the general meeting of shareholders for a period of up to six years but may be re-elected. The supervisory board of a single-shareholder SA may have a single member. The members of the supervisory board may also be revoked by the general meeting of shareholders. The supervisory board is in charge of the permanent control and supervision of the SA and has the right of inspection with regard to any of its corporate
documents. The Law provides explicitly that the supervisory board shall not interfere with the management of the company. The supervisory board may delegate special mandates to one or several of its members. The same person can not be both member of the supervisory board and of the management board. However, in the event of a vacancy on the management board, the supervisory board may appoint one of its members to act as
member of the management board. The functions of the person concerned as member of the supervisory board shall then be suspended during such a period. The daily management of the SA may be vested in a member of the management board or in another
agent, but not in a member of the supervisory board; no prior authorisation by the general meeting of shareholders is required (such prior authorisation was a legal requirement for a managing director to be appointed within the board members in the one-tier system prior to the adoption of the Law). The management board shall report to the annual general meeting on the remuneration and advantages granted to the managing director(s). The above mentioned solutions will follow the Luxembourg legislator’s intention which was to aim, through the introduction of the SA with management and supervisory boards, to achieve a more efficient supervision and control system between the different corporate bodies thereof and to improve the corporate governance of the Luxembourg SA.
Impact on UC
The new two-tier governance structure will permit the management company of UCI (FCP and SICAV) to formalize the relationship between its different organs. For the time being, the board of directors of a management company is usually composed of representatives of the promoter and is confined to an essentially supervisory function which is typically the
role of the new supervisory board. Extensive management powers may be delegated to managers or committees (comités de direction) which have functions similar to the ones of the management board created by the Law. For management companies governed by chapter 13 of the 2002 Law - mainly acting as designated management company for UCI in Transferable Securities (“UCITS”) benefiting from the European passport - the CSSF requires that the business of such companies be conducted by at least two responsible
persons fulfilling some special requirements with regards to their professional repute and experience (the “Responsible Persons”). The status of these Responsible Persons is different from a management company to another: they could be employees of the
management company or of an affiliated group company from the promoter, members of the board or even independent. The new two-tier governance structure could be an opportunity to standardize the role of such Responsible Persons in such management
companies: being members of the management board will permit such persons to conduct the business of the company and enable the supervisory board controlled by the promoter to revoke them if necessary.
The above reasoning may also apply to non-UCITS SICAV and self-managed UCITS SICAV.
We may also expect that promoters from foreign countries which are familiar with the two-tier governance structure such as Germany and France will use the flexibility offered by the Law.
b) Single-shareholder SA
The Law introduces the possibility of a singleshareholder SA. Prior to the amendment made by the Law, a Luxembourg SA needed to have at least two shareholders. A shareholder which had acquired all shares in an SA had a period of six months in order to rectify the situation and to transfer at least one share to a new shareholder. After this period the sole
shareholder became jointly and severally liable with the SA for its liabilities.
This former requirement of a second shareholder resulted from the concept of the contractual nature of the SA, but was impractical in situations where a subsidiary company was to be held entirely by a parent company. A second shareholder was required
in order to incorporate and hold the SA. The Law removes this restriction and now allows expressly for a single-shareholder SA, which may either result from its incorporation by a single shareholder or the subsequent transfer of all shares to a single shareholder at a later stage. Moreover, the death or the liquidation of the single shareholder does not
lead to the liquidation of the company.
The management of the single-shareholder SA is simplified. The board of directors, the management board and the supervisory board of a singleshareholder SA may each have a single member. The decisions of the single shareholder need not be taken in the form of an extraordinary general meeting of shareholders but may be laid down in writing in the
form of a written resolution.
Impact on UCI
The above will simplify the incorporation of Luxembourg management companies which are
usually wholly owned by the UCI’s promoter. The possibility for Luxembourg SICAV to have only one shareholder will also allow them to be dedicated to only one single investor.
c) Boards of the SA Permanent representative
Prior to the amendment made by the Law, a legal entity could act as member of the board of directors; it is now also possible for a legal entity to act as member of the management board, or of the supervisory board of the SA. In these cases, and in order to exercise its functions in the relevant board, according to the Law, the legal entity must appoint a
physical person as its permanent representative. The permanent representative may not be revoked prior to the designation of his successor. The appointment and revocation of the permanent representative must be filed with the Luxembourg Trade and Companies’
Register. Such representative will act as a proxy of the represented legal entity in compliance with the powers given by such entity. The permanent representative is subject to the same diligence level that would apply if he had been appointed personally in the place of the legal entity he represents, as member of the board of directors, the management board or the supervisory board of the SA. The physical person acting as permanent representative is personally jointly and severally liable with the legal entity he represents for the proper performance of its functions.
Casting vote of the chairman
The board of directors, the management board and the supervisory board shall appoint one of their members as chairman of the relevant board. The Law grants the chairman of the board a casting vote in the event of a tie vote. The articles of incorporation of the SA may confer further powers to the chairman and exclude the chairman’s casting vote. As a result, articles of incorporation of existing companies which are currently silent on this issue, will
need to be amended in order to avoid this newly introduced casting vote of the chairman of the board.
Presence quorum Subject to different provisions of the articles of incorporation of the SA, decisions of the board of directors, the management board and the supervisory board require a presence quorum of at least half (as opposed to a majority under the old rules) of the members of the relevant board and are taken by a simple majority of their members, present or represented.
d) Shareholders’ meetings of the SA
The board of directors, the management board, the supervisory board or the statutory auditor may convene shareholders’ meetings. They must convene a shareholders’ meeting so as to hold the meeting within one month, if shareholders representing more than 10 % of the share capital of the SA put a written request to convene such meeting to the company (prior to the Law only the board of directors or shareholders representing more than 20% of the share capital were allowed to convene a shareholders’ meeting).
Moreover, one or several shareholders representing at least 10 % of the share
capital may now request that one or several items be added to the agenda of any shareholders’ meeting. If the articles of incorporation allow for it, the shareholders may participate in a meeting by video conference or any other means of telecommunication
that allow an effective participation. Moreover, the article of incorporation may provide that
shareholders may vote through the use of voting forms to be sent to the company prior to the meeting. Before the amendment made by the Law, a majority of two-thirds of the votes of the shareholders present or represented at the general meeting called to amend the articles of incorporation of the SA - where at least half of the share capital needs to be present or represented on first call - was required and abstentions and nil votes were taken into account as votes against the relevant resolution. Under the new provision, abstentions and nil votes are not taken into account anymore for the computation of the two-thirds majority, which facilitates the decision making by the shareholders. Furthermore, the Law provides that the annual general meeting approving the annual accounts of the SA for the first financial year shall be held within a period of eighteen months starting from the date
of incorporation of the SA. The first financial year may therefore have duration of more than the standard twelve month period provided the annual general meeting is held within this eighteen month period. In the past, derogations were already granted by the CSSF for existing SICAV and management companies which could already have their first financial year with a duration of more than twelve months starting from the date of incorporation.
Changes brought by the Law on the functioning of shareholders’ meetings as described under 4) hereabove also apply to the Luxembourg SCA.