What happened? On 16 March 2021 a new bill of law (no 7791) was submitted to Parliament by the Luxembourg Government aiming to rectify a clerical error in a criminal law provision of the Luxembourg law of 10 August 1915 on commercial companies (the “1915 Law”) relating to the prohibition of unlawful financial assistance. The error dates back to the law of 10 August 2016 relating to the modernisation of the 1915 Law (the “2016 Modernisation Law”). The initial draft bill of the 2016 Modernisation Law sought to introduce for the société à responsabilité limitée (S.à r.l) a prohibition of financial assistance in case of acquisition of its own shares by a third party similar to the regime existing for a société anonyme (S.A.) (but yet more restrictive). In parallel, it was proposed that a breach of such prohibition should be subject to criminal sanctions. Following debates accompanying the legislative process it was decided to withdraw the prohibition of financial assistance for the S.à r.l on the grounds that for this type of company, where shares (parts sociales) are not freely transferable, a more flexible regime should be preserved. An assimilation to the regime of the S.A. was considered inappropriate. When deleting from the draft bill of law the articles introducing the financial assistance prohibition, the legislator however unfortunately forgot to also update the related criminal law provision.
The new bill of law 7791 now rectifies that error by deleting all references to shares of an S.à r.l (parts sociales) in the relevant article 1500-7 of the 1915 Law. It now clarifies and confirms that article 1500-7 (which inter alia provides for by criminal sanctions for directors of an S.A. for any participation in unlawful financial assistance schemes in an S.A.) does not apply to S.à r.ls.
Why is this important? While parliamentary documents accompanying the 2016 Modernisation Law made it abundantly clear that financial assistance provisions would not apply to S.à r.ls, the remaining references in the related criminal law provisions to shares of an S.à r.l (parts sociales) invariably raised discussions among practitioners on whether or not the financial assistance prohibition would apply to S.à r.ls. These discussions and the related residual risk now find an end and the legislator is about to confirm what was the general conclusion of practitioners.
What does it mean? Whilst financial assistance transactions in S.à r.ls (e.g. where the assets of a target organised as an S.à r.l. are used to finance or secure the acquisition of the S.à r.l.) still need to comply with certain safeguards and other requirements and the board of a S.à r.l still has to inter alia consider the corporate interest of the company, this rectification of the law means certainty as to the non-application of the specific criminal sanctions in respect to financial assistance which is a great result. In practice it re-enhances the flexibility of structuring an acquisition or a restructuring post acquisition.
