On 18 March 2021, the Luxembourg Chamber of Commerce approved the bill of law no 7791, submitted to the Luxembourg Parliament on 16 March 2020, pursuant to which it is proposed to amend Article 1500-7 of the Luxembourg law on commercial companies dated 10 August 1915, as amended (the "Companies Act") in order to remove an uncertainty regarding the application of the financial assistance prohibition to Luxembourg private limited liability companies (sociétés à responsabilité limitée) ("S.à r.l.").
Background to the Bill of law No 7791
The provisions relating to financial assistance have been introduced into domestic law (current article 430-19 of the Companies Act) through the implementation of article 23 paragraph (1) of Directive 77/91/CEE, as amended by article 1 paragraph 4 of Directive 2006/68/CE1.
Article 430-19 of the Companies Act prohibits public companies (sociétés anonymes), simplified joint stock companies (sociétés par actions simplifiées), partnerships limited by shares (sociétés en commandite par actions) and European companies (sociétés européennes) from providing financial assistance to third parties for the acquisition of their own shares2.
The non-compliance with this prohibition has penal consequences and Article 1500-7 of the Companies Act provides that any person who, in his/her capacity as a director, auditor, manager or member of the supervisory committee of a company, knowingly extends loans or advances using company funds with a view to finance the acquisition of such company’s own shares or units or grants a pledge over such company's assets to secure this acquisition may face penalties, including a prison term and/or fine.
In the context of the reform of the Companies Act in 2016, the extension of the financial assistance prohibition to S.à r.l.s was discussed. This extension was finally not included in the law of 10 August 2016 amending the Companies Act – at least, not explicitly.
Uncertainty around the revised Article 1500-7
However, due to certain leftovers referring to notions specific to S.à r.l in the revised Article 1500-7, certain practitioners are of the view that financial assistance restrictions are applicable to S.à r.l.s or at least that, it could not be excluded that S.à r.l.s are not exempted from such prohibition. The main arguments are that (i) Article 1500-7 2° of the Companies Act, does expressly refer to parts sociales which designates the shares issued by an S.à r.l. and (ii) the general rationale underlying the financial assistance prohibition is to preserve the integrity of the share capital in the interest of both the company’s shareholders and its creditors and that this protection should equally apply to shareholders and its creditors of an S.à r.l.
A welcome clarification from the legislator
The reference to "parts sociales" in Article 1500-7 2° of the Companies Act is generally interpreted by practitioners as a clerical error of the legislator, a remnant from discussions in the past about whether or not to submit the S.à r.l to the financial assistance regime. As Article 1500-7 is a criminal provision, it ought to be strictly interpreted and it is therefore very unlikely that such a provision was intended to be applicable to the S.à r.l.
However, the adoption of bill of law 7791 and the deletion of the references to "parts sociales" from the provisions of Article 1500-7 of the Companies Act would be a welcome clarification from the legislator and would eventually put an end to the discussions. Having a clear confirmation that the financial assistance prohibition does not apply to S.à r.l.s. would, without any doubt, make private equity transactions and related acquisition financings easier. Participants will have certainty that a target company can grant security over its assets to secure the bank debt incurred by the purchaser to finance the acquisition of the target's shares.
Authors: Isabelle Lentz, Fabien Debroise, Geoffrey Delamarre and Ludmilla Bouchez-Lecuy.
- By a law of 10 June 2009 a “whitewash procedure” was added to the financial assistance rules.
- May however rely on the so-called “whitewash procedure” to provide financial assistance, if certain conditions are fulfilled.
