Luxembourg capital impairment rules: to be (dissolved) or not to be (dissolved)?
The novel coronavirus pandemic and the measures taken to combat the outbreak have put many companies under significant financial pressure. In this newsletter we bring to your attention the Luxembourg capital impairment rules applicable to a public limited liability company (société anonyme/SA) and a corporate partnership limited by shares (société commandite par actions/SCA).
If the net assets of a SA/SCA have dropped below certain thresholds as a result of losses, an “alarm bell” procedure must be followed. This procedure includes special reporting by the management body and the holding of a shareholders meeting within two months from the date on which the loss was, or should have been, known so that the shareholders can resolve on the possible dissolution of the company and, as the case may be, on any other measures proposed by the management body to redress the financial situation of the company. Holders of non-voting shares will be entitled to participate in the vote on the dissolution. If the share capital is severely impaired, the vote of minority shareholders could be enough to dissolve the company. Non-compliance with this mandatory procedure may trigger far-reaching director’s liability.
Please note that the deadline extension for the holding of annual general meetings pursuant to the Grand Ducal Regulation of 20 March 2020 does not apply to general meetings to be held in the framework of the alarm bell procedure.
When alarm bells start to ring: two thresholds to watch
The alarm bell procedure forms part of a broader set of rules originating in the EU company law directives to protect the share capital of a SA/SCA.
The process must be initiated by the management body each time the net assets of a SA/SCA, as a result of losses, fall below (i) half the share capital or (ii) one-quarter of the share capital.
The net assets (i.e. assets minus provisions and liabilities) are to be assessed based on a balance sheet of the SA/SCA. The management body will need to determine on a case-by-case basis whether this balance sheet should be drawn up on a going concern basis, which is the default rule, or on a liquidation basis. The share capital refers to the “subscribed” share capital of the SA/SCA, although a reference to “paid and called” share capital would have been more logical.
The capital impairment rules are provisions of mandatory law. The thresholds may be lowered in the articles of association of the SA/SCA (the Articles), but may not be increased.
Shareholders meeting to be convened and held in a timely manner
If the thresholds are reached, the management body must convene a general meeting of shareholders so that it is held within a period not exceeding two months from the time at which the loss was or should have been ascertained by it. The Articles may require the meeting to be held within a shorter period.
The management body must not await the preparation and approval of the annual accounts to ascertain the application of the alarm bell procedure. The two-month period starts running when the management body has actual knowledge of the losses (e.g. on the basis of internal monthly reporting by a CFO) or should have knowledge thereof (e.g. on the basis of statutory semi-annual financial reporting or interim balance sheets drawn up at the occasion of certain corporate actions, such as a merger operation).
It is important to note that the deadline extension for the holding of annual general meetings pursuant to the Grand Ducal Regulation of 20 March 2020 (see our newsflash) applies only to annual general meetings and does not apply to general meetings to be held in the framework of the alarm bell procedure
Special report with proposed measures
The agenda of the shareholders meeting must specifically include the possible dissolution of the company and, where applicable, the other measures proposed by the management body.
The management body of the SA/SCA must prepare a special report for the benefit of the shareholders in which it sets out the causes of the financial situation and justifies its proposals.
If the management body proposes to continue to conduct business, it shall set out in its report the measures which it intends to take in order to remedy the financial situation of the company.
The special report must be announced in the agenda of the shareholders meeting and made available to the shareholders at the registered office of the company eight days before the shareholders meeting. Any shareholder is entitled to obtain a copy of the report, free of charge, upon request and upon evidence of his position as a shareholder eight days before the meeting. A copy of the report must also be sent to the holders of registered shares at the same time as the notice of the meeting.
Failure to draw up the special report shall invalidate the decisions of the shareholders meeting, unless all shareholders of the company have waived the requirement for such report to be prepared.
Shareholders meeting to resolve on a possible dissolution or on other proposed measures
The quorum and majority requirements applicable to the shareholders meeting will depend on the agenda items.
The decision to dissolve the company is in principle subject to the same requirements as for an amendment of the Articles. This means that the shareholders meeting can only validly deliberate on the dissolution if at least one-half of the share capital is represented. If the meeting is not quorate, a second meeting may be convened in the manner prescribed by the articles and the law. The second meeting deliberates validly regardless of which portion of the share capital is represented. At both meetings, in order to be valid, resolutions must be approved by at least two-thirds of the votes cast. Cast votes shall not include votes attaching to shares in respect of which the shareholder has not taken part in the vote, has abstained or has cast a blank or invalid vote. It is important to note that holders of non-voting shares will exceptionally be entitled to participate in the vote on the dissolution by virtue of law.
The same rules are observed if, due to losses, the net assets are reduced to an amount less than one-quarter of the share capital but, in that case, the dissolution will take place if approved by one-quarter of the votes cast at the meeting. In other words, a minority shareholder with 25% of the votes at the meeting can force the company into dissolution.
Other proposed matters entailing an amendment of the Articles (e.g. increase of the share capital to inject cash) will be subject to the usual quorum and majority requirements for the amendment of the Articles. Any increase in the shareholders’ commitments may only be resolved upon with the unanimous consent of the shareholders. If the company has more than one class of shares and the resolution is such as to change the respective class rights, the resolution must, in order to be valid, fulfill the quorum and majority requirements within each class.
Proposed matters which do not entail an amendment of the Articles and which are within the scope of powers of the shareholders are in principle subject to a simple majority.
Dissolution and amendments of the Articles must be enacted before a Luxembourg notary – notaries continue to be available to pass deeds in Luxembourg during the current pandemic and many are accepting electronic signatures on the documents presented to them (for more information on the status of electronic signatures under Luxembourg law, see our newsflash).
In the event of any breach of the capital impairment rules, the members of the management body may be held personally and jointly and severally liable vis-à-vis the company for all or part of the increase of the loss.
Guy PalmaersPartner Attorney at law / Avocat à la Cour
Guy Palmaers, partner, is a member of the Corporate Practice Group in our Luxembourg office. He focuses on mergers and acquisitions, cross-border corporate restructurings and general counselling on corporate and securities law matters.T: +32 2 743 43 31 / +352 466 230 446 E: email@example.com