Luxembourg Directors - beware the comfort letter
Historically, little consideration appears to have been given to the signature of comfort letters by Luxembourg parent companies. The exposure of the company and its board members can be significant depending on the wording used.
In this article, we examine the difference between a letter of comfort and a guarantee – an important distinction in these times of heightened distressed positions.
The conclusion to draw from the above is that careful wording of any letter of comfort is essential to create the correct intended obligations.
The important point to consider from a board liability perspective when concluding any letter of comfort, is whether the wording used (more especially, with respect to any statements relating to funding) creates an obligation of means or an obligation of result.
Any wording used should be specific enough to ensure that the intention of the Luxembourg parent issuing such letter is clear, i.e. (i) to provide comfort or (ii) to give an indemnity or guarantee.
The ability of a holding company holding a single asset consisting of an operating group, or alternatively holding various parts of an operating group through inter linked subsidiaries (a so called umbrella structure), to meet its specific obligations under the terms of the letter given must be carefully considered before issuing any such letter.
The above considerations are critical with respect to, amongst other matters: (a) board liability for directors approving conclusion of such letters, (b) potential bankruptcy of a parent linked to a bankrupt subsidiary (and therefore potential bankruptcy of other operating group entities where an umbrella structure is in place), and (c) availability of assets of the group to finance any such obligations where an obligation of result is created.
The precise wording in these letters which have become a “common request” to Luxembourg holding company boards is of absolute importance.
Diogo Morgado FilipeAssociate Attorney at law
Diogo Morgado Filipe, associate, is a member of the Corporate practice group in our Luxembourg office and a member of the Restructuring Team. He focuses on corporate restructurings, Private Equity, M&A, Corporate Finance and general Corporate Law.T: +352 466 230 594 E: email@example.com
Michael ScottPartner Attorney at law / Solicitor / Avocat à la Cour
Michael Scott, partner, is a member of the Corporate Practice Group in our Luxembourg office and co-heads the Luxembourg Restructuring Team. He focuses on private equity transactions, mergers and acquisitions and distressed debt restructurings. He mainly advises US and UK based clients investing through Luxembourg to European or other target jurisdictions.T: +352 466 230 294 M: +352 691 963 026 E: firstname.lastname@example.org