Bill of Law No. 7791 - Application of the ban on financial aid to private limited liability companies: an end to the present legislative ambiguity?
The Luxembourg Chamber of Commerce approved on March 18, 2021, the bill of law no 7791, which was sent to the Luxembourg Parliament on March 16, 2020, and which seeks to amend Article 1500-7 of the Luxembourg law on commercial companies dated August 10, 1915, as amended (the "Companies Act") in order to clarify the application of the financial assistance ban.
The Bill of Law No. 7791's Background
Via the application of article 23 subsection (1) of Directive 77/91/CEE, as amended by article 1 paragraph 4 of Directive 2006/68/CE1, provisions relating to financial aid have been incorporated into domestic legislation (current article 430-19 of the Companies Act).
Public companies (sociétés anonymes), condensed joint stock companies (sociétés par actions simplifiées), associations limited by equity (sociétés en commandite par actions), and European companies (sociétés européennes) are prohibited from offering financial support to third parties for the purchase of their own shares under Article 430-19 of the Companies Act2.
Non-compliance with this prohibition has legal ramifications, as stated in Article 1500-7 of the Companies Act: "Any person who, in his or 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 the intent of financing the acquisition of such company's own shares or units, or grants a pledge over such company's own shares or units, or grants a pledge over such company's own shares or units
The expansion of the financial aid ban to S.à r.l.s was discussed during the revision of the Companies Act in 2016. Finally, this extension was not included – at least not expressly – in the legislation amending the Companies Act on August 10, 2016.
There is a lot of uncertainty about the amended Article 1500-7.
However, owing to certain leftovers in the amended Article 1500-7 relating to notions unique to S.à r.l.s, some clinicians believe that financial aid restrictions apply to S.à r.l.s, or at the very least that it cannot be ruled out that S.à r.l.s are not removed from such prohibition. The main arguments are that I Article 1500-7 2° of the Companies Act expressly refers to parts sociales, which designates the shares issued by a S.à r.l., and (ii) the general rationale behind the financial assistance prohibition is to preserve the integrity of the share capital in the interests of both the company's shareholders and creditors, and that this security should equally apply to both the company's shareholders and creditors.
A welcome clarification from the legislator
Practitioners view the reference to "sections sociales" in Article 1500-7 2° of the Companies Serve as a clerical mistake on the part of the legislator, a holdover from previous debates about whether or not to subject the S.à r.l to the financial assistance regime. Since Article 1500-7 is a penal provision, it should be treated narrowly, and it is highly doubtful that it was meant to apply to the S.à r.l.
The passage of Bill of Law 7791, which would exclude references to "sections sociales" from the provisions of Article 1500-7 of the Companies Act, would be a good clarification from the legislator and would bring an end to the debates. Getting explicit assurance that the ban on financial aid would not extend to S.à r.l.s. would certainly promote private equity investments and associated takeover financings. Participants will know that a target company can give protection over its assets to protect the purchaser's bank debt to fund the acquisition of the target's shares.