LUXEMBOURG Law and Practice Contributed by: Andreas Heinzmann, Hawa Mahamoud and Eva Jean, GSK Stockmann
5.3 Downstream, Upstream and Cross- Stream Guarantees As a general rule, all transactions of a company (including the provision of guarantees or security) must comply with the company’s corporate object as set forth in its articles of association and be in the interest of the company. The latter concept means that a company may not engage in transactions that, though lawful, are aimed at conferring exclusive or substantially exclusive benefits on a person other than the company itself. This condition is generally met in the event that a com- pany provides collateral to secure its own indebted- ness. It is also clearly fulfilled in all instances where a company gives collateral to secure the indebtedness of third parties or other group companies in exchange for an arm’s length consideration. The above condition is also met if the company is providing an exclusive downstream guarantee, since one would assume that such a guarantee is helpful for the subsidiary of the relevant company to obtain credit and that will enhance the business of the subsidiary, which, in turn, will result in an increased value of the shareholding of its parent company. Finally, the condition is also met if the guarantor derives an indirect benefit, such as the possibility to borrow, under favourable conditions from the bank taking the relevant security, or in cases where the secured loan (or part thereof) is on-lent by the other group company to the company providing the collateral. Guarantees to secure loans to other group companies or to the parent also meet the “corporate interest” condition if these guarantees are necessary for the continuing operations of the relevant company and if the guaran- tor heavily depends on those operations. Upstream and Cross-Stream Guarantees There is no Luxembourg legislation governing group companies that specifically regulates the organisa- tion and liability of groups of companies. As a con- sequence, the concept of group interest as opposed to the interest of the individual corporate entity is not expressly recognised in Luxembourg. As such, a com- pany may not encumber its assets or provide guaran- tees in favour of group companies in general (at least
as far as parent companies and subsidiaries of its par- ent companies are concerned) unless the said Luxem- bourg company assists other group companies. In practice, upstream or cross-stream guarantees are limited to a certain percentage of the guarantors’ net assets. If a court finds that financial assistance such as the giving of a guarantee is not showing a sufficient ben- efit to the company, its managers may be held liable for action taken in that context. Furthermore, under certain circumstances, the managers of the latter company may incur criminal penalties based on the concept of misappropriation of corporate assets (Arti- cle 1500-1 of the Luxembourg Companies Law). Ulti- mately, it cannot be excluded that if the relevant trans- action were to be considered as misappropriation by a Luxembourg court or if it could be evidenced that the other parties to the transactions were aware of the fact that the transaction was not for the company’s cor- porate benefit, the transaction might be declared void based on the concept of illegal cause ( cause illicite ). 5.4 Restrictions on the Target As a general rule, companies that are an acquisi- tion target are prohibited from financing the buyout of their shares. However, it is possible for a public limited liability company, under certain conditions as provided for in the Companies Law, to directly or indi- rectly advance funds, grant loans or provide guaran- tees or security with a view to the acquisition of its own shares by a third party. If the requirements of the Companies Law are not met, the directors of the company may face civil or criminal liability. The question of whether criminal sanctions provided under Article 1500-7 paragraph 2° of the Companies Law apply to managers of a private limited liability company or not, has been controversial until recently, mainly due to the use of the term “corporate units” in the said article. This controversy has been clari- fied with the entry into force of the law of 16 August 2021, which amended the provision of Article 1500-7 paragraph 2° of the Companies Law. The Companies Law makes no reference to the term “corporate units” and hence criminal sanctions provided under the said article do not apply to managers of a private limited
331 CHAMBERS.COM
Powered by FlippingBook