Luxembourg Treasury Shares Guide IBA Corporate and M&A Law Committee 2014

Transcription

1 Luxembourg Treasury Shares Guide IBA Corporate and M&A Law Committee 2014 Contact Guy Harles Marc Elvinger Arendt & Medernach, Luxembourg

2 Contents Page INTRODUCTION 2 REGULATORY FRAMEWORK 3 ACQUISTION OF TREASURY SHARES 4 UTILIZATION OF TREASURY SHARES 7 SALE OF TREASURY SHARES 8 TREASURY SHARES AND TAKEOVER LAW 9 1

3 INTRODUCTION This guide provides an overview of the Luxembourg law on the acquisition and sale of treasury shares of companies incorporated in Luxembourg. It is to be noted that the legal provisions described in this guide are not applicable to listed companies (except as expressly stated herein) as they are subject to a more restrictive set of rules which will not be covered herein. The information in this guide cannot substitute professional legal advice. Therefore, anyone involved and considering a treasury share transaction should not rely solely on this guide and should seek specialist advice. GENERAL OVERVIEW Is the buyback of shares permitted in your jurisdiction? Yes, under the Luxembourg law on commercial companies dated 10 August 1915, as amended (the Law ), the buyback of shares by a public limited company ( société anonyme S.A.) and a corporate partnership limited by shares ( société en commandite par actions S.C.A.) is permitted. Depending on the circumstances of the contemplated buyback, different regimes of acquisition are provided for by article 49-2 and following of the Law. A general regime (the General Regime ) is set forth in article 49-2 (1) of the Law. In order to prevent serious and imminent harm to the company or in case the shares are acquired for the distribution to the staff of the company, a different regime, provided for by article 49-2 (2) and (3), is applicable (the Exemption Regime ). Finally, article 49-3 sets forth different situations under which neither the General Regime, nor the Exemption Regime are applicable. Among these situations are the acquisition of shares pursuant to a decision to reduce the capital (article 49-3 (a)), the acquisition of shares as a result of a universal transfer of assets (article 49-3 (b)), the acquisition of shares in the event of a default by a shareholder to fully pay in its subscribed shares (article 49-3 (e)) (the Flexible Regime ). For an exhaustive list of situations falling under the Flexible Regime, please refer to the section entitled How can a company acquire treasury shares below. Irrespective of the applicable regime, it is to be highlighted that the buyback of shares shall comply with the principle of equal treatment of all shareholders being in an identical situation. Once the buyback of shares is effective, a set of rules in respect of the holding of such shares is provided for by article 49-5 of the Law (the Holding Rules ), irrespective of the regime of acquisition (i.e. whether the buyback of shares comes under the General Regime, the Exemption Regime or the Flexible Regime). These rules relate to the voting rights attached to the shares, the creation of a non-distributable reserve and the information that shall be mentioned in the annual management report. 2

4 It is to be noted that a company is also authorized to issue redeemable shares (the Redeemable Shares ) which are provided to be redeemable from the outset. The conditions for the issue of Redeemable Shares are set forth in article 49-8 of the Law. The main difference between a buyback of shares and the redemption of Redeemable Shares is that the conditions pursuant to which Redeemable Shares are redeemed are provided for in the articles of association of the company and that the redemption does not require the prior approval of the general meeting of shareholders. This guide will not cover the redemption of such Redeemable Shares. What are the characteristics (maximum holdings, voting rights and other rights) of treasury shares? There is no statutory limit on the proportion of equity that a company can hold in treasury, but of course a company could not hold one hundred per cent of its own shares. Although treasury shares are not cancelled once held in treasury, the voting rights in respect of the company s own shares shall be suspended as long as the shares are held in treasury, as provided for by article 49-5 of the Law. As regards the financial rights attached to the treasury shares (i.e. dividends), the board of directors is entitled to cancel the right for a dividend distribution attached to such shares. If the board of directors does not cancel the distribution, the dividend coupon is kept until the treasury shares are sold and the entitlement to such past dividends is transferred to the transferee of the treasury shares so sold. It is to be highlighted that under the three regimes, different rules apply with respect to the detention of treasury shares. The details of these rules are provided for under the section entitled How can a company acquire treasury shares. What are the main reasons to acquire treasury shares? The main reasons for a Luxembourg company to purchase its own shares are (i) to implement a stock-options program for its employees, (ii) to distribute available funds to its shareholders through buyback programs, or (iii) to create a stock of its own shares in the contemplation of a merger and acquisition transaction. REGULATORY FRAMEWORK The main relevant legislative provisions are provided for by article 49-1 to article 49-5 of the Law. The current Luxembourg law on the acquisition and sale of treasury shares is mainly based on the European law and in particular, without limitation: - the Second Council Directive 77/91/EEC dated 13 December 1976 as amended by the Council Directive 92/101/EEC dated 23 November 1992 and the Directive 2006/68/EC of the European Parliament and the Council dated 6 September 2006; 3

5 - the Market Abuse Directive 2003/6/EC of the European Parliament and of the Council dated 28 January 2003; and - the European Commission Regulation number 2273/2003 dated 22 December 2003 implementing the Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buyback programs and stabilisation of financial instruments. ACQUISITION OF TREASURY SHARES How can a company acquire treasury shares? As mentioned above, three regimes are to be considered before discussing the common set of rules. General Regime (article 49-2 (1) of the Law) The company may acquire its own shares either itself or through a person acting in his own name but on the company s behalf, with the prior authorisation of the company s shareholders. The shareholders meeting gives a general authorisation to repurchase shares to the board of directors, who will then execute the individual repurchases under the conditions defined by the general meeting of shareholders (maximum number of shares to be acquired, the duration of the period for which the authorisation is given which may not exceed five years and, in the case of an acquisition for value, the maximum and minimum consideration). Such conditions shall apply equally to each shareholder being in a similar situation. Such acquisitions shall not result in the net assets of the company being below the aggregate amount of the subscribed capital and the reserves which may not be distributed under the Law or the articles of association. Only fully paid-up shares may be included in the transaction. Under the General Regime, a company is authorised to hold treasury shares without limitation of time. Exemption Regime (article 49-2 (2) and article 49-2(3) of the Law) The main difference between the General Regime and the Exemption Regime is that no prior authorisation of the general meeting of shareholders is required for the Exemption Regime. The other conditions (i.e. the acquisition shall not result in the net assets being below the aggregate amount of the subscribed capital and the reserves which may not be distributed under the Law or the articles of association and, only fully paid-up shares may be included) remain applicable. 4

6 Where the acquisition of the company s own shares is necessary in order to prevent serious and imminent harm to the company, the prior authorisation of the shareholder s meeting is not necessary. In such a case, the next general meeting must be informed by the board of directors of the reasons for and the purpose of the acquisitions made, the number and nominal values, or in absence thereof, the accounting par value, of the shares acquired, the proportion of the subscribed capital which they represent and the consideration paid for them. Likewise, in the case the company acquires the shares either itself or by a person acting in his own name but on behalf of the company for the distribution thereof to the staff of the company, the prior authorisation of the general meeting of shareholders is not required. However, the distribution of these shares must take place within twelve months from the date of their acquisition. Flexible Regime (article 49-3 of the Law) A different set of rules is applicable to the following acquisitions: (a) shares acquired pursuant to a decision to reduce the share capital or in the circumstances referred to in article 49-8 (i.e. Redeemable Shares); (b) shares acquired as a result of a universal transfer of assets; (c) fully paid-up shares acquired free of charge or acquired by banks and other financial institutions pursuant to a commission contract; (d) shares acquired by reason of a legal obligation or a court order for the protection of minority shareholders, in the event, particularly of a merger, the division of the company, a change in the company s object or form, the transfer abroad of the registered office or the introduction of restrictions on the transfer of shares; (e) shares acquired from a shareholder in the event of failure to pay them up; (f) fully paid shares acquired pursuant to an allotment by court order for the payment of a debt owed to the company by the owner of the shares; (g) fully paid up shares issued by an investment company with fixed capital as defined in article 72-3 and acquired at the investor s request by that company or by a person acting in his own name but on behalf of the company. Neither the General Regime, nor the Exemption Regime applies to these acquisitions. The only condition applicable is that these acquisitions shall not result in the net assets being below the aggregate amount of the subscribed capital and the reserves which may not be distributed under the Law or the articles of association. However, the shares acquired in the cases indicated under (b) to (f) of article 49-3 (1) must be disposed of within a maximum period of three years after their acquisition, unless the nominal value, or, in the absence of nominal value, the accounting par 5

7 value of the shares acquired, including the shares which the company may have acquired through a person acting in its own name, but on behalf of the company, does not exceed ten per cent of the subscribed capital. If the shares are not disposed of within such period, they must be cancelled. The subscribed capital may be reduced by a corresponding amount. Such a reduction shall be compulsory where the acquisitions of shares to be cancelled results in the net assets having fallen below the aggregate amount of the subscribed capital and the reserves which may not be distributed under the Law or the articles of association. Common set of rules: Holding Rules (article 49-5 of the Law) Where the acquisition by the company of its own shares is permitted, the voting rights in respect of the company s own shares shall be suspended. If such shares are included among the assets shown in the balance sheet, a non-distributable reserve of the same amount shall be created among the liabilities. The management report, addressed to the annual general meeting of shareholders, must indicate (i) the reasons for acquisitions made during the financial year, (ii) the number and the nominal value, or in the absence of nominal value, the accounting par value, of the shares acquired and disposed of during the financial year and the proportion of the subscribed capital which they represent, (iii) in the case of acquisition or disposal for value, the consideration for the shares, and (iv) the number and nominal value, or, in the absence of nominal value, the accounting par value, of all the shares acquired and held in the company s portfolio as well as the proportion of the subscribed capital which they represent. Are there any restrictions in acquiring treasury shares? (e.g. purpose-wise; accounting-wise?) There is no statutory limit on the proportion of equity that a company can hold in treasury, but, as previously mentioned, a company could not hold one hundred per cent of its own shares Nevertheless, according to the General Regime, the Exemption Regime and the Flexible Regime, the acquisition of treasury shares shall not result in the net assets being below the aggregate amount of the subscribed capital and the reserves which may not be distributed under the Law or the articles of association. Besides, pursuant to the General Regime and the Exemption Regime, only fully paidup shares may be included in the transaction. Which authorization is needed? As mentioned above, the General Regime provides for a prior approval of the general meeting of shareholders. Such prior approval is not required neither in the Exemption Regime (i.e. buyback to prevent serious and imminent harm to the company or for the distribution to the staff of the company) or in the Flexible Regime (list of cases as detailed in article 49-3). 6

8 What are the publicity requirements in the event of acquisition of treasury shares? As mentioned previously, the management report must indicate (i) the reasons for acquisitions made during the financial year, (ii) the number and the nominal value, or in the absence of nominal value, the accounting par value, of the shares acquired and disposed of during the financial year and the proportion of the subscribed capital which they represent, (iii) in the case of acquisition or disposal for value, the consideration for the shares, and (iv) the number and nominal value, or, in the absence of nominal value, the accounting par value, of all the shares acquired and held in the company s portfolio as well as the proportion of the subscribed capital which they represent. Put and call options do they count as acquisition of own shares? Put options In practice, the granting by the company of a put option to its shareholders has the same effect than the actual repurchase of the shares as the company will not have any control on the exercise of the put option in question. As a consequence the same restrictions should apply to put options as to the acquisition of treasury shares. We consider that in the case of a put option, the conditions as required for the acquisition of treasury shares shall be complied with at the time the put option is granted to the beneficiary. Call options The exercise of a call option, which is at the sole discretion of the company, is equivalent to an acquisition by the company of its own shares and subject to the rules and restrictions concerning the acquisition of own shares. We consider that in the case of a call option, the conditions as required for the acquisition of treasury shares shall be complied with at the time of the exercise of the call option by the company. UTILIZATION OF TREASURY SHARES Are there any statutory obligations to resell or redeem treasury shares? As mentioned previously, there is no limitation of time with regard to the holding of treasury shares by a company. Any shares acquired in contravention of the General Regime, the Exemption Regime and of the regime applicable to shares acquired pursuant to a decision to reduce the capital or in the circumstances referred to in article 49-3 (1) (a) of the Law (Flexible Regime (a)), must be disposed of within a period of one year after their acquisition. Should they not be disposed of within that period, the shares shall be cancelled. The subscribed capital might be reduced by a corresponding amount. Such a reduction shall be compulsory where the acquisitions of shares to be cancelled results in the net assets having fallen below the aggregate amount of subscribed capital and the re- 7

9 serves which may not be distributed under the Law or the articles of association. The shares, in this case, are not automatically cancelled by operation of law. Their cancellation shall be voted upon by an extraordinary general meeting of shareholders held in front of a Luxembourg notary. Under the Flexible Regime (with the exceptions of the cases listed as (a) and (g)), the shares acquired must be disposed of within a maximum period of three years after their acquisition, unless the nominal value, or, in the absence of nominal value, the accounting par value of the shares acquired, including the shares which the company may have acquired through a person acting in its own name, but on behalf of the company, does not exceed ten per cent of the subscribed capital. If the shares are not disposed within such period, they must be cancelled. The subscribed capital may be reduced by a corresponding amount. Such a reduction shall be compulsory where the acquisition of shares to be cancelled results in the net assets having fallen below the aggregate amount of the subscribed capital and the reserves which may not be distributed under the Law or the articles of association. How are treasury shares redeemed/cancelled? The cancellation of treasury shares will result in the reduction of the company s share capital and will have to be decided upon by an extraordinary general meeting of shareholders in front of a Luxembourg notary. Unlike an ordinary reduction of the share capital of a company, the creditor protection procedures are not applicable in case of cancellation of treasury shares. The treasury shares shall cease to exist as of the effectiveness of their cancellation, i.e. the day the decision is taken at the extraordinary general meeting of shareholders in front of a Luxembourg notary. SALE OF TREASURY SHARES How can the company sell treasury shares? As a general principle, the sale of treasury shares can be performed (i) anonymously over the counter (i.e. on the stock market), (ii) by way of a public offer, or (iii) by way of negotiation of a purchase agreement with an individual shareholder. Are there any restrictions for selling treasury shares? Although the Law provides for the equal treatment of shareholders with respect to the buyback of shares, there is no explicit provision for the sale of treasury shares. Nevertheless, one may expect that a pre-emptive right vests in the shareholders of the company and that the more general principle of equal treatment of all shareholders being in a similar situation should be applicable even though no express provision in the Law exists. In the absence of a specific provision in the Law and in the absence of case law, the assumption is that, unless otherwise motivated, the company shall apply, when selling 8

10 treasury shares, the same rules it would apply when issuing new shares to be subscribed for. Which authorization is needed for selling treasury shares? From a Luxembourg corporate law perspective, the sale of treasury shares is a decision to be taken by the board of directors. The selling of treasury shares is not subject to the approval of a general meeting of shareholders. Can treasury shares be sold other than via the stock exchange or by public tender offer? Under Luxembourg law treasury shares may be sold other than via stock exchange or public tender offer, namely as a private sale. If the articles of association or any other agreement between the shareholders provide for pre-emptive rights in case of a sale of shares, such pre-emption right should be applicable in case of sale of treasury shares by the company and the company should comply with its terms, provided that the company is a party to such agreement and is bound by its terms. A waiver should be obtained from the shareholders of the company entitled to such pre-emption right, if the company wishes to sell treasury shares, either at the time of the sale of the treasury shares or when the resolution granting the authorisation to the board of directors to acquire treasury shares is taken. What are the publicity requirements in the event of a sale of treasury shares? There exists no publicity requirement under Luxembourg law as regards the sale of treasury shares by a Luxembourg company. What legal restrictions are there in order to avoid market abuse? The purchase and sale of treasury shares are not per se exempt from the prohibition of insider dealing and market manipulation (market abuse). However, article 7 of the Luxembourg law on market abuse, implementing the Market Abuse Directive, as amended, provides that the prohibitions set out in the directive shall not apply to trading its own shares in buyback programs if carried out in accordance with the European Commission Regulation number 2273/2003. TREASURY SHARES AND TAKEOVER LAW What are the general implications of treasury shares under the applicable takeover law regime? As a preliminary comment, it should be noted that takeover bids of a company where all or part of the shares (or other transferable securities carrying voting rights) are admitted to trading on a regulated market, are governed by the law dated 19 May 2006 on takeover bids, implementing the Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids into Luxembourg law. 9

11 The purchase and the holding of treasury shares by a Luxembourg listed company have takeover law implications with relevance to the listed company itself, its shareholder base and potential investors. As treasury shares are non-voting shares, such shares impact the voting power of all shareholders of the company. Treasury Shares as defense measures? In certain circumstances a company may wish to use treasury shares as a defense measure. In case a possible takeover has been made public, the company may, acquire the shares under the authorisation received by the general meeting of shareholders to purchase its own shares (General Regime). 10