A general introduction to shareholder rights and activism in Luxembourg
Unlike certain neighbouring countries, in Luxembourg, listed companies are often controlled by one or more major shareholders, rendering it difficult to provide examples of shareholders or investors having taken public and adversarial approaches. Probably the most memorable example of shareholder activism in Luxembourg is in relation to the ArcelorMittal merger in 2007. Furthermore, a significant number of Luxembourg companies are listed abroad and these entities often need to apply Luxembourg law as well as the rules of the foreign exchange (e.g., the New York Stock Exchange (NYSE) or Nasdaq). The Shareholder Act of 24 May 20112 has been amended by the Act of 1 August 2019 setting out a number of shareholders’ rights and aiming to increase long-term shareholder engagement, transposing the Second Shareholders’ Rights Directive3 into Luxembourg law. This is another important step in corporate social responsibility legislation and may potentially lead to more shareholder activism in Luxembourg where, until now, shareholder engagement does not seem to be a current practice.4
Legal and regulatory framework
i The corporate governance regime
Shareholder activism is a prerequisite to sound corporate governance.5 Next to the Shareholder Act, Luxembourg’s main statutes on corporate governance include the 10 August 1915 Act on commercial companies (the Companies Act)6 and the Market Abuse Regulation.7
Over the years, the shareholders’ role has evolved and shareholders’ rights have been increasingly strengthened. The first version of the Shareholder Act came into force on 1 July 2011 and implemented Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies, aiming to increase shareholders’ activism and setting out a number of shareholders’ rights.
The Shareholder Act applies to companies that have their registered office in Luxembourg and whose shares are admitted to trading on a regulated market in a Member State of the European Union, and to Luxembourg companies whose shares are traded on a regulated market outside the European Union if the companies have elected to opt into the rules of the Shareholder Act. After the transposition of Directive 2017/828, this scope has been extended to institutional investors and asset managers.8
Shareholder rights and governance in Luxembourg are statute-based, consisting primarily of the Civil Code, the Companies Act and, for listed companies, the rules and regulations of the Luxembourg Stock Exchange (LuxSE). However, the statutory law provisions only give very general governance rules or principles.
As a supplement to the general statutory law, the LuxSE’s 10 Principles of Corporate Governance (the LuxSE Principles), revised for the last time in December 2017 (fourth edition),9 provide guidelines on best practice on corporate governance for all companies listed on the LuxSE and all Luxembourg companies whose shares are admitted to trading on a regulated market operated by the LuxSE.10 Luxembourg companies listed abroad often find inspiration in these principles of good governance. The LuxSE Principles refer to general corporate governance issues, such as duties of the management board, the management structure, conflicts of interest provisions, remuneration and reporting issues. They also aim to enable the shareholders of listed companies to be actively involved in the companies’ activities. The LuxSE Principles are highly flexible and adaptable to the activity, size and culture of individual companies. They consist of general principles that must be complied with (i.e., compliance) and recommendations that, although obligatory in principle, may be deviated from when justified in specific circumstances, provided that adequate explanation is provided (i.e., comply or explain). The recommendations are supplemented by guidelines on how a company should implement or interpret them. The obligation to comply or explain does not apply to the guidelines, which are indicative but not binding.
ii The market for publicly traded companies and Luxembourg-based companies traded abroad
Many companies’ shares are traded on the LuxSE, but there are also a number of entities whose shares are listed on a regulated market within the European Union, other than the LuxSE, such as Euronext or the Warsaw Stock Exchange, and also on the NYSE or Nasdaq. In the case of Luxembourg entities listed abroad, their board needs to reconcile and combine the Luxembourg rules with the rules of the exchange, which in some cases may be challenging.
iii Corporate bodies
The Companies Act and the Shareholder Act provide in general the rules and the framework for shareholders to become active. The Companies Act contains the provisions on the governance of commercial companies, including the powers and responsibilities of the board of directors and the shareholders.
iv The board of directorsStructure
Although public limited liability companies may choose between a two-tier board structure11 and a one-tier board structure,12 the latter remains by far the preferred option in Luxembourg, with the company being managed exclusively by a board of directors invested with the broadest powers to act in the name and on behalf of the company.
In the two-tier system, a company is managed by two bodies: the management board, charged with the day-to-day management of the company, and a supervisory board. The supervisory board’s responsibilities include the appointment and the permanent supervision of the management board members, as well as the right to inspect all company transactions.13 No person may at the same time be a member of both the management board and the supervisory board.14 Members of the supervisory board are liable towards the company and any third party in accordance with general law.15 However, there is no specific guidance relating to the exercise by members of the supervisory board of their duties.
Composition of the board in a one-tier board structure
The board is composed of appointed members (the company’s directors). A public limited-liability company can be managed by one director as long as it has a sole shareholder.16 Otherwise, the Companies Act requires a minimum of three directors;17 the maximum number of directors is undefined (the LuxSE Principles advise 16 directors as a reasonable limit).18 Although the directors are appointed by the shareholders of the company,19 the directors choose a chair among their members.20
Even if director nomination is typically made via the company’s nomination committee, one or several shareholders holding together at least 5 per cent of the votes for listed entities falling within the scope of the Shareholder Act or 10 per cent for the other entities, as the case may be, have the right to amend a notice to the shareholders’ meeting and add the nomination of directors for election.21
Although no general legal obligations are in place, the LuxSE Principles require that listed companies’ boards have a sufficient number of independent directors (the number depends on the nature of the company’s activities and share ownership structure), defining independent directors as not having ‘any significant business relationship with the company, close family relationship with any executive, or any other relationship with the company, its controlling shareholders or executive managers which is liable to impair the independence of the director’s judgement’.22 Although there are no specific legal provisions regarding independent directors, it is generally understood that all directors, including independent directors, should be provided with information in good time for the proper performance of their duties.
Separation of CEO and chair roles – the chair’s role and responsibilities
Although the roles of CEO and chair tend to be separated in practice, there are no legal provisions or guidelines pertaining to a separation of roles or responsibilities. For listed companies, a Recommendation of the LuxSE Principles requires that the chair prepares the board meeting agendas after consulting the CEO and ensures that the procedures for preparing meetings, deliberations, decision-making and the implementation of decisions are correctly applied.23 Under this non-compulsory guideline, the chair should ensure the proper application of the rules of governance and provide advice to the board.
For listed companies, according to the LuxSE Principles, companies should ‘establish a policy of active communication with the shareholders’ and allow shareholder dialogue with the board and the executive management.24
Liability of directors
Directors must act in the best corporate interests of the company, and are obliged to comply with the Companies Act and with the company’s articles of association. This includes the obligation to act as reasonably prudent business persons. They must manage the company’s business in good faith, with reasonable care, in a competent, prudent and active manner, at all times in the company’s best interests, and must refrain from doing anything that does not fall within the scope of the company’s corporate objectives. The Companies Act also imposes certain general duties on directors, including the general management of the company, representation of the company towards third parties and upholding their duty to avoid any conflict of interests.25 Above all, when making decisions, the directors must respect the duties imposed by the Companies Act and by the company’s articles of association.
The Luxembourg legislature has remained silent on what should be considered a company’s best corporate interest. In its judgment delivered in 2015,26 the Luxembourg District Court made some observations on this notion. It explained that it is an adaptable concept of which the exact interpretation depends on the company concerned and the nature of its activities. For some companies, the corporate interest is aligned with the interests of a company’s shareholders. For other companies, it includes the interest of the legal entity as a whole, including the interests of shareholders but also those of employees and creditors. The court remarked that for financing companies and pure holding companies, the interest of the company’s shareholders will be of overriding importance as the focus of the company’s activities is on the rate of return of its investments.
However, directors of LuxSE-listed companies are held to a number of more specific duties under the Transparency Act27 and the Market Abuse EU Regulation,28 in addition to the LuxSE regulations and principles. In terms of the LuxSE Principles, the board of a listed company is bound by a fiduciary duty to its company and shareholders, and ‘shall act in the corporate interests and shall serve all the shareholders by ensuring the long-term success of the company’.29
Directors are jointly and severally liable in accordance with the general provisions on civil liability and the provisions of the Companies Act,30 towards both the company and all third parties for any damage resulting from a violation of the Companies Act or of the articles of association of the company. The company as well as third parties (including any shareholder or creditor with a legitimate interest) may bring an action against a director for violation of the articles or the Companies Act. To elude collective liability, a director must prove that he or she has not taken part in the breach of the Companies Act or of the articles of association of the company; that no misconduct is attributable to him or her; and that he or she reported the breach at the first shareholders’ meeting following his or her discovery or knowledge of the breach. With regard to mismanagement, every director is individually liable.31
In the event of misconduct, according to prevailing doctrine and case law, the shareholders’ meeting must decide whether to make any claim against a director in connection with faults committed by the director in the performance of his or her functions. Creditors of a company may, under certain circumstances, institute action on behalf of the company if the latter fails to do so and if that failure harms the company’s creditors.32
Besides, each director is individually liable in accordance with the general provisions on tort liability, provided the director’s act or omission caused direct, personal harm to the applicant and the damage suffered does not result from directorial misconduct or a violation of the Companies Act or the company’s articles of association.33
If the shareholders have suffered collective damage, it is up to the shareholders’ meeting to demand compensation, in which case an action must be brought by the shareholders’ meeting on behalf of the company (an action initiated by a single shareholder will be dismissed). The legal basis for the action differs depending on whether the proceedings are invoked by the company or by third parties. Shareholders may only seek compensation for a prejudice that is distinct from the company’s collective damage, and that can be defined as individual or personal damage. The possibility for a (minority) shareholder representing at least 10 per cent of the votes to sue a director has been given an explicit legal basis in Luxembourg law (since the reform in 2016).34
Any action by the company has a contractual basis, whereas an action by third parties will be brought on the grounds of tort liability. Under contractual liability, only reasonably foreseeable damage is to be repaired (except in cases of fraud), whereas under tort liability, all damage caused by the misconduct must be repaired.
In addition, provisions relating to the alarm bell procedure35 set out a specific liability regime for directors who fail to convene a general meeting of shareholders if the company’s net equity drops by 50 per cent or more of its share capital to resolve upon either liquidation of the company or the continuation of the company’s activities and measures to be taken to improve its solvency (e.g., injecting additional equity or granting a shareholder loan). If the company’s net equity drops by 75 per cent or more of its share capital, the shareholders’ decision is adopted by a qualified majority of one quarter of all shares present or represented. In the event of violation of these specific provisions on net equity drop, the directors can be held personally and jointly and severally liable to the company for all or part of the increase in the loss suffered by the company.36
Directors are discharged from their liability towards the company if approved by the annual shareholders’ meeting approving the annual accounts. This discharge is only valid for the period covered by the accounts presented to and approved by the general meeting of shareholders, provided that they do not contain any omission or false statement of a material fact. Although a discharge given by the general meeting of shareholders extinguishes the board members’ liability towards the company, proceedings initiated by third parties are not affected by this discharge.
The statute of limitations for civil liability claims against the directors is five years from the date on which the act was committed, except in the case of fraud.37For listed companies, the LuxSE rules and regulations provide a series of sanctions in the event its rules are breached, including fines or compensation for damage caused to the stock market.