Luxembourg is a leading financial and investment centre in Europe and, in recent years, the Luxembourg legal system has undergone a number of changes in the field of securities law. Many of these changes were in response to an ever-growing interest in the Luxembourg securities market, while others were set forth in order to implement recent European directives. This chapter will serve as an introduction to and overview of securities law in Luxembourg, with a special emphasis on highlighting recent innovations in the law. In addition to laying out the framework of the Luxembourg securities market and legal structure, this chapter will also discuss the regulation of public offerings and private placements, undertakings for collective investments, the regulation of investment companies including corporate governance and organisation, the regulation of publicly-held companies and anti-fraud provisions.
The Luxembourg markets have proven to be an attractive location for international and domestic issuers. The Luxembourg legal framework and the structure of the Luxembourg markets accommodate a range of legal entities, including the investment company in risk capital (the société d’investissement en capital risque or ‘SICAR’), the specialised investment fund (the ‘SIF’) and the undertaking for collective investment (the ‘UCI’). The Luxembourg market allows a wide variety of different types of debt securities (including indexed bonds, high yield bonds, convertible bonds, debt issuance programmes, commercial paper, international debt, sovereign debt, supranational debt, asset backed securities and convertible bonds) and investment funds (such as hedge funds, real estate funds and UCIs), as well as global warrants and certificates, depositary receipts, and equity securities.
The Luxembourg market structure
The Luxembourg Stock Exchange (LSE) is divided into two markets: a main regulated market and an exchange-regulated market. The main regulated market – the LSE – grants issuers on this market access to a European passport and allows the securities to be offered in more than one EU member state. The exchange-regulated market – the Euro MTF (Multilateral Trading Facility) – was established on 18 July 2005 in order to provide issuers with an alternative market in light of the enactment of the new laws affecting the LSE. In effect, the Euro MTF enables issuers to, in a sense, opt out of these innovations. Issuers on the Euro MTF are not granted a European passport and are not submitted to the new regulations relating to transparency, the International Financial Reporting Standards (the ‘IFRS’) and the Luxembourg implementation of the EU Prospectus Directive (which will be discussed in greater detail in the proceeding pages). The Rules and Regulations of the LSE delineate the operating rules of the Euro MTF which were set out by decree on 29 June 2005.
Financial products
Since its establishment in 1928 by the Law of 27 December 1927, the LSE has historically taken a liberal, innovative and flexible approach to the securities industry. In 1963, the LSE was the first stock exchange to list a Eurobond and, since 1969, the LSE has listed and allowed the trading of bonds in their issuing currencies.
As a result of its rich history, its dedication to changing with the evolution of the global securities marketplace and its accommodating approach to this industry, the LSE has become the foremost stock exchange for the listing of debentures in Europe and a leading market globally. According to the figures from 2005, the LSE included listings from 4,100 issuers from approximately 100 different jurisdictions. In 2005, the LSE ranked first among European exchanges for listing international bonds with the LSE accounting for 59 per cent such listings and its nearest competitor, the Irish Stock Exchange, accounting for only 16 per cent. The equity market capitalisation of the LSE totalled over €322 billion by the close of the market at the end of 2005 with approximately two-thirds of this equity market capitalisation originating in Asia. LSE is also a global leader for the listing of the sovereign debts of other countries. In 2005, at least 50 countries had turned to the LSE for listing such debts. Additionally, the LSE is a dominant market for both bonds and investment funds, with nearly 27,000 debt securities listed on the market in 2005 and over 500 issuers from 15 countries listing over 6,100 lines of UCIs in 2005.
The Luxembourg securities markets are regulated by the Commission de Surveillance du Secteur Financier (the Commission for the Supervision of the Financial Sector, ‘CSSF’). The CSSF was created by the Law of 23 December 1998 and effectively started functioning as a regulatory structure on 1 January 1999. The CSSF assumed power from the Luxembourg Central Bank (earlier called the Institut Monétaire Luxembourgeois ie, the Luxembourg Monetary Institute), which itself was preceded by the regulatory structure of the Commissaire au contrôle des banques (the Commissioner for the Control of Banks) established on 17 October 1945. Additionally, in its establishment, the CSSF donned the role previously held by the Stock Exchange Supervisory Commission and, thus, is the head supervisory authority for the LSE.
The CSSF has delegated specific supervisory and regulatory powers to the LSE and, under the Law of 10 July 2005 (the ‘Prospectus Law’), the LSE has assumed approval authority over certain securities. This sharing of power will be discussed further in a later section of this chapter. However, the CSSF remains, in general, the supervisory authority responsible for overseeing and regulating the LSE. For example, the LSE has the power to refuse a particular listing, yet an issuer may appeal the decision to the CSSF who can force the LSE to re-evaluate the refusal. If during this re-evaluation, the LSE again decides to refuse the listing, CSSF and LSE structures do not allow for a subsequent appeal process for the issuer and the refusal stands. It is interesting to note in comparison that the CSSF, in its supervisory capacity, may outright prohibit an offer to the public based on a finding of the publication of misleading information regarding the offer. Such decisions by the CSSF are deemed to be administrative decisions under Luxembourg law and, thus, an issuer can appeal the decision to an appropriate administrative court.
The securities industry in Luxembourg is governed by a series of national laws, many of which transpose and implement European Directives. The following is a non-exhaustive list of legislative developments (as may have been amended from time to time) and CSSF circulars which have impacted and helped to define securities law in Luxembourg:
| Luxembourg | |
|---|---|
| 30 March 1988 | Law relating to undertakings for collective investment (UCIs) |
| 4 December 1992 | Law on the reporting requirements concerning the acquisition |
| and disposal of major holdings in a listed company | |
| 31 March 1996 | Grand Ducal regulation concerning the concession granted to |
| and the general terms and conditions to be complied with by | |
| the LSE | |
| 3 September 1996 | Law concerning the involuntary dispossession of bearer |
| securities | |
| 29 June 1997 | Law endorsing the Convention on the financial transactions of |
| insiders opened for signature in Strasbourg on 20 April 1989 | |
| and its related Protocol | |
12 March 1998 Law relating to investment services 23 December 1998 Law relating to the supervision of the securities market
23 December 1999 Grand Ducal regulation defining the nature of the financial assets subject to transaction reporting
20 December 2002 Law relating to undertakings for collective investment (UCIs)
| 22 March 2004 | Law on securitisation |
| 15 June 2004 | Law relating to the investment company in risk capital (SICAR) |
| 10 July 2005 | Law on prospectuses for securities implementing Directive |
| 2003/71/EC of the European Parliament and of the Council | |
| dated 4 November 2003 |
10 October 2005 Circular CSSF 05/210 on the drawing-up of a simplified prospectus within the scope of Chapter 1 of Part III of the law on prospectuses for securities
15 December 2005 Circular CSSF 05/224 on the choice of the home member state for third country issuers whose securities are admitted to trading at 1 July 2005 and notification by these issuers of their choice by 31 December 2005
16 December 2005 Circular CSSF 05/225 on the notion of ‘offer to the public of securities’ as defined in the law on prospectuses for securities and the ‘obligation to publish a prospectus’ that may ensue
16 December 2005 Circular CSSF 05/226 giving a general overview of the law on prospectuses for securities and technical specifications regarding communications to the CSSF of documents for the approval or for filing and of notices for offers to the public and admissions to trading on a regulated market, in relation to the law relating to prospectuses for securities
| 9 May 2006 | Law on market abuse |
| 19 May 2006 | Law on takeover bids implementing Directive 2004/25/EC of the |
| European Parliament and of the Council of 21 April 2004 on | |
| takeover bids |
13 February 2007 Law relating to specialised investment funds (SIFs)
2. REGULATION OF PUBLIC OFFERINGS AND PRIVATE PLACEMENTS
Recent developments in Luxembourg law, namely the Prospectus Law, have modernised and streamlined the manner in which securities are handled in Luxembourg. The Prospectus Law has had a particularly significant impact upon public offerings and private placements, in that this law has established a more structured framework and a standardised working vocabulary that has facilitated the use of these two methods of securitisation.
Before the Prospectus Law heralded in a series of innovations to Luxembourg securities law, the Luxembourg legal system did not easily delineate between private placements and public offerings. Private placements were, according to the old legislation, any placement which did not use means of communication (such as the public media or mass announcements) directed at the public at large. This definition, however, was troublesome because the old legal framework allowed public offerings to include those that targeted only a small grouping of individuals. Thus, it was difficult to aptly distinguish between what constituted a private placement or a public offering of securities.
The Prospectus Law, as a legal document and in its application in practice, has alleviated this confusion. The Prospectus Law effectively attributes the title ‘public offer’ to any offer of securities made to more than one person. In practice, the category of private placements is oftentimes broadened to include certain public offerings that are exempt from the prospectus publication requirement. Such public offerings include: • offers to qualified investors or offered to less than 100 individuals or legal entities per member state other than qualified investors; • offers that total at least €50,000 per investor; and • offers for securities in which each security has a nominal value of at least €50,000.
The Luxembourg legal system does not dictate a formalised procedure for private placements. Instead, in the case of so-called private placements (ie, certain public offerings that are exempt from the prospectus publication requirement), the offering merely must be shown to fit within one of the three abovementioned exempt categories. Additionally, the Prospectus Law requires that if material information is given to one specifically targeted group of investors, this information must also be provided to all such investors. Although the Prospectus Law does not directly define the term ‘material’ in this instance, it is understood that ‘material’ refers to all information that an investor would need in order to make an informed decision regarding the offered securities.
Securities acquired through private placement are freely transferable and the Luxembourg legal system does not place any restrictions or additional requirements on such securities that are placed on the LSE. If, however, the transfer of such securities takes the form of a public offering, as defined by the law, then the rules related to public offerings will apply.
The Prospectus Law offers a wide interpretation of what constitutes a public offering by defining an ‘offer of securities to the public’ as a ‘communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to such securities.’ The Prospectus Law has introduced major changes in the way that public offerings are dealt with in Luxembourg, these changes and public offerings, in general, will be discussed in detail in the following section discussing prospectuses.
In general, in Luxembourg, issuers are not required to be registered or licensed, except in the case of offers involving UCIs. An issuer may, however, need to have a local agent in Luxembourg if having one would facilitate the communication of necessary information to the LSE. Additionally, a Luxembourg paying agent may be similarly required if payments are to be made through such agents. In the case of UCIs, the appointment of a Luxembourg paying agent is systematically required. UCIs, whether foreign or Luxembourg-based, are required to be registered with the CSSF before a public offer of such securities can be made in Luxembourg. UCIs that qualify as UCITS (ie Undertaking for Collective Investment in Transferable Securities), however, do not need to fulfill this registration requirement, yet they are obligated to follow a notification requirement before an offer can be made in Luxembourg.
Luxembourg law does not have a registration requirement for securities, yet under the Prospectus Law the pubic offering of securities and the admission of securities to the non-regulated market do require adherence to a well-structured prospectus system whereby a prospectus must be submitted for prior approval to either the CSSF or the LSE.
The Prospectus Law has established a more structured format for the public offering of securities in Luxembourg by creating a three regime system relating to the approval and publication of prospectuses.
Background and purpose of the Prospectus Law
The Prospectus Law transposes into Luxembourg law the European Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements (‘Prospectus Regulation’). The purpose of the Prospectus Regulation, and by way of transposition also the Prospectus Law, is essentially the harmonisation of requirements relating to the creation, approval, and publication of prospectuses thus creating a uniform disclosure system ensuring that all interested parties would have access to all material information. The Prospectus Regulation also provides a harmonised set of disclosure requirements whereby securities are eligible to benefit from the single European passport, which allows an approved prospectus or admission to trading in one European Union member state to be acceptable in all other member states.
The Prospectus Law and its three regime system
The Prospectus Law sets forth three different prospectus regimes for the submission and approval of prospectuses:
The First Regime (Part II of the Prospectus Law)
Under the first regime, a person who wants to make a public offer or admit securities to trading on an EU regulated market must first notify the CSSF by filing an application, gain CSSF approval, and publish a prospectus. The application must include:
The application must be filed with the CSSF at least 20 business days before the public offer or admission is made, if (a) the issuer’s securities have not previously been listed on the a regulated market or (b) the securities have not been previously the subject of a public offer (ie, a private placement that is transferred by way of a public offer). If the securities do not fit into either of these categories, then the application must be filed with the CSSF at least 10 business days before the public offer or admission. This time period starts to run once all required documents have been properly filed with the CSSF. During the interim while the CSSF is deliberating over a submitted application, the securities cannot be the subject of a public offer and similarly cannot be admitted to trading.
Once the CSSF has approved a prospectus, then the issuer must file a version of the final prospectus with the CSSF and publish it. While this publication should occur on the day that the prospectus is approved, publications are still deemed acceptable if they occur within a reasonable time before the securities are offered publicly or admitted to trading. If the securities are being admitted to trading for the first time, then the prospectus must also be published at least six business days before the end of the public offer period. Publication must occur in at least one newspaper widely circulated in Luxembourg, a printed brochure, or in a free publication that is available in a number of locations. Electronic publication on the internet is also permissible. If, however, the publication of the prospectus occurs solely by way of printed media (ie newspapers and brochures), then it must also be publicised on the issuer’s website or on the website of a financial intermediary. When a prospectus is published on the LSE website, it remains available via the website for at least 12 months.
The Second Regime (Part III of the Prospectus Law)
The second regime applies to the public offerings (Chapter 1 of Part III of the Prospectus Law) and admissions to trading on the regulated market of securities and other comparable instruments (Chapter 2 of Part III of the Prospectus Law) that are outside the scope of the Prospectus Regulation and Part II of the Prospectus Law. This includes securities or exempted issuers such as ‘open-ended’ UCIs (under the Prospectus Law, ‘close-ended’ UCIs are those in which the investor has no repurchase right). The second regime also offers a simplified prospectus regime which does not make the offering or admission eligible for a European passport.
The Prospectus Law designates the CSSF as the competent authority to review applications fitting under this second regime of public offerings by exempted issuers or of exempted securities. The application process is largely the same under the second regime, as it is under the first regime. However, a second regime application does not require the inclusion of a summary and the general contents of the prospectus is dictated by the CSSF. According to the CSSF Circular 05/210, simplified prospectuses for public offerings are acceptable if they follow the guidelines set out by the LSE.
The LSE is deemed the competent authority for the approval of prospectuses under the second regime in the case of the EU regulated market admission of exempted securities or by exempted issuers.
Under the second regime, the time period for filing all the necessary information with the CSSF is 10 business days, except for cases in which the issuers have not yet publicly offered securities, where the time period is extended to 20 business days. In the case of applications to the LSE, the time period is 10 business days.
Upon approval, second regime prospectuses must be filed with the appropriate competent authority, either the CSSF or the LSE. As with first regime prospectuses, publication should occur concurrently with approval and filing. Similarly, first time public offers under the second regime also must be published at least six days before the end of the offer period. In general, the publication rules for the second regime are the same as those for the first regime.
The Third Regime (Part IV of the Prospectus Law)
The third regime of the Prospectus Law applies to those securities admitted to trading on a market not included on the European Commission’s list of regulated markets. In Luxembourg, this refers to admission to trading on the Luxembourg exchange-regulated market, the Euro MTF market. For such admissions, the LSE is the competent authority for reviewing and approving prospectuses. Such prospectuses are governed by the rules of the LSE and applications to the LSE must be submitted at least ten days before the intended admission. The publication rules are essentially the same as those set out above for the first and second regimes.
3. DISTRIBUTION SYSTEM
The distribution of securities in Luxembourg requires licensing as a financial sector professional or as a bank. Luxembourg law allows distribution within Luxembourg by EU investment groups or EU banks using the European passport. Non-EU banks and investment groups may engage in distribution by way of private placements on a limited basis. Distribution is generally done by mailings to existing clients of the banks involved; while Luxembourg law also allows distribution through advertising, in practice this is rarely used.
4. LISTING
Luxembourg law does not place any restrictions on the types of securities that can be listed on the LSE and the Euro MTF and, as a result of the country’s accommodating approach to listings, the Luxembourg market has become a main stock exchange for the listing of debt securities in Luxembourg. The Luxembourg market is also favoured for the listing of company shares. Companies and financial vehicles wishing to list on the LSE must be able to indicate the following:
Application for a listing requires a submitted and approved prospectus (in accordance with the Prospectus Law), a statement on future compliance with listing obligations and a detailed application letter. The listing obligations include obligations relating to transparency and reporting as dictated by the Rules and Regulations of the LSE. Applications by issuers must include signatures from at least one institution which is a member of the LSE which will serve as an agent. Applications are reviewed by the Listing Committee made up of senior officials of the LSE. The LSE also provides services and information via an ‘e-file’ communication platform that increases the transparency associated with the application approval process and improves communication between the competent authorities (ie the LSE and the CSSF) and those involved in the listing process (ie issuers, law firms and listing agents).
5. UNDERTAKINGS FOR COLLECTIVE INVESTMENTS
Luxembourg is one of the leading centres for UCIs in Europe and the world. The number of lines of UCIs listed on the LSE nearly tripled from 2,776 to over 6,000 between 1996 and 2006. These 6,000 UCIs represented over 500 issuers from across the globe.
The LSE provides a flexible market that is particularly advantageous for UCIs. The LSE allows UCIs that are registered in Luxembourg and UCIs of other member states to be listed on the LSE without requiring them to undergo any additional requirements beyond the prospectus created for their home country. Additionally, UCIs that are listed on the LSE can potentially serve as investments for insurance projects and pension funds.
6. REGULATION OF INVESTMENT COMPANIES – CORPORATE GOVERNANCE AND ORGANISATION
In April 2006, the LSE published a list of ten principles of corporate governance in order to facilitate good governance and transparency in companies that trade on the Luxembourg markets. The list is applicable as of 1 January 2007. According to the preamble to the principles, Luxembourg corporate governance is dictated by three classes of rules. The first two classes include statutory law (namely the Law concerning commercial companies of 10 August 1915 (the ‘Company Law’), the Civil Code and the Stock Exchange Law) and general principles of law. The third class, according to the LSE, ‘consists of the body of rules for the management of a company and the procedures for implementing the legal text and the general principles, designed to ensure that a company is managed efficiently’.
Recent amendments to the Company Law have introduced into the Luxembourg legal system the European Company and have allowed public limited companies (société anonyme or SA) to choose between a one-tier (board of directors) or a two-tier (management board and supervisory board) system.
Members of these boards are obliged to act on behalf of the company and can be held liable for breach of this fiduciary duty. Board members, except in particular circumstances, are held jointly and severally liable for company losses and losses to third parties. Similarly, they may be held liable for mismanagement of the company and negligence.
The Company Law establishes a system whereby shareholders are able to question the boards regarding their management of the company during the annual general meeting of shareholders, thus increasing transparency and holding board members accountable for their actions and decisions.
Similarly, the Company Law has set methods in which the rights of minority shareholders are protected against the abuse of the majority. Here is a non exhaustive list of these methods:
According to the preamble to the principles, while the list was drafted with the intention that it would apply to list companies, the LSE indicates non-listed and multi-listed companies should also adhere to these principles. They do not, however, apply to UCIs, UCITS and SICARs listed on the LSE.
The ten principles of corporate governance set forth by the LSE are the following:
Principle 1: Corporate governance framework
The company will adopt a clear and transparent corporate governance framework for which it will provide adequate disclosure.
Principle 2: Duties of the board
The board will be responsible for the management of the company. It will act in the best interests of the company and will protect the general interests of the shareholders by ensuring the sustainable development of the company. It will function in a well-informed manner as a collective body.
Principle 3: Composition of the board and the special committees
The composition of the board will be balanced so as to enable it to take well-informed decisions. It will ensure that any special committees necessary for it to properly fulfill its duties are set up.
Principle 4: Appointment of directors and executive managers
The company will establish a formal procedure for the appointment of directors and executive managers.
Principle 5: Conflicts of Interest
The directors will take decisions in the best interests of the company and will refrain from taking part in any deliberation or decision that creates conflict between their personal interests and those of the company or any subsidiary controlled by the company.
Principle 6: Evaluation of the performance of the board
The board will regularly evaluate its performance and its relationship with the executive management.
Principle 7: Management structure
The board will set up an effective structure of executive management. It will clearly define the duties of executive management and delegate to it the necessary powers for the proper discharge of these duties.
Principle 8: Remuneration policy
The company will secure the services of good quality directors and executive managers by means of a suitable remuneration policy that is compatible with the long-term interests of the company.
Principle 9: Financial reporting, internal control and risk management
The board will establish strict rules, designed to protect the company’s interests, in the areas of financial reporting, internal control and risk management.
Principle 10: Shareholders
The company will respect the rights of its shareholders and ensure they receive equitable treatment. The company will establish a policy of active communication with the shareholders.
In addition to setting out these ten principles, the LSE also emphasised the importance of transparency in corporate governance by reiterating the transparency requirements including a list of disclosures companies should make available (such as a list of board members, list of paid positions held by directors in other listed companies and the total amount of remuneration and other benefits directly or indirectly granted by the company).
7. REGULATION OF PUBLICLY-HELD COMPANIES – TAKEOVER BIDS
The Law of 19 May 2006 on takeover bids implements Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (the ‘Takeover Bids Law’). It introduced into Luxembourg law a standardised regulation of takeover bids.
Pursuant to the Takeover Bids Law, when a person acquires more than 33.3 per cent of the voting rights in a company having its registered office in Luxembourg and which shares are listed on a regulated market in the European Union, such person has to make a public takeover bid. The offeror has to make public its decision to make a bid forthwith after this operation is decided and he is further required to draw up and make public an offer document containing the information necessary to enable the holders of the offeree company’s securities to reach a properly informed decision on the bid.
Besides, the Takeover Bids Law provides that when following an acquisition or a transfer, the shareholding held by a person in a Luxembourg company which is listed on the stock exchange of a member state of the EU reaches, exceeds or falls under the thresholds of 10 per cent, 20 per cent, 33.3 per cent, 50 per cent and 66.6 per cent, such company shall forthwith, communicate this information to the public of each member state of the European Economic Community where the shares of the company are listed on a stock exchange.
Moreover, the Takeover Bids Law provides that any operation relating to securities admitted to trading on a regulated market made for the benefit of persons with managing functions in such company (or persons having close relations with these persons) has to be made public by the company in the shortest possible time.
8. ANTI-FRAUD PROVISIONS
Another recent innovation in Luxembourg law is the Law of 9 May 2006 on market abuse implementing the Directive 2003/6/EC (the ‘Market Abuse Law’). This law introduces into Luxembourg law a comprehensive definition of and means of addressing market manipulation.
The Market Abuse Law places the CSSF as the competent authority in matters of market manipulation and, as such, the CSSF has the jurisdiction to determine whether a practice amounts to market manipulation. As part of its role as the competent authority in this field, the CSSF commented on the Market Abuse Law in Circular No 07/280 in which it defined the applicability of this law.
The Market Abuse Law obliges professionals working within the financial sector, market operators and those involved with the LSE or Euro MTF to report to the CSSF every operation that they construe as potentially being a case of market manipulation or insider dealing.
Similarly, issuers must follow the rules of transparency in order to thwart possible attempts at market manipulation and also must keep a list of all individuals who have insider information or access to privileged information regarding the issuance of securities.
9. CONCLUSION
Luxembourg has traditionally been a leader in the securities industry in Europe and, with the dawning of the twenty-first century, Luxembourg has implemented a series of new laws fostering increased transparency, a strong regulatory framework, a choice of markets and protection against market manipulation. As Luxembourg looks to the future, it will continue to provide a modernised market with a flexible and secure system that accommodates the needs of global investors.
1The authors wish to thank Lauren Harris for her assistance in the preparation of this chapter.
.jpg)