Minority shareholders: All you need to know when negotiating a shareholders' agreement in Luxembourg

This article was originally published in Agefi Luxembourg in July 2022 and is reproduced with the permission of the publisher.

Although the Luxembourg law of 10 August 1915 on commercial companies (the 1915 Law) grants certain rights to minority shareholders,¹ the number of legal safeguards is limited. However, a company and its shareholders remain free to contractually agree on specific rights that may be granted to minority shareholders. Shareholders’ agreements are a central governance agreement in joint venture companies by which shareholders agree on the way the company should be managed. They also set out how a company will allocate its profits and how shares may be transferred and potential shareholders’ conflicts will be solved. It’s a key document whereby minority shareholders are granted specific rights.

This article sets out the main areas of focus from a corporate law standpoint in the implementation of a shareholders’ agreement from the point of view of an investor holding a minority stake in a Luxembourg company. Our analysis will tackle private limited liability companies (sociétés à responsabilité limitée) (SARL) since they’re most commonly used for joint ventures in Luxembourg.

Management: Be part of it

Under Luxembourg law, the management of a SARL falls within the authority of the board of managers (or in case of a sole manager, its sole manager).

Although certain jurisdictions give the right to a specific shareholder to appoint a board member, under Luxembourg law, the general meeting of shareholders, as a corporate body, is vested with the power to appoint the members of the board of managers. In principle this decision requires a simple majority of the share capital of the company to be adopted. With this principle in mind, one of the key concerns of joint venture partners will usually be the allocation of the powers to propose candidates to be appointed as board members and the majority required for the decision to be validly adopted. Shareholders’ agreements commonly provide that a certain number of board members will be appointed by the general meeting of shareholders among candidates proposed by certain shareholders, to ensure that such shareholders are represented in the management corporate body. In addition, the majority legally required to approve changes to the board composition may be increased through the shareholders’ agreement. So a minority shareholder could have a veto when it comes to such decisions.

In certain cases, a minority shareholder may not have sufficient leverage to be contractually granted the right to nominate candidates to the board of managers. A way for the shareholder to keep an eye over the management affairs of the company is to be offered the right to designate an observer, who could attend board meetings. Although the observer would not be authorised to vote on board decisions, their attendance at board meetings would still enable them to access key information.

Aside from participation in board debates and decisions, shareholders may still want to be consulted with respect to certain key decisions and have a say in making them. The scope of these decisions, known as the “reserved matters,” will need to be contractually agreed by the shareholders and reflected in the shareholders’ agreement and/or the articles of association. In practice, they will cover decisions that are out of the ordinary course of business of the company or which deviate from the strategy and business plan originally agreed between the joint venture partners. Minority shareholders would demand that decisions be approved only if a high majority or even unanimous consent is reached, thus having a veto right on such decisions.

The downside of veto rights is that a company may more easily face situations where no majority can be reached, leading to deadlocks. Shareholders’ agreements would ideally include the process to be followed in case such situation arises (eg escalation proceedings or call options whereby a shareholder would sell its shares to another shareholder).  

Stay informed

Information rights of shareholders are strictly framed by the 1915 Law. Shareholders have the legal right to consult – at the company’s registered office – the balance sheet and reports drawn up by the supervisory board, if any.  And shareholders may also want to have access to more detailed information such as reports prepared by the management or third parties on the performance of the company’s investments.

Shareholders may contractually agree with the company that certain additional information will be provided at a certain frequency so they can monitor the situation of the company and, potentially, its investments.

Protect your stake

When it comes to a SARL, the 1915 Law does not provide for any preferential subscription rights to existing shareholders. The shareholders are still protected by the obligation falling on the company to treat equally all shareholders that are in the same situation.

That said, shareholders may contractually agree with the company that any new issuance of shares will be offered by preference to the existing shareholders pro rata their shareholding. Anti-dilution provisions may also aim at protecting shareholders against a more advantageous subscription price offered to shareholders subsequently to their investment. In the latter case, the shareholders’ agreement could provide that in the case of an issuance of shares completed after the accession by a shareholder to the company’s share capital at a lower subscription price than the one requested from the existing shareholder, compensation would be given to the existing shareholder. So ultimately it would be placed in the same situation as if the subscription price had been the lowest one.

Protect your economic rights

The allocation of economic rights in a company don’t only depend on the shareholding percentage held by the shareholders in the share capital of the company. Although a shareholder may hold a minority stake in a company, they may bring other assets to the company, such as a certain expertise and may want to be compensated. It’s notably the case of founding shareholders in startup companies when third-party investors accede to the share capital of the company, or promoters of real estate assets. Shareholders’ agreements may provide that preference will be given to certain shareholders when the company allocates its available profits.

Think about your exit options

Although the relationship between shareholders is usually at its best upon the set-up of the joint venture, it’s crucial to think about exit restrictions or options.

Key clauses to be considered are as follows:

• Lock-up: Lock-up provisions aim to prevent a shareholder from disposing of their shares to a third party for a certain period of time. The length of such period will depend on the business plan of the joint venture. Although the relevance of such type of clause may at first glance seem limited in a SARL as Luxembourg law requires the approval of at least three-quarters of the share capital for a shareholder to transfer shares to a third party (which majority may be lowered to 50% of the share capital), a minority shareholder could prefer that such clause be included in the shareholders’ agreement as it would refrain a majority shareholder from exiting the company.

• Drag-along: Drag-along clauses oblige a minority shareholder to sell their shares at the option of a majority shareholder who’s identified a third-party acquirer subject to certain conditions. Minority shareholders should ensure that such obligation to sell is appropriately framed; for example, by providing that they dispose of their shares at the option of the majority shareholder only if the offered price exceeds a certain threshold.

• Tag-along: Tag-along provisions enable minority shareholders to dispose of their shares at the same conditions the majority shareholder has been offered by a third party. Such provisions are in the interest of minority shareholders as they are the ones deciding whether or not they want to be part of the sale.

• Right of first refusal: Such provisions would come into play when a shareholder has identified a third-party acquirer for its shares and would entitle a shareholder to refuse that such shares be sold to the acquired and to acquire the disposed shares at similar conditions.

Negotiating the terms of a shareholders’ agreement in an appropriate manner is key as additional protection may be granted to minority shareholders.

¹ For the purpose of this article, the term “minority shareholders” shall refer to any shareholders which do not hold a participation of at least 50% in the share capital.