Shareholders' agreement and applicable law: A wide range of possibilities?

"Gouverner, c'est prévoir; et ne prévoir rien, c'est courir à sa perte."¹

"To govern is to foresee; and to foresee nothing is to run to one's ruin."

This adage is well understood by various players in the business world, and it’s particularly appropriate when it comes to shareholders' agreements.

Shareholders' agreements are widely used and essential tools for organising and defining the terms of association within a company. They afford shareholders genuine freedom and flexibility, offering a wide range of applications. They notably determine shareholders' financial and political rights, the conditions under which they can leave the company, and the governance structure of the company.

The globalisation of trade and the influence of major powers have profoundly altered the business landscape. It's now common practice for shareholders to make their agreement subject to a law other than that which would otherwise be applicable to the company. But the flexibility afforded to the parties under contract law (lex contractus) doesn't exempt them from complying with the requirements of the law applicable to the company (lex societatis).

 

Distinction between lex societatis and lex contractus

Distinguishing between the lex societatis and the lex contractus is a common issue, particularly in cases where the two bodies of rules are inextricably intertwined within the same company.

The initial difficulty arises from the fact that the scope of application of the lex societatis isn't always readily determinable.² Nevertheless, it's widely acknowledged in Luxembourg and in the European legal framework that the lex societatis pertains to the internal organisation of the company and its interactions with external parties.³ In contrast, the lex contractus identifies the legislation that applies to a contract, with shareholders' agreements falling into this second category.

These two sets of rules are based on distinct rationales and normative frameworks. The lex societatis derives from national legislative texts, such as the law of 10 August 1915 on commercial companies, as amended (the 1915 Law) in Luxembourg. This legislation was designed, in part, to protect the company's social interest and the public policy of the state that adopted the rules. The parties aren't allowed to derogate from, set aside or amend these rules by private agreement. Conversely, the lex contractus affords the parties the autonomy to delineate their respective rights and obligations (including the scope of the matters that the contract is to govern), including choosing the applicable law to their contractual relationship.⁴

 

Scope of this distinction

The distinction between the lex societatis and the lex contractus is not only theoretical; it has practical implications, particularly the formal requirements for the validity of documents and their publicity and protection.

To illustrate, the articles of association of a Luxembourg company, which are subject to the exclusive jurisdiction of the lex societatis, must be drafted in the form of a notarial deed to guarantee compliance with the mandatory provisions of the 1915 Law.⁵ Conversely, shareholders' agreements can be validly executed under a private seal.

The requirements pertaining to the public dissemination of information and the dissemination of information to third parties also exhibit considerable variation. It's a legal requirement that the articles of association of a Luxembourg be registered in the Luxembourg Trade and Companies Register, along with other pertinent legal information. In contrast, the content of shareholders' agreements is typically regarded as confidential and accessible only to the signatories.

The degree of legal protection varies in accordance with the nature of the legislation in question. In the event of non-compliance with the regulatory framework governing the operation of Luxembourg companies, the consequences can be severe, including the nullification of decisions taken at general meetings or criminal prosecution, where applicable. In contrast, a breach of a shareholders' agreement is typically addressed in accordance with the fundamental principles of contract law, resulting in the award of damages.

The provisions set forth in the Luxembourg company's articles of association can be enforced against third parties (unless there's a legal exception), whereas the stipulations of shareholders' agreements can, in principle, only be invoked by the signatories.

 

Illustration of a conflict between lex societatis and lex contractus: Shareholders' right to information

There may be a temptation to mitigate the application of certain national rules that are deemed too restrictive by concluding an agreement that is governed by foreign law. To illustrate, a shareholders' agreement governed by Anglo-Saxon law may prove more advantageous to the interests of shareholders than Luxembourg law, which affords precedence to the corporate interests of the company over those of individual shareholders.

But beyond the clauses that are manifestly incompatible with Luxembourg law, the question arises as to the effectiveness of an agreement that modulates the operation of a Luxembourg company and is subject to foreign law. The right to information for shareholders provides an illustrative case in point. This political right, which is granted to all shareholders of Luxembourg companies, is governed by the lex societatis. The right to information isn't absolute or unlimited in Luxembourg law and is subject to conditions. These include:

• A timeframe: shareholders can only exercise this right in the context of general meetings. They can request information within a set period before the meeting is held and ask questions at the meeting itself.⁶

• Necessity and relevance: requests for information must be justified and relevant to the items on the agenda of the general meeting'.

• Confidentiality: certain information may be protected by business secrecy, limiting its disclosure. In addition, shareholders can request information in advance of the general meeting, and they can ask questions at the meeting itself.

In light of the influence of common law practices, some shareholders' agreements that govern Luxembourg joint ventures and are subject to a distinct legal framework from the Luxembourg lex societatis tend to establish specific terms and conditions concerning the right to information. This may entail providing supplementary information and establishing periodic communication channels between shareholders and the company's management.

In the absence of publication of the agreement and the assumption that its provisions aren't reflected in the articles of association of the Luxembourg company, it seems challenging, if not impossible, for the Luxembourg authorities, including the notary, to exercise control, allowing its provisions to be applied freely. But this issue assumes a wholly distinct character in the context of shareholder disputes. In accordance with the tenets of private international law, submitting a contract to the jurisdiction of a foreign state doesn't inherently preclude the application of national law. In certain instances, the latter may mandate the invocation of the rules of the lex societatis with a view to safeguarding the public policy of the state of origin.⁷ It can be argued that contractual stipulations that attempt to limit or modify the right to information beyond what's provided for by the lex societatis may be declared inapplicable.

In the context of business, where amicable dispute resolution is often preferred, the question of the applicable law to a shareholders' agreement and its content is of crucial importance when it's being drafted. This issue is particularly salient when shareholders of disparate nationalities seek to have their relations governed by their own national law.

The inclination to opt for a legal framework perceived as more flexible or advantageous can give rise to a superficial analysis of the legal implications, which, in certain situations, may prove more destructive than protective. A proactive and enlightened approach will not only safeguard the interests of shareholders but also foster harmonious and enduring collaboration within the company.

This article was originally published in AGEFI Luxembourg and is reproduced with permission from the publisher.