Alarm bell procedure under Luxembourg law

In case the net assets of a Luxembourg public limited liability company (société anonyme/SA) and a corporate partnership limited by shares (société commandite par actions/SCA) fall below half of the share capital of the SA/SCA as a result of losses, the management body of the SA/SCA is obliged to ring the alarm with respect to such losses (the Alarm Bell Procedure).

In application of the Alarm Bell Procedure, the management body of the SA/SCA must, within two months from the date on which the loss was, or should have been, known prepare a special report for the benefit of the shareholders in which it sets out the causes of the financial situation and justifies its proposals and convene a general meeting. At such meeting, the shareholders will be given the opportunity to resolve on the possible dissolution of the company and, as the case may be, on any other measures proposed by the management body to redress the financial situation of the company. The voting thresholds applicable for the dissolution decision are as follows:

  1. if the net assets fall below half of the SA’s/SCA’s share capital: approval by at least two thirds (66.6%) of the votes cast at the general meeting is required to approve the company’s dissolution; and
  2. if the net assets fall below one quarter of the SA’s/SCA’s share capital: approval by at least one quarter (25%) of the votes cast at the general meeting is sufficient to approve the company’s dissolution.

In both cases, there is a quorum requirement of at least 50% of the SA’s/SCA’s share capital being present or represented at the general meeting. If such quorum is not satisfied on first convening, a second general meeting can be convened. The second meeting deliberates validly regardless of which portion of the share capital is represented.

Clarifications from the Luxembourg Court of Appeal

Via a decision rendered on 16 June 2020 (the Decision - Numéro du rôle: CAL-2019-00813) the Luxembourg Court of Appeal (the Court) addressed, inter alia the point in time to determine the decrease of net assets against the share capital.

By dealing with the above matters, the Court has provided guidance on an important question often relevant in the financial restructuring of international groups with a Luxembourg law component: what happens if there is a fluctuation in the amount of the loss from the time a general meeting of the shareholders is convened to resolve on this matter and until such meeting takes place to adopt respective resolutions?

In other words, would new equity funding or a debt write-off provided after the general meeting is convened render the need for the decision on the SA’s/SCA’s dissolution obsolete if the net assets do not consequently fall below half of its share capital?

Based on the Court’s analysis, the relevant shareholders had to take into account the financial situation of the SA/SCA as it stands at the time of the general meeting. Hence, a partial waiver of the company’s debt obtained in the interim period had to be taken into account when determining if the net assets had fallen below half of the company’s share capital and therefore if the Alarm Bell Procedure should continue to be followed.

In line with the approach taken by the first instance district court, the Court also confirmed that, if the company’s net assets recover to at least one quarter of the share capital prior to the holding of the general meeting, the decision to dissolve the company will need to be approved by at least two thirds (66.6%) of the votes cast at the general meeting. In the specific case covered by the Decision, the Court found that the lower dissolution threshold (25% of the votes cast) had been applied wrongfully on the basis that the relevant conditions for the decreased threshold were met when the general meeting had been convened – as a result, the decision of the general meeting to dissolve the relevant company was invalidated by the Court.

Key takeaways

The key takeaways in respect of the Alarm Bell Procedure resulting from the Decision are the following:

  • The Court confirmed that the Alarm Bell Procedure provisions are public policy provisions providing a minimum level of protection to shareholders.
  • The Court reiterated that it can only very cautiously and exceptionally intervene in the life of a company.
  • A debt-write off given in the period after a general meeting has been convened and prior to the adoption of the respective resolutions by the general meeting can change the applicable thresholds for the dissolution decision from one quarter to two quarters of the votes cast.

Accordingly, in our view an improvement of the company’s net asset position until the date of the general meeting vote could also render a dissolution vote obsolete if, by the time of the general meeting, the net assets recover to an amount equal to at least half of the share capital. The above could be mutatis mutandis applied in any situations were financial restructuring measures taken (such as new equity funding), result in sufficient coverage of the loss prior to the general meeting.