We are very pleased to present the fifth edition of our Luxembourg corporate law-focused case law briefing.
In this edition, we are focusing on the 2024 calendar year rulings we identified to be the most relevant for actors navigating the corporate sector. Subject matter includes, among other topics:
- the validity of share transfers, even if not recorded in the shareholders' register;
- the importance of clarity in drafting articles of association concerning the classification of employee resignations as "good leaver" or "bad leaver" events;
- the financial condemnation of directors for gross negligence contributing to a company's bankruptcy; and
- the effects of merger-absorption on legal proceedings.
We intend to inform the reader on the practical relevance of these cases, rather than present a full academic analysis.
We believe it is crucial for the Luxembourg legal community, as well as international investors, to gain a thorough understanding of key case law developments, and we welcome any feedback, which we will aim to implement in future editions.
We remain at your disposal if you wish to discuss any of the decisions in further detail.
On behalf of the A&O Shearman Luxembourg Corporate/M&A Team
1. Transfer of shares - Recording the transfer in the shareholders' register is not a legal condition to the transfer
Luxembourg Court of Appeal, 9 January 2024, no 4/24 IV-COM, role number CAL-2023- 00474
The case relates to a dispute between two shareholders of a Luxembourg public limited liability company (société anonyme) (the Company) concerning a sale of shares. One of the shareholders, the Buyer, held 50% of the Company's shares and the other, the Seller, held the remaining 50%. In July 2019, the two shareholders entered into a share purchase and transfer agreement (the SPA), providing that the Seller agreed to sell to the Buyer all the shares it held in the Company and the Buyer agreed to acquire these shares for a price of EUR15,500 (the Price). After signing the SPA, the Seller sent several emails to the Buyer to request the payment of the Price. Despite these repeated requests, the Buyer refused to pay the Price.
The Seller sued the Buyer before the Luxembourg District Court to obtain payment of the Price. The Luxembourg District Court declared the claim well-founded and ordered the Buyer to pay the Price. The Buyer appealed against this judgment, noting the absence of registration of the transfer in the Company's shareholders' register, the absence of contractual stipulations regarding the timing of the payment of the Price, the delay with which the Seller had claimed payment of the Price and the absence of formal notice sent by the Seller to the Buyer to perform its obligations under the SPA.
The Luxembourg Court of Appeal confirmed the judgment of the Luxembourg District Court. It recalled that since the sale is a consensual contract, it is perfected as soon as the parties are in agreement, as recorded by the entering the SPA, at which time the Seller has to transfer the shares and the Buyer has to pay the Price. It also recalled that although under article 430-4 of the Luxembourg law of 10 August 1915 on commercial companies, as amended (the 1915 Law)1 , the ownership of registered shares is established by recording an entry in the register of registered shares, this entry is only a means of evidencing the ownership of the shares (rendering it opposable toward the Company and third parties), between shareholders, the transfer is perfected only by the exchange of consent (solo consensu), in accordance with article 1583 of the Civil Code. Therefore, the Court of Appeal concluded that the fact that the SPA provided that the transfer had to be recorded in the shareholders' register does not constitute a condition to the transfer but merely reiterates the provisions of article 430-4 of the 1915 Law.
The Luxembourg Court of Appeal also recalled that if the SPA does not provide for a specific timing when the payment must be made, the payment of the Price must be made at the same time of the transfer itself, the price being a determining factor of the SPA. The mere absence of an indication of a bank account or a date for payment under the SPA shall not be construed as the absence of an agreed price between the parties.
Furthermore, the Luxembourg Court of Appeal noted that at no time did the Buyer contest the existence of the transfer of the shares to its benefit, nor did it contest its obligation to pay the Price. The Luxembourg Court of Appeal concluded that the argument based on tardiness of the payment requests was unfounded. The argument based on the lack of formal notice was also deemed unfounded, as the legal action before the courts itself constituted formal notice.
This ruling confirms existing case law on the transfer of shares. It reaffirms that entry in the register of registered shares is not a condition for the validity of the transfer between shareholders, but only a means of evidencing the ownership of the shares. Moreover, it recalls that the legal action can served as formal notice for payment.
2.Transfer of shares in a private limited liability company Possibility to waive by way of settlement the right to contest a transfer in breach of article 710-12 of the 1915 Law
Luxembourg District Court, 12 January 2024, no 2024TALCH11/00013, role number TAL2023-00297
The case relates to a dispute over the validity of two transfers of shares in a Luxembourg private limited liability company (société à responsabilité limitée) (the Company). The Company was incorporated in 2016 with a share capital of EUR12,000, divided into 100 shares of EUR120 each, each shareholders holding 50 shares.
In January 2017, one of the shareholders (the Seller) transferred its 50 shares to a third party (the Buyer) for a price of EUR6,000.
On 25 July 2018, the remaining shareholder (the Shareholder) transferred its 50 shares to the Buyer and on the same day, the Buyer and the Shareholder met in the context of an extraordinary general meeting passed before a Luxembourg notary (the EGM) to approve such transfer.
The Shareholder subsequently challenged the validity of both transfers and the EGM. He contested the first transfer of shares, claiming that it had not been approved in a general meeting of the shareholders, as required by article 710-12 of the 1915 Law and article 7 of the Company's articles of association. On this basis, he further alleged that the Buyer had never validly acquired the status of shareholder and was therefore not entitled to participate in the EGM, which approved the second transfer. Consequently, he sought the annulment of the second transfer as well, alleging that the EGM was irregular and that the transfer lacked valid approval.
The Seller and the Shareholder entered into a settlement agreement on 25 July 2018 to end all disputes between them, including those related to the transfer of shares dated 11 January 2017. The Shareholder subsequently challenged the validity of the settlement agreement arguing that the provisions of article 710-12 of the 1915 Law are of public order and no settlement agreement can cure the lack of approval of a transfer in accordance with article 710-12 of the 1915 Law.
The Luxembourg District Court judged both transfers valid and ordered the Shareholder to pay procedural indemnities for the costs and expenses of the proceedings. The Luxembourg District Court analysed the two transfers separately.
- Transfer dated 11 January 2017
The Luxembourg District Court recalled that under article 710-12 of the 1915 Law, the shares of a S.à r.l. cannot be transferred without the approval of the shareholders representing at least three-quarters of the shares. Article 710-17 also provides that decisions of the shareholders must be made in a general meeting, unless the number of shareholders is less than 60, in which case decisions can be made in writing.
In this case, the transfer was not approved at a general meeting of shareholders or subject to a written vote by the shareholders.
The Court then recalled that a settlement is defined under article 2044 of the Civil Code as a contract between the parties under which they agree, through mutual concessions, to end a dispute that has arisen or may arise.
The Seller and the Buyer claimed that by entering the settlement agreement, the Shareholder expressly renounced to its right to challenge the validity of the transfer as a result of the absence of approval by a general meeting of the shareholders, as required by article 710-12 of the 1915 Law. The Shareholder opposed this argument by replying that article 710-12 of the 1915 Law is a public order provision and that it was not possible to circumvent it by signing a settlement agreement.
The Luxembourg District Court recalled that the prior approval required by article 710-12 of the 1915 Law is an essential condition required to transfer shares of a Luxembourg S.à r.l. to a third party. The Court based its decision on interpretations made by several authors on an identical provision of the French Commercial Code and considered that the provisions of article 710-12 of the 1915 Law are of public order in the sense that the provisions of the articles of association of the company cannot derogate from them but the nullity resulting from the non-compliance with the provision of article 710-12 is a relative nullity, which can be waived by a shareholder. The judge concluded that the Shareholder waived its right to contest the transfer of shares dated 11 January 2017 by entering into the settlement agreement. Consequently, the request for annulment of the transfer was declared inadmissible.
- Transfer dated 25 July 2018
The request for annulment of the transfer dated 11 January 2017 having been declared inadmissible, the Luxembourg District Court judged that the Buyer was indeed a shareholder since 11 January 2017 and could therefore participate in the EGM, during which the Shareholder and the Buyer approved the transfer of the Shareholder's 50 shares to the Buyer. This second request for annulment was therefore declared unfounded.
This judgment reaffirms the imperative nature of the legal provisions regarding the approval by the shareholders of transfers of shares in a S.à r.l. per article 710-12 of the 1915 Law, while emphasising that the nullity resulting from non-compliance with these provisions is relative and may be regularised at a later date. It also highlights the effect of settlements, confirming that parties to a settlement agreement can waive their rights to challenge certain actions, even if these actions are tainted with irregularities. It thus strengthens the legal certainty of share transfers, while protecting parties against unfounded subsequent disputes.
Footnote
1 Please note that this definition will apply throughout the entire document.
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