I. INTRODUCTION. 1 Directive 2011/61/EU of 8 June 2011 on alternative investment fund managers.

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1 LEGAL ALERT AMENDMENTS TO THE LAW OF 10 AUGUST 1915 ON COMMERCIAL COMPANIES CONCERNING THE SOCIÉTÉS EN COMMANDITE SIMPLE AND THE SOCIÉTÉS EN COMMANDITE SPÉCIALE JULY

2 I. INTRODUCTION The société en commandite simple ( S.C.S. ) constitutes one of the six types of commercial entities which currently exist in Luxembourg and which are regulated under the Luxembourg law of August 10, 1915 on commercial companies, as amended (the 1915 Law ). The S.C.S., in its current form, is equivalent to a limited corporate partnership, having two classes of members, namely, a general partner ( GP ) and a limited partner ( LP ). In this vein, the S.C.S. is similar to the société en commandite par actions (the S.C.A. ), another form of corporate partnership that exists under the 1915 Law which is limited by shares. Despite being a civil law jurisdiction, it is widely acknowledged that Luxembourg s legal system takes a practical approach and similarities can be drawn with developments in Anglo-Saxon law. Indeed, concepts derived from Anglo-Saxon law can be seen to have been reflected in many areas of Luxembourg law. It is presumably against this background, that proposals were made by the Luxembourg legislature for the adaptation of the current S.C.S. structure and for the creation of a completely new regime in the form of a Special Limited Partnership (société en commandite spéciale) (henceforth referred to as SLP ) in order to fully embrace the Anglo-Saxon common law concept of the limited partnership with a view to attracting more fund-raising vehicles to Luxembourg. Although both the S.C.S. and S.C.A. are already very similar to the Anglo-Saxon limited partnership, the former have not been marketed in the same way as the latter and the S.C.S. and S.C.A. structures exist only in an incorporated form, unlike their Anglo-Saxon counterpart in its familiar and frequently utilised form. It is thought that in order for Luxembourg to continue to be competitive as a financial hub and to attract those who are accustomed to working with the flexible and unregulated Anglo-Saxon partnership vehicles, particularly in the investment funds sphere, an equivalent vehicle must be reproduced in Luxembourg which would attract industry gatekeepers who might otherwise see Luxembourg solely as a solution to those demanding a more regulated environment. The task of reproducing the Anglo-Saxon limited partnership structure in Luxembourg has been completed by Luxembourg Parliament through the adoption of new amendments to the 1915 Law, which have the effect of, inter alia: a) amending the existing S.C.S. structure; and b) creating a new regime to allow the creation of an SLP structure, being a limited partnership having ultimately the same characteristics as the S.C.S. but crucially, having no separate legal personality. The above amendments to the 1915 Law were introduced by the Luxembourg law of 12 July 2013 relating to managers of alternative investment funds (the AIFM Law ), which transposed the Alternative Investment Fund Managers Directive 1 ( AIFMD ) into Luxembourg law. The amendment of the 1915 Law comes as one of a number of other amendments introduced by the AIFM Law which, in addition to transposing the provisions of the AIFMD, also uses the opportunity to introduce a number of innovations which are designed to facilitate and improve the development of the alternative investment funds industry in Luxembourg. It is thought that these new alternative structures will allow Luxembourg to benefit from its proven experience in the investment funds sector, an area where Luxembourg s success depends on its ability to offer a vehicle that confirms with standards that are already known and accepted by the industry, like the limited partnership. Thus, by amending existing company law to include the modernised S.C.S. and new SLP entities, Luxembourg 1 Directive 2011/61/EU of 8 June 2011 on alternative investment fund managers. 2

3 can be seen to be placing itself in an advantageous position compared to other EU jurisdictions which are competing to attract alternative investment funds on-shore in the wake of the AIFMD coming into force. The specific details pertaining to the SLP are discussed in further detail in Section III below. II. CHANGES TO THE EXISTING S.C.S. STRUCTURE The AIFM Law amends the provisions of the 1915 Law applicable to the S.C.S. vehicle in Luxembourg. The most significant of these amendments can be summarised as follows: 1. Publicity of the identity of the LPs There is no longer a requirement for extracts of the deeds or instruments establishing the S.C.S. to contain information concerning the identities of the LPs or the nature of their respective contributions. Having regard to the limited responsibility of the LPs visà-vis third parties of an S.C.S., it is believed that sufficient protection is afforded to third parties who will have knowledge of the identity of the GPs who are jointly and severally liable for the S.C.S. s commitments. In removing the obligation to publish the identities of the LPs or the nature of their contribution, the S.C.S. structure might become more attractive to prospective promoters, initiators and investors who are willing to become LPs but who would prefer the protection that such increased confidentiality and anonymity can offer. As a balance to this amendment, which would have the effect of affording increased confidentiality to LPs, a register containing the names of all partners would be required to be kept at the registered office of the S.C.S.. 2. Maintenance of a register The S.C.S. is required to maintain a register which shall be available to all partners, subject to the limitations set out in the partnership agreement, and which shall contain at least 2 : a) a complete and up-to-date version of the partnership agreement; b) a list of all partners, including the full name, occupation and address, or in the case of legal persons, their name or company name, legal form, address and registration number as well as the ownership interests held by each; and c) a reference to transfer of ownership interests and the date of notification or acceptance of such transfers. 3. Reassertion of the limited liability of the LPs The definition of the S.C.S. has been better harmonised with that of the S.C.A. in order to more accurately reflect the limited liability position of the LPs. In this vein, other than in cases specifically provided for, the LP shall not have to bear the losses of the company and shall not be declared bankrupt in the event that the company becomes insolvent, merely because they held a participation in the company as a LP. The direct action by the creditors against the LPs, as was previously permitted under the 1915 Law 3, whereby they can be required to repay any interest or dividend which they have received, where such amounts have not been paid out of the real profits of the company have been repealed. Circumstances whereby amounts would be owed by the LP to the company need to be covered by the contrat social i.e. the partnership agreement. Thus, the protection afforded to creditors or other third parties, in the absence of fraud, shall be in accordance with the terms of the partnership agreement in addition to the comfort afforded to such parties by the unlimited liability of the GPs. 2 Article 189 of the AIFM Law amending Article 16 (6) of the 1915 Law. 3 Article 189 of the AIFM Law amending Article 17 of the 1915 Law. 3

4 4. Contributions of partners It shall be possible for the partners of an S.C.S. to contribute to the capital of the company either in the form of cash, in kind or in services ( apport en industrie ). The realisation of such contributions, as well as the admission of new partners to the S.C.S. must be specified in the partnership agreement Name of the S.C.S. Additional flexibility is provided through a provision allowing the company name to consist of any denomination, instead of being required to contain a raison sociale (i.e. where the company name had to at least contain the name of the GP) 5. Thus, the name of one or more LPs could theoretically form part of the name of the company and this inclusion would not, on its own, impose any joint and several unlimited liability on the LP in question. 6. Contractual features The AIFM Law stipulates that the S.C.S. would essentially be regulated by the terms of a partnership agreement. 7. Nullity of the S.C.S. It will only be possible to cancel the registration of the S.C.S. in a limited number of cases, which are listed exhaustively. Such provisions bring the S.C.S. into closer alignment with the provisions applicable in such circumstances to the S.C.A., the public limited liability company (société anonyme) ( S.A. ) and the private limited liability company (société à responsabilité limitée) ( S.à R.L. ). 8. Management of the S.C.S. A further amendment to the 1915 Law 6 is that the management of the S.C.S. belongs to one or more managers, who can be GPs or not, and who are appointed in accordance with the terms of the partnership agreement. The managers who do not qualify as GPs will only be responsible in accordance with the general rules set forth in article 59 of the 1915 Law. The partnership agreement may permit the managers of the S.C.S. to delegate one or more of their duties to another person and such third party delegate will only be responsible for the specific duties delegated to it. Unless the partnership agreement provides otherwise, each manager may take any actions necessary or useful to realise the corporate object of the company, thus aligning the S.C.S. more closely with the provisions of the 1915 Law as are applicable to the S.A. and the S.à R.L.. Any limitations to the management powers of the managers will not be enforceable against third parties even if such limitations have been published. The principle that the LP is not permitted to be involved in the management of the S.C.S. is maintained, however, this principle is only valid for external management activities (relations between the S.C.S. and third parties) and not for internal managements acts. Although the 1915 Law authorised the LPs to advise or even supervise the GPs in their management activities, authorised internal management activities will be more precisely distinguished from prohibited external management activities. Moreover, certain acts of management are enumerated under the amended 1915 Law in relation to which the liability of the LP shall not be unlimited vis-à-vis third parties, including, the giving of opinions and advise to the company, its affiliates or their managers, acts of control and oversight, granting of loans, guarantees or securities or any other assistance to the company to its affiliates as well as authorisations given to managers as provided in the partnership agreement for acts exceeding their mandates 7. 4 Article 189 of the AIFM Law amending Article 16(2) of the 1915 Law. 5 Article 189 of the AIFM Law amending Article 16(5) of the 1915 Law. 6 Article 189 of the AIFM Law amending Article 17 of the 1915 Law. 7 Article 189 of the AIFM Law amending Article 18 of the 1915 Law. 4

5 9. Financial rights The financial rights of the partners are governed by the partnership agreement. Unless otherwise indicated in the partnership agreement, the sharing in the profits and losses of the S.C.S. shall be in proportion to each partner s partnership interests. 10. Voting rights Unless otherwise indicated in the partnership agreement, the voting rights of every partner would be in proportion to the interests held by each partner 8. It would however be possible to provide in the partnership agreement that in certain circumstances the voting rights are limited or suspended or that multiple voting rights are granted. In addition, unless stated otherwise in the partnership agreement, the decisions of partners must be taken at a general meeting or by written resolution. Unless otherwise stated in the partnership agreement, every decision requires a simple majority (i.e. 50%) of expressed votes in order to be deemed validly passed, regardless of the partnership interests represented, except for modifications to the corporate object, the change of nationality, the transformation or the liquidation of the S.C.S. which would require the approval of partners representing 75% of the partnership interests and in any event the unanimous approval of all the GPs. It is also provided that each year, the partners will vote on the annual accounts on the date fixed in the partnership agreement and in any event at the latest within six (6) months following the end of the financial year. By derogation, the partnership agreement may provide that such vote may occur within eighteen (18) months following the incorporation of the S.C.S.. Certain information must be made available to partners at the registered office at least 15 days (or longer if provided in the partnership agreement) in advance of such voting by the partners Transferability of the partnership interest It is considered more appropriate to let the partners establish the rules of the transferability of the LP s partnership interests in the partnership agreement and accordingly, the partners could even stipulate that the LP s partnership interests are freely transferable 10. In the absence of such provisions, the transfer, dismemberment or pledge of the LP s interests requires the approval of the GPs. In the absence of any other provision, each transfer, dismemberment or pledge of the GP s partnership interests requires the approval of the other partners, who must observe the same formalities required for the modification of the partnership agreement. The transferability of partners interests allows increased flexibility and takes into account the specific nature of the S.C.S. entity without being too restrictive by preventing any transfer. The regime that already existed under the 1915 Law concerning the enforceability against third parties is maintained. III. THE NEWLY PROPOSED SLP As outlined above in Section I, in order for Luxembourg to remain competitive and for it to continue to be seen as an attractive location for initiators, promoters and investors, particularly in the investment funds area, it is imperative that flexible structures are put in place by the Luxembourg legislature which resemble those already offered in other jurisdictions, such as the Anglo-Saxon limited partnership model, with a view to attracting those who are already familiar with and loyal to such structures. By modernising the existing S.C.S. structure to allow more flexibility and an increased level of active participation by the LP in the management of the company, the S.C.S. vehicle has the potential to become a more attractive vehicle for those looking to establish their business in Luxembourg in the form of a lightly regulated corporate 8 Article 189 of the AIFM Law amending Article 20 of the 1915 Law. 9 Article 189 of the AIFM Law amending Article 20 of the 1915 Law. 10 Article 189 of the AIFM Law amending Article 21 of the 1915 Law. 5

6 entity which offers organisational flexibility based on a contrat social or consolidated partnership agreement. Given that the Anglo-Saxon limited partnership served as a source of inspiration to the modernisation of the S.C.S. structure in Luxembourg and due to the fact that common law recognises that partnerships can be created with or without a legal personality, thus offering increased choice and flexibility to cater for specific business needs, there was impetus for such a choice to also exist in Luxembourg. Hence, the introduction by the AIFM Law of a further amendment to the 1915 Law which allows for the creation of a new type of limited partnership vehicle in Luxembourg, the SLP, which offers an alternative limited partnership vehicle and, crucially, which does not have a separate legal personality distinct from its members. The SLP is modelled to a large extent on the modernised S.C.S. structure, however, the absence of a legal personality is the distinguishing feature and the applicable provisions of the 1915 Law reflect this divergence in status. The main features of the SLP which are distinct from those of the S.C.S. and therefore require additional or unique provisions, are outlined below. 1. No legal personality The amending section of the 1915 Law specifically provides that the SLP does not constitute a legal person separate from that of its partners. It can either be denominated by a particular name or referred to as a name containing the names of one or more of the partners. 2. Treatment of Assets In addition to the above, registration of, and all other formalities in connection with the assets which form the partnership property shall be completed in the name of the SLP, as opposed to in the name of the partner who contributes such assets to the partnership. Importantly, it is also provided that the assets forming the common property of the SLP will only guarantee the liability of the SLP itself. Thus, none of the partner s personal creditors will have a claim to the SLP s assets Transformation into another corporate form The transformation of the SLP as permitted under the 1915 Law, into any of the other company forms authorised under the 1915 Law would necessarily involve the creation of a new entity, which would have a separate legal personality. IV. CONCLUSION The Anglo-Saxon limited partnership is acknowledged as being a very attractive vehicle for the structuring of investment funds, whereby the investors act as LPs and make their contributions available to the GP who invest the funds in line with a defined policy. Such partnerships are closely resembled by the existing S.C.S. and S.C.A. vehicles in Luxembourg, however, it is necessary for these structures to be modernised in order to allow them to evolve and adapt themselves better to the needs of the investment funds industry in particular. The implementation of the AIFMD in Europe will force alternative investment fund actors to reconsider the jurisdictions in which they choose to launch their products. Luxembourg can benefit from its recognised experience in the alternative investment fund ( AIF ) sphere where the private equity actors are already familiar with the Luxembourg SOPARFI as a taxefficient holding vehicle. By offering the promoters of AIFs a unique jurisdiction for the domiciliation of their funds as well as for their investment holding structures, Luxembourg can increase its 11 Article 189 of the AIFM Law introducing a new Article 22-2 into the 1915 Law. 6

7 competitiveness with other jurisdictions in the AIF domain. As outlined above, Luxembourg s success in this regard depends on its capacity to offer a vehicle corresponding to the known and accepted standards in the industry, namely, the limited partnership. Thus, through the introduction into Luxembourg law of a modernised commandite, Luxembourg can be seen to be positioning itself as an attractive location for AIFs that are expected to come on-shore following the transposition of the AIFMD by the AIFM Law. For further information feel free to contact the following persons: Alex SCHMITT aschmitt@bonnschmitt.net Chantal KEEREMAN ckeereman@bonnschmitt.net Candice WISER cwiser@bonnschmitt.net Frederic LEMOINE flemoine@bonnschmitt.net *** BONN & SCHMITT JULY

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