Companies may combine forces in several manners and mainly in the following (i) the purchasing of shares, (ii) the purchasing of a business or part of a business, (iii) domestic or cross border mergers, and (iv) public offers for shares. The purpose of this article will be to introduce you to the legal merger system in Luxembourg.

Luxembourg benefits from a leading position as global domicile for investment structuring. The European Union merger directives (the UE Directives) transposed into its national law have facilitated to create this open market, and has definitely improved the merger procedures.

Besides the well-known domestic mergers, companies in Luxembourg are also confronted to cross-border mergers (with foreign companies). As global finance center in Europe, it is common practice in Luxembourg to proceed with cross border mergers, either by means of absorbing a new company, called Merger by Acquisition or by means of creating a new entity, called Merger by Incorporation.

The economic reasoning behind such cross-border mergers is inter alia to combine two businesses in a single legal entity in order to benefit from economics of scale, rationalize group structures, benefit from a more appropriate environmental, regulatory or tax framework.

Merger by Acquisition - Legal Effects

The Merger by Acquisition is the “operation whereby one or more companies, following their dissolution without liquidation, transfer to another pre-existing company, all their assets and liabilities in exchange for the issue to the shareholders of the company or companies being acquired of shares in the acquiring company.” (Law of 10 August 1915 on commercial companies, as amended).

The process will be as follows:
1) Preparation of the common, written terms of merger by the respective board of directors of the merging entities containing the general information related to the merger and inter alia the corporate description of the entities merging, the share-for-share exchange ratio, the effective date, a copy of the bylaws of the acquiring company and any employment implications, etc.

2) The board of directors of the merging companies will approve the terms of the merger and make the relevant publications in the national gazettes of each jurisdiction involved in the merger.

3) Convening notice sent to the shareholders one month before the shareholder’s meeting.

4) Holding of the shareholder’s meeting in front of a Luxembourg notary to formally approve the merger and the terms of the merger. The Luxembourg notary will then issue a special certificate confirming the compliance with Luxembourg law. The notary may also request a foreign legal opinion to ensure that the non-Luxembourg law does not prohibit the cross-border merger.

The merger will be effective between parties as of the moment of the approval of the shareholders at the shareholders meeting held in front of the notary. Towards third parties, the merger will be effective as of the publication date of the notarial deeds recording the shareholders meeting in the Luxembourg Trade and Companies Register.

Merger by Incorporation - Legal Effects 

The difference with the above-described merger is that the merging companies transfer their assets and liabilities to a new company that they incorporate. It is less frequently used in practice but follows the same procedure as the Merger by Acquisition.

Tax Implications

The tax consequences will vary for each case and according to the jurisdictions involved. However, with the freedom of establishment between member states, the EU Directives outline that a common system of taxation should be applied to mergers on a tax neutral basis and under certain conditions.