The end of a long controversy: Financial assistance regime does not apply to S.à r.l.s

Today, a Luxembourg amendment act (the Act) was published to clarify that the financial assistance regime provided for by the act of 10 August 1915 on commercial companies, as amended (the Companies Act), does not apply to private limited liability companies (S.à r.l.s). In so doing, the legislator puts an end to almost five years of uncertainty.

According to the Companies Act, there is financial assistance where a company “directly or indirectly, advances funds or makes loans or provides security with a view to the acquisition of its shares by a third party”.

Financial assistance is prohibited for public limited liability companies (S.A.)¹ except under certain limited conditions.

This prohibition is criminally sanctioned. The Companies Act provides that all those who, in their capacity as directors, internal auditors (commissaires), managers (gérants) or members of the supervisory committee, who knowingly “made loans or advances using company funds or provided security with a view to the acquisition of shares in the company or pledged the company’s shares in breach of” the Companies Act may be jailed for between one month and two years and fined from EUR5,000 to EUR125,000, or either of these penalties.

The Companies Act did not provide for a similar regime for S.à r.l.s but, since the entry into force of the act of 10 August 2016 reforming the Companies Act which erroneously introduced a reference to “corporate units” (parts sociales) in the above provision, the application of criminal sanctions to the board members of a S.à r.l. providing financial assistance could not be entirely excluded.

The legislator has now ended this uncertainty by removing the words “corporate units” (parts sociales) in the relevant provision. It is now clear that the financial assistance regime does not apply to S.à r.l.s.

This clarification is extremely welcome as the uncertainty created by the former wording resulted in unwarranted limitations on deals which were otherwise commercially justifiable. That said, the board members of a S.à r.l. bound to provide financial support for the acquisition of the shares in the S.à r.l. will need to consider the benefit for the company in doing so under the general rules governing directors’ duties.

The Act will enter into force on 16 August.