Due Diligence Of Luxembourg Target Companies

M&A transactions regularly involve the acquisition of Luxembourg target companies.

The target may have operations based in Luxembourg. We are seeing, for example, a significant amount of consolidation in the Luxembourg financial sector.

It is fair to say, however, that the majority of Luxembourg target vehicles are holding companies. Luxembourg continues to be a popular jurisdiction for holding company structures, and a share deal at the level of the "LuxCo" is often the preferred means of exit. These companies hold a wide variety of investments across a range of sectors and geographies, but many of the issues that arise in respect of their due diligence are recurring and apply irrespective of the sector.

This article provides a brief introduction to the legal context in which due diligence exercises are carried out, a summary of the principal sources of information that are available to buyers of Luxembourg companies and an overview of some of the issues that frequently arise.

Why Carry Out Due Diligence?

Shaping the deal structure

The results of the due diligence exercise will shape the deal structure and its terms. On a share deal and in the case of a merger, demerger or other form of universal transfer of assets, all of the liabilities and risks in the target will transfer. A buyer may be reluctant to entertain such a deal, or may require a reduction in price, in the event that the due diligence exercise unveils significant or potentially significant liabilities or risks. A pre-closing reorganisation or carve-out of out-of-scope assets and liabilities may be required. A sale of specific assets may be preferable.

Limited protection from the general law

In our experience an increasing number of sale and purchase agreements ("SPAs") relating to Luxembourg target companies are governed by Luxembourg law. Luxembourg law is sometimes seen as the neutral choice between buyers and sellers from different jurisdictions.

Under an SPA governed by Luxembourg law, absent fraud, breach of the general duty of good faith and other extreme circumstances, the buyer will obtain very little automatic protection from the general law. That protection is likely to be limited to the existence of the shares and the ability to use them for the purpose for which they were acquired (i.e. the ability to exercise the economic and voting rights which are attached to them), and is unlikely to extend to the quality or value of the target company itself. On a sale of assets, the Luxembourg civil code may offer more protection depending on the nature of the assets and, potentially, the nature of the contracting parties.

In the event that the SPA is governed by English law, the general principle is one of caveat emptor or "buyer beware". In other words, the buyer will be responsible for assessing the nature and value of what it is acquiring.

A combination of effective due diligence and targeted buy-side protection under the SPA is essential.

Varying levels of protection under the SPA

"Market practice" as it applies to the terms of an SPA governing the sale of a Luxembourg target...