On 6 April 2013 Luxembourg enacted a new law concerning dematerialised securities and amending a number of existing Luxembourg laws (the "New Law"). The New Law was published in the Mémorial A (the Luxembourg Official Gazette) N° 71 on 15 April 2013.

With the coming into force of this New Law, Luxembourg companies will now have the option of issuing debt or equity securities in dematerialised form while foreign companies will have the same option, but only for debt securities which are governed by Luxembourg law. The possibility to issue debt and equity securities in bearer and registered form remains. Unlike similar legislation in other jurisdictions, the New Law is not drafted so as to result in the eventual abolition of bearer securities.

Below, we take a closer look at some of the specific provisions of the New Law as well some of the important changes it will introduce to existing Luxembourg laws.

1. ISSUANCE OF DEMATERIALISED SECURITIES

1.1. Necessary steps for the issuance of dematerialised equity securities

Prior to issuing dematerialised equity securities, an issuer must:

  • amend its articles of incorporation or the management regulations of the issuer, as applicable, to provide for the issuance of dematerialised securities.
  • take the necessary steps to ensure the entire issue of dematerialised securities of the same kind are recorded with a single clearing house (l'organisme de liquidation) or single central securities depository (le teneur de compte central), and
  • publish in a national newspaper and on its website (if it has one), the name and address of the chosen clearing house or central securities depository.

Each issuer who is registered with the Luxembourg Trade and Companies Register (Registre de Commerce et des Sociétés de Luxembourg) must file an extract for the purposes of publication in the Mémorial, Recueil des Sociétés et Associations which indicates the name and address of the clearing house or central securities depository.

1.2. Necessary steps for the issuance of dematerialised debt securities

Each issuer who wishes to issue dematerialised debt securities must take the necessary steps to ensure the entire issue of dematerialised securities of the same kind are recorded with a single clearing house or single central securities depository.

2. CONVERSION INTO DEMATERIALISED SECURITIES

2.1. Necessary steps for the conversion of dematerialised securities

An issuer who wishes to convert equity securities that it has issued into dematerialised securities must amend its articles of incorporation or management regulations in order to set out:

  • the right of the issuer to issue dematerialised securities;
  • the securities which shall be subject to the conversion;
  • the mandatory or optional nature of the conversion;
  • the conversion procedure; and
  • if the conversion is mandatory, the conversion period and the penalties for non-submission of the securities for dematerialisation within the conversion period (which may not be less than two years).

Such issuer must also take the necessary steps to ensure the entire issue of dematerialised securities of the same kind are recorded with a single clearing house or single central securities depository.

2.2. Conversion Process

2.2.1. Conversion of bearer securities

Bearer securities, which are in the physical possession of the holder, shall be converted upon presentation for inscription in a securities account (le compte-titres) held with a securities depository (le teneur de compte), a central securities depository or a clearing house. They must eventually be deposed with the clearing house or central securities depository which holds the issuing account (le compte) who shall, unless otherwise agreed, forward them to the issuer. The bearer securities will thereafter be destroyed.

2.2.2. Conversion of registered securities

Registered securities are converted via inscription in the securities account which is in the name of their owner. The owner recorded in the register of registered securities must provide the issuer with the necessary information regarding its securities depository or foreign securities depository (le teneur de comptes étranger), as the case may be, and of its securities account, to allow for the securities to be credited to it. This information shall be transmitted to the clearing house or central securities depository who will adjust its issuing account and transfer the securities to the relevant securities depository. The issuer must adapt its register of registered securities as a consequence.

2.2.3. Conversion of securities which circulate by account to account transfer

Securities which are held with a securities depository, a central securities depository or a clearing house, and which are transmitted by transfer from one account to another, may no longer, from the moment the decision to convert is published in the Mémorial until three months from such date, be delivered other than in dematerialised form.

2.3. Implications of not presenting securities in the cases of compulsory dematerialisation

2.3.1. Voting rights

The voting rights attached to securities which are subject to mandatory conversion but which have not been dematerialised within the set conversion period, shall be automatically suspended from the end of such conversion period until they are dematerialised. The holders of such securities shall not be admitted to general meetings nor shall they be considered for the purposes of calculating quorum or majorities during general meetings.

2.3.2. Distributions

Any distributions on the securities which are subject to mandatory conversion but which have not been dematerialised within the set conversion period, shall be automatically suspended (on the condition that such rights of distribution are not time-barred) from the end of such conversion period until they are dematerialised. There shall be no obligation to pay interest on these suspended distributions.

2.3.3. Forced conversion

Securities which are subject to mandatory conversion but which have not been converted within two years of the general meeting deciding upon such mandatory conversion, may be converted by the issuer into dematerialised securities and inscribed by the issuer in a securities account in its own name. The securities shall remain in the name of the issuer (and the costs for opening and maintaining the account shall be borne by the issuer) until such time as the owner presents himself and secures the inscription in his name. Inscription in the name of the issuer does not confer ownership rights on the issuer. However the suspension of voting and distribution rights outlined above will apply until such time as the securities are issued in the name of the issuer.

The articles of incorporation/management regulations/issue terms may provide that securities which are subject to mandatory conversion but which have not been converted within a stated time limit, which cannot be less than eight years from the date of the general meeting deciding upon their mandatory conversion, can be offered for sale by the issuer through a three-month notice to be published in the same way as a convening notice to a general meeting of holders of securities. The available methods of sale are set down in the New Law and depend on the type of security involved (whether they are listed securities, units in undertakings for collective investment or other securities) and whether or not pre-emption rights apply.

2.4. Impact of conversion into dematerialised securities in cases where there is a pledge over such securities

Luxembourg law governed pledges over registered or bearer securities which are subject to a conversion, remain valid and continue to have full effect without further formalities. The continued dispossession of the securities in question is realised as against third parties by inscription in the securities account.

When the pledged securities are recorded in a securities account opened in the name of the pledgor, the third party holder must be informed in writing of the existence of the pledge at the time of inscription of the pledged securities in the account.

When the securities which form the basis of the pledge are submitted to mandatory dematerialisation, the pledgor and the pledgee agree which of them will proceed with the dematerialisation before the end of the conversion period. In the absence of any agreement or despite the existence of an agreement the pledgor fails to proceed with the dematerialisation within the conversion period, the pledgor may proceed with the conversion himself (with the pledgor lending all necessary assistance).

3. TRANSFER OF DEMATERIALISED SECURITIES

Dematerialised securities circulate by account-to-account transfer. The law of 1 August 2001 on the circulation of securities, as amended, applies to dematerialised securities except to the extent that the New Law derogates therefrom.

4. THE ISSUER

4.1. Exercise of rights against the Issuer

In order for the account holders (les titulaires de compte) to exercise the rights attaching to their dematerialised securities against the issuer or third parties, the securities depository/foreign securities depositary, as the case may be, may (upon satisfaction of certain conditions) issue certificates to the account holders.

4.2. Distributions

Payment by an issuer of distributions on dematerialised securities, to the clearing house or central securities depository shall be sufficient discharge of the issuer's payment obligation.

Likewise, the clearing house or central securities depository shall be discharged from their payment obligation with respect to distributions when they make such payments on their books to the accounts of the relevant account holders.

5. CLEARING HOUSES AND CENTRAL SECURITIES DEPOSITORIES

  • The Commission de Surveillance du Secteur Financier (the "CSSF", being the Luxembourg financial sector supervisory authority) may establish specific accounting rules to be complied with by securities depositories, central securities depositories and clearing houses, in respect of dematerialised securities.
  • No issuing account may be seized or blocked in any way by an account holder, counterparty or third party (other than the clearing house or the central securities depository) and the securities in an issuing cannot not be included in the collective assets in the event of liquidation proceedings.
  • Securities depositories shall keep the dematerialised securities which they hold on their own behalf or on behalf of third parties, on securities accounts opened with a clearing house or central securities depository or with one or more institutions which act for them, directly or directly, as intermediaries between the securities depositories and the clearing house/central securities depository.

6. AMENDMENTS TO EXISTING LAWS

The New Law will have the effect of amending a number of existing Luxembourg laws, namely:

  • the law of 5 April 1993 relating to the financial sector, as amended (the "1993 Law");
  • the law of 10 August 1915 concerning commercial companies, as amended (the "1915 Law");
  • the law of 3 September 1996 concerning the involuntary dispossession of securities, as amended;
  • the law of 1 August 2001 concerning the circulation of securities and other fungible instruments, as amended, which pursuant to the New Law is now entitled the law of 1 August 2001 concerning the circulation of securities, as amended (the "2001 Law");
  • the law of 20 December 2002 on undertakings for collective investment, as amended;
  • the law of 17 December 2010 concerning undertakings for collective investment;
  • the law of 13 February 2007 concerning specialise investment funds, as amended, and
  • the law of 22 March 2004 concerning securitisation, as amended;

Herebelow, we shall outline some of the more substantial amendments to the aforementioned laws.

6.1. Amendments to the 1993 Law

The New Law amends the 1993 Law to introduce the central securities depository as a new category of professional of the financial sector. The new provisions of the 1993 Law provide that only Luxembourg credit institutions or investments firms, or Luxembourg branches of credit institutions or investments firms which are authorised in another Member State, may obtain approval as a central securities depository. The amendments to the 1993 Law set down additional conditions for approval and detail the actual authorisation procedure.

6.2. Amendments to the 1915 Law

As the 1915 Law has, to date, governed the ownership of equity and debt securities issued in bearer or registered form, a number of the provisions have been amended so as to cover securities issued in dematerialised form.

Some particular changes to note:

  • the register of registered shares of the company must mention any conversion of registered shares into dematerialised shares;
  • owners of shares or dematerialised securities may attend general meetings and exercise their votes only if they own such shares or dematerialised securities at the latest, by midnight Luxembourg time, on the 14th day preceding the meeting, and,
  • collective bond securities in the form of global certificates, deposed with a securities settlement system (un système de règlement des opérations) may be signed by one or more authorised persons of the issuer.

6.3. Amendments to the 2001 Law

The New Law modernises substantially the 2001 Law by effectively redrafting completely Sections 1 to 5 of that law, aligning it with the Unidroit Convention on substantive rules for intermediated securities signed in Geneva on 9 October 2009 and with the expected EU legislation on harmonisation of securities law throughout the EU.

The amended 2001 Law also lends greater protection of securities' holders' rights who hold their securities with a securities settlement system, a clearing house, a central securities depository or a securities depository. An example of such greater protection afforded by the New Law, is, in the case of liquidation proceedings of the securities depository, the affected holders will immediately acquire rights to the securities that have been credited to the securities account of the securities depository, even before such securities are credited to the relevant holder's own account.

CONCLUSION

The New Law has brought about a much needed modernisation of Luxembourg securities law.

Whilst introducing a new legal framework for dematerialised securities, the existing techniques of issuing and holding securities have not been affected, thus providing issuers and investors with wider choice and greater flexibility than before.

However, as the European Central Bank pointed out in January 2012 in its opinion on the draft New Law, the harmonisation of securities laws across the EU is on-going and Luxembourg authorities will need to keep abreast of new developments in this area, in particular with regard to the possible introduction of mandatory book entry form for transferable securities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.