In recent years, co-investments have gained momentum in the private equity sector, driven by a growing appetite among investors to participate in potentially high-return deals by directly investing alongside established private equity firms (PE Firms) in their portfolio companies. This trend has been further fuelled by the current challenges facing PE Firms. Rising interest rates, which require larger equity contributions from PE Firms, combined with extended fundraising periods, have heightened the attractiveness of co-investment arrangements for both investors and sponsors.
In this context, it is crucial for PE Firms to preserve control over the decision-making power within their portfolio companies. Under Luxembourg law, the principle of “one share, one vote” applies. However, there are ways to bypass this principle and separate capital contributions from voting rights. Luxembourg law provides several tools for achieving this, which can be divided into two categories: structural and contractual tools.
Structural Tools
Structural tools relate to the nature of the instrument itself and depend on the legal form adopted by the portfolio company. The most common forms of commercial companies in Luxembourg are the Société Anonyme (SA) and the Société à Responsabilité Limitée (SARL).
An SA can issue non-voting shares, provided that their financial rights are clearly defined in the articles of association. There are no restrictions on the number of non-voting shares that can be issued, although under certain circumstances, non-voting shares may regain voting rights.
The capital of portfolio companies can also consist of different classes of shares, each with varying share premiums. Thus, a shareholder wishing to hold an equivalent number of shares in a class with a higher share premium would need to pay a higher subscription price.
Similarly, companies may issue shares with different nominal values. However, a distinction must be made between the SA and the SARL. In a SARL, although shares may have different nominal values, each share is still entitled to one vote. In an SA, voting rights are proportional to the nominal value of the shares. However, the articles of association may derogate from this rule, resulting in a similar outcome to that of a SARL, where shares with different nominal values may carry the same voting power.
Both SAs and SARLs can also issue beneficiary shares (parts bénéficiaires). These are not part of the share capital and allow for significant flexibility in defining their rights and obligations. As beneficiary shares are not technically shares, they do not inherently carry voting rights. Nonetheless, it could be possible to grant them a voting right or in the absence of any legal provision prohibiting it multiple voting rights.
Contractual Tools
Contractual tools require the implementation of contractual arrangements between the parties.
One typical example is voting agreements (conventions de vote), often included in shareholders’ agreements. These agreements govern how parties will exercise their voting rights in general meetings. Care must be taken when drafting such agreements to ensure their validity, as Luxembourg law imposes certain conditions for their validity.
Another widely used mechanism in Luxembourg is the ability for a shareholder to waive its voting rights, either for a set period or indefinitely. This allows, for instance, a co-investor to waive its right to vote at general meetings for the entire duration of the investment upon the PE Firm’s request. However, this waiver is personal to the shareholder, meaning that if the co-investor transfers its shares, the new shareholder will regain the voting rights.
Conclusion
The rise of co-investments adds complexity to deal structuring through Luxembourg-based holding platforms. However, Luxembourg offers a robust legal framework equipped to meet these new challenges, providing PE Firms with effective tools to maintain control over their portfolio companies while accommodating co-investment arrangements.