Monique Bachner, Bachner Legal
mbachner@bachnerlegal.com
With thanks for presenting to:
Brigitte Pochon, Pochon Lawyers & Associates
brigitte.pochon@pla.lu
Legal Framework for
Corporate Governance in
Luxembourg
Female Board Pool, Luxembourg
22 January 2013
1
Outline
• Definitions
• International & EU Framework
• Luxembourg sources
• Board composition
• Functioning of Luxembourg Boards
• Director responsibilities and duties
• Managing liabilities
• Looking to the future
• ILA – The Luxembourg Institute of Directors
2
Corporate governance –
Definition
• Governance
Derives from the Greek verb κυβερνάω [kubernáo] which means “to steer”.
• Corporate governance
1) Multi-faceted - no single definition: Complex web of relationships.
The way companies organize relationships with stakeholders through their management and their
board of directors, in order to provide structures through which Company objectives are set (and
monitored).
The manner in which a Board directs, administers and controls an organization, with a view to
achieving long-term strategic goals for its shareholders and stakeholders and ensure compliance with
legal, regulatory and environmental requirements.
2) Modern corporate governance - only since late 1970s:
Macroeconomics - positive effect of corporate governance on different stakeholders ultimately is a
strengthened economy, and hence a tool for socio-economic development,
Microeconomics - corporate governance positively affects some key performance indicators (such
as medium-term financial performance and growth in market cap).
3
Corporate governance –
Why it matters
• Modern organisations - separation of ownership and control:
The Principal/Agent DILEMNA
• Principals (shareholders and other stakeholders) delegate decision rights to the
management to act in the principal's best interests.
• Separation of ownership from control implies a loss of effective control by
shareholders over managerial decisions => system of corporate governance controls is
implemented to attempt to align the incentives of managers with those of shareholders.
• Governance measures aim to ensure a healthy board culture which safeguards policies
and processes PLUS Accountability to reduce conflicts inherent to Principal/Agent
relationship:
•
•
•
•
Ensure needs of stakeholders being served
Internal and External controls (transparency and the information gap)
Ethics and morality - often a moral contract
Internal (processes) vs External governance (shareholder activism): lapse in external
oversight in large organisations (easier to sell shares)
4
Corporate Governance –
The international framework
• International Bodies - General Guidelines
 UN “Ten Compact Principles” - www.unglobalcompact.org
ethics - human rights, labor standards, environment, anti-corruption,...)
 OECD Principles on Corporate governance
(rights & duties of shareholders, board responsibility, disclosure & transparency)
 IOSCO reports – various (since 2005)
 Worldwide now over 120 corporate governance codes http://www.ecgi.org/codes/all_codes.php
Stock Exchanges => “comply or explain”, principles vs rules
• European Union: Guidelines, Directives, green papers...
 Guidelines : Winter Report (2002), independent directors (2004),
remuneration listed companies (2004 & 2009),
remuneration policy in financial sector (2009, also CSSF Circular), …..
 EU Directives: e.g. Prospectus Directive, MiFID, UCITS Directives, company law updates
 Green Papers & consultations:
• 2010 Green Paper on corporate governance in financial institutions & remuneration
• 2011 new Green Paper “The EU Corporate governance framework”
=> 12 12 2012 EU Corporate Governance Action Plan
• 2012 Consultation on Gender Imbalance in Corporate Boards in the EU (cf quota threat)
=> Nov 2012 – limited quota 40 % of non-executive seats /only publicly traded on regulated
markets
 UK initiatives important e.g. UK Corporate Governance Code, UK Stewardship Code, Walker
Report, FSA, Lord Davies report
• Corporate Codes
• Issued by corporations themselves (on individual or group-wide basis)
5
Luxembourg sources of corporate
governance
• Primary Luxembourg sources
 Company law: Law on Commercial companies of 15 August 1915 (as amended) (“LSC”)
• 2011 Law on shareholders rights in listed companies (transposing EC 2007/36/EC)
• Bill No.5730 modernising the LSC
 Code Civil e.g. agency rules (“mandat”), liability
 Code de Commerce
 CSSF circulars (regulated entities)
e.g. CSSF Circular 10/437 regarding remuneration in the financial sector (cf variable remuneration)
 Listed entities: - Ten Principles of the Luxembourg Stock Exchange (“LuxSE”),
- Rules & Regulations of LuxSE
- Prospectus, Transparency & Market Abuse Laws, CSSF Circulars, etc…
 Sector specific laws and regulations, guidelines and/or practices
e.g. MiFID Law, UCITS Laws, ALFI Code of Conduct (Investment funds - 8 principles)
 The company’s Articles (“statuts”)
 “Prises de position” by industry bodies – e.g. 2011 ILA statement regarding Board Diversity
 Useful websites: cssf.lu, bourse.lu (publications), law & accountancy firms websites, Légilux, rcsl.lu, ila.lu
• Luxembourg has strict confidentiality laws
 Particularly in the financial sector, but also set out in the 1915 Companies Law.
 Directors must take care to ensure that no information received is divulged to third parties or used for any
other purposes.
 Care must be taken with professional confidentiality that certain items are not sent abroad.
e.g. if there is a copy of the shareholders register to view at a Board meeting, its contents should not be
detailed in the Board minute.
6
Directors in Luxembourg –
Board Composition
•
No specific qualifications for directors of Luxembourg companies.
 certain persons may be excluded e.g. if banned by CSSF or following a previous bankruptcy
 CSSF pre-approval (regulated entities): to assess whether sufficiently good repute and sufficient
experience
•
No need to be Luxembourg resident
 although sometimes desirable for other reasons (e.g. regulatory, substance, etc.)
 the majority of Board meetings tend to be held in Luxembourg
•
No legal requirement to appoint independent directors
 however trend towards appointing non-executive directors
(may be forced from EU in future for listed companies)
 definition: “independent “ (Listed Companies – LSE 10 Principles Rec.3.5/EU definition)
•
Boards should have a balanced composition in terms of expertise
 Listed companies – LSE‘s 10 Principles require appropriate representation of both genders and
account to be taken of the specific features of the company and its activities, and particularly the
various business lines of the company and their geographic diversity.
 Wort 15/2/2011
- 2% Luxembourg listed company Directors are female
- 7 of the 10 Luxx Companies have no female directors
(improved since: e.g. +1 at Foyer)
However, diversity is a lot more than gender alone…
7
Directors in Luxembourg –
Board Composition – Diversity (1)
• Boards are often criticised for having board members who are too
similar
≠simple surface level differences (www.ila.lu - Prof.Huse presentation June 2010)
 A certain level of disagreement and debate/conflict between Board members is good
(discussion)
• Davies Report (UK), February 2011
http://www.bis.gov.uk/assets/biscore/business-law/docs/w/11-745-women-on-boards.pdf
 Corporate boards perform better when they include the best people who come from a
range of perspectives and backgrounds.
The boardroom is where strategic decisions are made, governance applied and risk overseen.
It is therefore imperative that boards are made up of competent high caliber individuals who
together offer a mix of skills, experiences and background. Board appointments must always be
made on merit, with the best qualified person getting the job.
But given the long record of women achieving the highest qualifications and leadership
positions in many walks of life, the poor representation of women on boards, relative to their
male counterparts, has raised questions about whether board recruitment practice based on
skills, experience and performance.
This report presents practical recommendations to address this imbalance.
8
Directors in Luxembourg –
Board Composition – Diversity (2)
• Accessing the widest talent pool – by what other means?
 Compulsory for firms to adopt
disclosure? Comply or explain?
diversity
policies?
Annual
 Compulsory Board reviews – all aspects of diversity?
 Compulsory for headhunters to present diverse candidates,
including from both genders?
However in the past “soft” measures have failed…
Is the pace good enough? is it speeding up?
EU quota => only non-execs / only main listed Co’s (not many impacted)
9
Directors in Luxembourg Functioning of the Board (1)
•
Appointment
 Board proposes new Director candidates,
 Shareholders in general meeting elect (or reject) directors (LSC a.51)
 Exception = cooptation until next shareholder meeting
 Maximum 6 year terms (renewable),
 Best practice is annual re-election, with each Director elected separately (no bundling),
 Appointment letters are not standard in Luxembourg, however are useful to clarify
issues such as remuneration, insurance, term of appointment, rights after termination
(see ICSA examples),
 Shareholders also approve board remuneration (Board submits proposal).
•
Removal
 Can resign at any time, but should be careful not to do so where it could injure the
company,
 In most entities, can be removed at any time by a majority of shareholders.
10
Directors in Luxembourg Functioning of the Board (2)
•
Luxembourg Company Law enshrines the Principal-Agent Principle:
 LSC art.60 : “The day-to-day management of the business of the company and the power to
represent the company with respect thereto may be delegated to one or more directors, officers,
managers or other agents, who may but are not required to be shareholders, acting either alone
or jointly... ”
 The Board is generally entitled to do all things deemed necessary to achieve the corporate objects
except for those actions that have been expressly reserved by law or the Articles for decision by the
shareholders,
 The Articles may contain restrictions to this general delegation - Check them!
 Code Civil contains the general rules regulating execution of agency mandate (“mandat”).
• Board meetings – convening
 The Articles usually set out the basic rules regarding Board meetings (convening, voting majorities,
quorum, etc.)
 The Board should meet as often as is necessary to properly manage the business and exercise its powers
- this will differ with the specific needs of each business.
• Board Meetings - information provided
 “Board Packs”: Convening notices should include a formal Agenda and supporting Information (in a timely
manner & appropriate form/quality for review before the meeting, and appropriate discussion & approval at
the meeting).
 Each Director is entitled to receive copies of all information and documents transmitted to the Board
(whether related to a meeting or not).
11
Directors in Luxembourg Functioning of the Board (3)
• Board meetings - third parties attending
 A Board meeting is a private affair - a director may only invite a third party to attend a Board
meeting (i) for information and advisory purposes, and (ii) if all the directors present at that
meeting agree to this. The third party cannot vote and may only comment if invited to do so.
 It is usually thought acceptable for the Board, in the execution of its duties, to take independent
legal advice at the Company’s expense.
• Board meetings – participation, voting
 Articles usually set out the basic rules regarding Board meetings (convening notices, voting
majorities, quorum, etc.)
• LSC art.64(1):
– Board forms a collegiate body which shall deliberate in accordance with the Articles,….
– If Articles are silent on certain matters => ordinary rules for deliberating assemblies
• LSC art.64bis : default = quorum 50% of directors; vote: 50% of those present/represented
• Chairman has a casting vote (unless excluded by Articles)
 Articles usually allow directors to participate by proxy, telephone or videoconference (LSC a.67(3)
+ must check the Articles):
•
If proxies are allowed for director meetings, they can only be given to another Director (nb:
shareholder meetings usually can give proxy to anyone you wish),
•
Still best to participate in person where possible => different level of interaction and participation.
12
Directors in Luxembourg Functioning of the Board (4)
• Board meetings - conflicts of interest
 The 1915 Companies Law states that Directors cannot vote on decisions where they have an “opposing
interest” to that of the Company unless these are in the ordinary course of business.
 Generally, a Director will still be able to vote on decisions taken in the ordinary course of business and
under normal conditions. The Articles of the Company should be checked in relation to the type of decision
to be made.
 In cases where there is a material opposing interest, the Director in question normally must:
(1) inform the Board;
(2) ensure the conflict is mentioned in the minutes;
(3) be excluded from voting, and
(4) inform the next meeting of shareholders of the nature of the conflict before any other business is
voted.
 Best Practice is for Directors being in a conflict situation to abstain from participating in the relevant
discussion and decision.
 Extremely important to actively manage conflicts of interest
• Board Meetings - Board committees
 Sub-committees are possible to deliberate on specific ad hoc issues
•
•
= simply sub-sets of the Board (idea = better efficiency)
the Board as a whole still remains ultimately responsible for any decision taken
13
Directors in Luxembourg –
Functioning of the Board (5)
• Board meetings - Minutes of Meetings
 Always take and keep Minutes
 should be circulated to all present and commented on before signing
 Best practice = deal with each issue/item in separate points (no bundling)
• Company Secretary?
 valuable resource for staying up-to-date and well-informed
 no legal requirement, other employees or service providers may fulfil this coordination role
 a company secretary can, however, provide invaluable assistance to coordinate the preparation for
Board meetings, the running of the meetings, follow-up after meetings and updating Directors where
legal, regulatory or internal changes have taken place.
• Powers of Directors to bind the company
 e.g. sign contracts, take steps to complete asset sale, etc.
 general position = Board is a collegial body, powers lie collectively with the Board as a whole acting at
duly convened meetings of the Board,
 Articles - usually set out specific signature and representation powers of each Directors (e.g. 2 Directors
may sign together). Check the Articles of association of the company.
• Powers of others to bind the Company
 Board may decide to grant a proxy (or “power of attorney”) to one or more Directors or third parties for
certain activities,
 Keep track of such delegations. Good idea to have some delegation guidelines in place,
 Ultimately Directors remain responsible for the actions taken in the Company’s name pursuant to a
delegation Need to supervise delegates e.g. ensure regular reporting from them.
14
Directors in Luxembourg –
Responsibility : Directors duties (1)
• Shareholders elect the Board of Directors as a collegiate body
 To manage the affairs of the company (until their replacement)
• Strategy: must consider the business to be pursued
• Decisions : must take management decisions and appropriate steps to implement such
decisions
• Duty to supervise persons to whom the day-to-day management has been delegate
 To manage the company in its best corporate interests and to fulfil its
objects (as set out in its Articles):
• Company’s corporate interest may not always be same as shareholder(s) interest(s)
• Shareholder interests as a whole may generally be taken into account along with other
stakeholder functions
Directors must devote necessary time and attention to allow proper discharge of their
functions.
15
Directors in Luxembourg –
Responsibility : Directors duties (2)
• Specific duties include, for example:
 Preparing annual accounts and submitting to shareholders
 Convening shareholder meetings at request e.g. 10% shareholders / as needed / date in Articles
(LSC a.70)
 Reporting to shareholders (e.g. on conflicts of interest)
 If day-to-day management delegated to a director, disclose total remuneration paid to that director
• Listed companies
 Market Abuse Law => insider knowledge of price sensitive information. Dir./Mgt dealings in own
shares.
 Transparency Law => on-going disclosure obligations e.g. accounts, major shareholdings
(thresholds)
 Prospectus Law => where securities offered to public, or admitted on a regulated exchange
 Chairman => to ensure procedures for Board meetings are correctly applied
 Financial Services => additional organisational and internal control requirements e.g. MiFID,
UCITS, etc…
16
Directors in Luxembourg –
Responsibility : Liability (1)
• Directors are ultimately responsible for their actions & omissions
Directors face several main types of liability, for example:
(1) Mismanagement – Individual contractual liability to the company (only cf shareholders)
(LSC art.59, al.1)
(2) Breaches of Companies Law or Articles - Joint liability to the Company (contractual) or third
parties (tort) (LSC art.59, al.2)
(3) Individual liability of a director who commits a fault that causes a loss to the company or a
third party (C.Civ a.1382)
• Many (but not all) offences are judged in relation to reasonableness
 Director must act as a normally prudent & diligent person in the same position would.
 NOTE: Certain breaches of the 1915 Companies Law may also incur criminal liability for
Directors (LSC art. 162 to 173). Although most often these are limited to fraudulent acts on
the part of the Directors, not always ... e.g. not filing accounts within the statutory deadline!
 May be banned from serving as a director in future (Code de Commerce / CSSF).
17
Directors in Luxembourg –
Responsibility : Liability (2)
• Many other possible sources of responsibility / liability
Liability could arise from breaches of any type of law or regulation e.g:
- Accounting rules
- Employment law
- Criminal law
- CSSF circulars
- Insolvency regulations
- Civil responsibility
- Planning regulations
- Health and safety
- Environmental regulations
• Criminal liability of legal entities
Crimes and misdemeanours (délits) by representatives (concurrent liability with those persons)
18
Directors in Luxembourg –
Managing Liability (1)
• Annual discharge
 Following approval of annual accounts, shareholders may vote to grant
discharge to the directors:
• Discharge only covers items appropriately disclosed in annual report &
accounts,
• Discharge only v-à-v shareholders (does not cover liabilities towards third
parties)
• Indemnities
 check indemnification provisions in Articles and other documents.
• Time limits for claims (prescription)
 Code Civil = generally 30 years (C.Civ. art.2262)
 Company Law = generally 5 years (LSC art.157)
 Some time limits only start when facts discovered e.g. Fraud
19
Directors in Luxembourg –
Managing Liability (2)
• Directors & Officers Insurance (“D&O”)
 Never accept a Director mandate unless also insured by the Company.
 Policy - demand a copy of the policy & check each year that it is up-to-date & renewed.
 Negotiate - review the policy in detail for coverage retentions, significant exclusions etc.
 Exclusions – be aware of the exclusions.
• May only cover defense costs (not damages, fines or penalties).
• Geographical exclusions (esp. USA).
 Aggregate – amount is usually an aggregate amount for all the Directors each year,
• If disagreement between them and each Director appoints own lawyers, may erode quickly
• If Group cover –the aggregate may also be eaten up by a big scandal elsewhere in the Group
 Group vs individual cover
• Company level cover will be easier to monitor & control,
• Group-level cover may be more cost effective (simply add entity to existing group policy)
 Resignation/removal
• Covered for claims arising after you have left?
• if leave on bad terms, may have difficulty getting access to the policies and other documents
• Avoid liability in the first place… act conscientiously and with integrity.
20
Corporate governance in Luxembourg Where to from here... (1)
• Enormous regulatory agenda (EU driven and very political)
 Will people still want to be directors?
=> greater director responsibility = greater potential director liabilities
 Currently difficult to keep up with all the regulatory developments
 Very politically driven e.g Director remuneration, AIFMD, quotas, ….
• Rules vs principles?
• How to be a “good” director?
 Be prepared. Be professional. Be conscientious.
• Not too many mandates – ensure sufficient time (although supervisory role, not daily management).
• Attend all meetings, and in person wherever possible (avoid phone, proxy).
• Be prepared - read and understand board packs before meetings.
• Be proactive e.g. request additional information if required – also between meetings.
• Be critical and question freely. Avoid “group think” & “rubberstamping”.
• Ensure appropriate risk management systems in place. Problems should be dealt with quickly &
proactively.
• Ethical & moral responsibility - do what is right.
21
Corporate governance in Luxembourg Where to from here... (2)

Remain as independent as possible
• Build a diverse portfolio => ability to walk away (maintain integrity & ability to criticise)
• Act in best interests of company (principal/agent : cf all shareholders not only major)
• Actively manage conflicts of interest
• Questions to ask before joining a Board
• Understand why have you been approached & what are you expected to contribute?
• What do they offer you?
• Due diligence - before you join
e.g. see ICSA guidance on joining the right board: due diligence for prospective
directors.
http://www.icsa.org.uk/assets/files/pdfs/guidance/Guidance%20Notes%202011/ICSA%20Guid
ance%20on%20joining%20the%20right%20board%20May%202011.pdf)
22
Institut Luxembourgeois des Administrateurs
(ILA)
•
Non-profit association - created in 2005
•
Creation coincided with growing awareness
of corporate governance in Europe and
adoption of the EU “Bolkenstein“ Plan for
Modernizing Company Law and Enhancing
Corporate Governance (following the
Enron&Parmalat scandals).
•
•
•
Mission : to foster :
• good practices,
• the development and the promotion of
the profession of directors.
“Institute“ : mission of research and
education.
Seminars and conferences organised by
ILA & ecoDa.
• Formal training programmes and
qualifications in conjunction with well
known providers (INSEAD, Uni.lu, IoD, etc.).
• ILA working groups - possibility to
contribute
• Exchange of board practices
• within industry sectors
• within board committee areas (audit
committees, remuneration
committees,...)
• Research - access to corporate governance
research.
• Updates and details of European
Commission governance initiatives.
• Cross-membership with other ecoDa
Institutes of Directors associations, (including
the UK IoD and French, Belgian, British,
Polish, Slovenian and Spanish).
• 2nd ranking defence cost D&O insurance
policy for all ILA members.
www.ila.lu