Insufficient Information Summary

Until 2006, the corporate governance framework in Luxembourg mainly consisted of the 1915 Law on Commercial Companies (as amended) and securities regulations. In April 2006, the Luxembourg Stock Exchange (LSEX) established the Ten Principles of Corporate Governance for listed companies, which entered into force on January 1, 2007. In 2009 these Principles were updated and a new version entered into force on October 1, 2009. These Principles are based on the comply-or-explain principle, and take into consideration the Organization for Economic Co-operation and Development’s (OECD) Principles of Corporate Governance. The LSEX is supervised by the authority responsible for the prudential supervision of credit institutions, the Commission for the Supervision of the Financial Sector (CSSF). On November 1, 2007, the Law on Markets of Financial Instruments was enacted to incorporate new provisions on transparency for shares and transaction reporting. The European Union Transparency Directive No. 2004/109/EC was also transposed into Luxembourg law on January 11, 2008 through the Law on Transparency Requirements, in which supervision of transparency requirements are transferred from the LSEX to the CSSF. However, there is insufficient information publicly available directly addressing Luxembourg's compliance with the OECD’s Principles of Corporate Governance.

General Overview

The legal framework for corporate governance in Luxembourg mainly consists of the 1915 Law on Commercial Companies (as amended), the 2008 Law on Transparency Requirements, and other securities laws and regulations. The draft bill No. 5730 is expected to largely update and amend the 1915 Law on Commercial Companies, previously amended in 2003, as an effort “to continue the process of modernization of Luxembourg corporate law and corporate governance rules,” according to a 2009 article written by Dirk Leermakers and Gerald Origer for the International Financial Law Review. In addition, the Luxembourg Stock Exchange (LSEX) established the Ten Principles of Corporate Governance for listed companies in April 2006 and issued them on January 1, 2007. The Ten Principles underwent a general revision in 2009 and the new version entered into force on October 1, 2009. These Principles are based on the concept of comply-or-explain and include requirements on the role and composition of the Boards of Directors, and relations with shareholders and investors, as noted in a 2006 report by the Luxembourg’s Bankers Association (Association des Banques et Banquiers Luxembourg, or ABBL). An article published on the LSEX’s website, “Investor protection and transparency: practical experience of the Luxembourg Stock Exchange,”notes that the Principles were developed taking into consideration the Organisation for Economic Co-operation and Development’s (OECD) Principles of Corporate Governance. On November 1, 2007, the European Union (EU) Directive No. 2004/39/EC on Markets in Financial Instruments was implemented into Luxembourg law to incorporate new provisions on transparency for shares and transaction reporting. The EU Transparency Directive No. 2004/109/EC was also transposed into Luxembourg legislation on January 11, 2008 through the Law on Transparency Requirements, in which supervision of transparency requirements are transferred from the LSEX to the Commission for the Supervision of the Financial Sector (CSSF), the supervisory authority for credit institutions. Other securities regulations which cover corporate governance in Luxembourg include the Grand-Ducal Regulations, the 1998 Law Creating a Supervision Commission of the Financial Sector, and the 1998 Law Concerning the Supervision of the Markets of Financial Assets (as amended).

According to information published on the CSSF’s website, it started its activities on January 1, 1999 under the authority of the Minister of Treasury and Budget. It is an independent agency, integrating the supervisory tasks of the Central Bank of Luxembourg (Banque Centrale du Luxembourg, or BCL) and the Exchanges Commission. The CSSF is responsible for the prudential supervision of credit institutions, including securities markets, banks, undertakings for collective investment, operators of payment or securities settlement systems, and pension funds. Regulatory work is the responsibility of the CSSF's internal committees, which include internal and external representatives. According to a 2002 study by the firm Weil, Gotshal & Manges LLP, the CSSF also deals with insider trading and declarations related to stock transactions and significant shareholdings in the capital of listed companies. Luxembourg has a small but active Stock Exchange, which specializes primarily in the issuance of international bonds (i.e. Eurobonds). On an international level, the LSEX remains the primary listing center for Global Depositary Receipts. Its main role, according to its website, is to organize markets by simultaneously ensuring investor protection. The LSEX entered into a cooperation agreement with NYSE Euronext in November 2000, as well as with the Brussels, Paris, and Amsterdam exchanges, which began operations in early 2001, as noted in a 2009 U.S. Department of Commerce’s Country Commercial Guide. According to data published on the website of the World Federation of Exchanges, as of end 2008, domestic market capitalization of LSEX was 66 billion U.S. dollars; with 262 companies listed on the stock exchange, consisting of 34 domestic companies and 228 foreign companies.

In October 2009, the Luxembourg Stock Exchange published the “Report on the Application of the Ten Principles of Corporate Governance during the 2008 Financial Year.” The report surveyed 24 Luxembourg companies listed on the regulated market of LSEX, based on an analysis of the public documents (i.e. annual reports, corporate governance chapters, corporate governance charters and websites) of these companies. The report concluded that “the listed Luxembourg companies have made efforts to improve observance of the Ten Principles compared to 2007” (p.31) and that “there has been a strong development of compliance with the Ten Principles since their publication” (p. 31). However, improvements are still needed especially regarding providing information on evaluation of board performance and on training and composition of board, and providing useful and timely information for shareholders.

As stated in the World Bank's 2009 report, "Doing Business 2010: Luxembourg," investor protection in Luxembourg is lower than the average achieved by member states of the OECD. The Investor Protection Index is a subcomponent of the World Bank's Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Luxembourg scores 6 in the disclosure index against an OECD average of 5.9. It scores 4 in the Director Liability Index against an OECD average of 5.0 and 3 in the Shareholder Suits Index against an OECD average of 6.6.

The Principles

IIPrinciple I: Ensuring the Basis for an Effective Corporate Governance Framework

As mentioned above, the legal framework for corporate governance in Luxembourg mainly consists of the 1915 Law on Commercial Companies (as amended), the 2008 Law on Transparency Requirements, and other securities laws and regulations. Similarly, the Draft Bill No. 5730 is expected to largely update and amend the 1915 Law on Commercial Companies, previously amended in 2003, as an effort “to continue the process of modernization of Luxembourg’s corporate law and corporate governance rules,” according to a 2009 article written by Dirk Leermakers and Gerald Origer. The Ten Principles of Corporate Governance underwent a general revision in 2009 and the new version entered into force on October 1st, 2009.These Principles are based on the concept of comply-or-explain and include requirements on the role and composition of the Boards of Directors, and relations with shareholders and investors, In addition, Luxembourg's capital market is governed by the relevant EU Directives. Other securities regulations which cover corporate governance in Luxembourg include the Grand-Ducal Regulations, the 1998 Law Creating a Commission for the Supervision of the Financial Sector, and the 1998 Law Concerning the Supervision of the Markets of Financial Assets (as amended). Despite the descriptive information provided above, neither report directly addresses Luxembourg's compliance with this principle.

IIPrinciple II: The Rights of Shareholders and Key Ownership Function

According to the 2002 Weil et al. report, shareholders have the right to convene or adjourn meetings, share in the profits, and appoint internal auditors, and are protected by anti-dilution provisions (i.e. preferential subscription rights). Per the same report, preference shares and cumulative-type shares are allowed under Luxembourg legislation. Under the LSEX's Ten Corporate Governance Principles, companies are required to respect the rights of their shareholders, as well as establish active communication with the shareholders. Following the Draft Bill No. 5730, “agreements between shareholders regarding the exercise of their voting rights will be expressly allowed insofar as they do not infringe the Law or the corporate interest of the company,” according to the 2009 article by Lermakers and Origer. However, the information provided above does not directly address Luxembourg's compliance with this principle.

IIPrinciple III: The Equitable Treatment of Shareholders

As reported in 2002 by Weil et al., Luxembourg's legislation secures "the right to extend the protection of minority shareholders by stipulating provisions in a company's articles of association" (p. 165). Furthermore, issuers of listed securities in Luxembourg are required to ensure the equitable treatment of all shareholders including minority and foreign shareholders. However, per the same report, minority shareholders have no formal rights on the distribution of dividends, or allocation of profits to the reserves. Furthermore, preference shares and cumulative type shares, which are permitted under Luxembourg law, could potentially be used as a way of depriving minority shareholders of their rights. As part of their 2002 study, Weil et al. recommended establishing "satisfactory exit provisions" (p. 182) for minority shareholders in the event that a party obtains majority control of the company. Under the LSEX's Ten Corporate Governance Principles, companies are required to respect the rights and equitable treatment of their shareholders, as well as establish active communication with the shareholders. Lermakers and Origer note in their 2009 article that the Draft Bill No. 5730 proposes the possibility for minority shareholders to “act in court, on behalf of the company, against the management.” Meanwhile, they also note that the draft bill intends to “introduce a right of control for minority shareholders representing at least 10 percent of the share capital or 10 percent of the voting rights of a company.” However, the information provided above does not directly address Luxembourg's compliance with this principle.

IIPrinciple IV: The Role of Stakeholders in Corporate Governance

There is insufficient information publicly available addressing Luxembourg's compliance with this Principle.

IIPrinciple V: Disclosure and Transparency

According to the 2002 Weil et al. report, shareholders have considerable rights on disclosure of information, including the right to access the company's share register at any time. Under the LSEX's Ten Corporate Governance Principles, companies are required to adopt a clear and transparent corporate governance framework and must provide adequate disclosure. Furthermore, it is the responsibility of the Board of Directors to protect the corporation by establishing strict rules in the areas of financial reporting, internal control, and risk management. The EU Directive No. 2004/39/EC on Markets in Financial Instruments was transposed into Luxembourg law on November 1, 2007, to incorporate new provisions on transparency for shares, and transaction reporting. The EU Transparency Directive No. 2004/109/EC was also implemented into Luxembourg legislation on January 11, 2008 through the Law on Transparency Requirements, in which supervision of transparency requirements are transferred from the LSEX to the CSSF. Nevertheless, the information provided above does not directly address Luxembourg's compliance with this principle.

As of 2005, according to the May 2007 update from the Deloitte & Touche IAS Plus website, companies in Luxembourg listed on an EU / European Economic Area stock exchange are required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU. Deloitte & Touche further note that IFRSs "will be introduced into the local Luxembourg commercial law as an alternative to the current Luxembourg accounting principles."

IIPrinciple VI: The Responsibilities of the Board

The traditional board system in Luxembourg is a one-tier board system (i.e. single board). Under the 1915 Law on Commercial Companies, as reported in 2002 by Weil et al., the Board of Directors "has the power to accomplish all the acts that are necessary or useful to realize the purpose of the company, except the acts that are reserved to the general meeting pursuant to the articles or statutory provisions" (p. 161). Supervisory responsibilities of the Board of Directors include appointing and dismissing senior managers, ensuring the company's compliance with applicable laws and regulations, and protecting the integrity of the corporation's accounting, auditing, and financial reporting systems. According to Lermakers and Origer in their 2009 article, the draft bill provides the possibility to set up executive committees, and “such committees already exist in a number of companies out of any legal framework.” The LSEX's Ten Corporate Governance Principles include requirements on the role and composition of the Boards of Directors, and apply to committees emanating from the management boards, such as audit, remuneration and nominating committees, as noted in the ABBL's 2006 report. However, the information provided above does not directly address Luxembourg's compliance with this principle.
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