Introduction to Luxembourg
Ideally situated at the crossroads between Belgium, France and Germany, Luxembourg is a country that, although small in geographical size, enjoys unparalleled stability and figures among the world’s wealthiest nations by GDP per capita. It is also a founding member of a number of major international organisations (e.g. the European Union, the OECD, the United Nations, the OSCE and the WTO), and home to some of the EU’s most important institutions, including the European Investment Bank and the European Court of Justice.
Luxembourg’s financial centre encompasses approximately 130 banks, as well as 88 insurance and 216 reinsurance companies. Originally a private banking centre, it has now become the second largest investment fund centre in the world, supported by a business-friendly legal and regulatory framework modernised through continuous reform.
Thanks to its central location in Western Europe, highly-skilled international workforce, stable political environment, easy access to government bodies and reputation as a high-calibre gateway to Europe, Luxembourg is the destination of choice for multinational companies for their European headquarters. The country’s globalised economy also attracts emerging sector players active in the high-tech and e-commerce industries; today, 8 out of 10 of Luxembourg’s largest employers are non-financial companies, which stand to benefit just as richly from the pan-European access it offers.
Level of activity, recent trends and developments in the fields of Corporate and M&A
Recent years in Luxembourg have been marked by a high degree of stability with relatively consistent growth rates (although growth did decline from 3.1% to 2.3% in 2019 compared to 2018 ). For 2020, economists expect negative growth of −4.5% because of the COVID-19 pandemic. However, the government hopes to see a robust recovery from this recession, with potential GDP growth of 4% in 2021.
Luxembourg has a strong international orientation, with an active M&A market across many sectors – albeit there was a slowdown in the first half of the year 2020, brought on by the uncertainty around Brexit and the pandemic-fuelled fears among investors.
Late 2020 saw a rally in the overall level of business activity in Private Equity structuring, as well as local and international Venture Capital acquisitions and M&A transactions, especially in attractive sectors such as health and digitalisation-related businesses (despite an observable dip in large-scale transactions). This upward trend is predicted to strengthen in 2021: the rapid development and delivery of the first vaccines, expected to increase confidence in the future of businesses, and the considerable dry powder that has accumulated over the last years could reasonably provide the necessary substance for larger M&A transactions.
The growing maturity of Luxembourg’s domestic market has also meant that more and more locally-based players in the financial, industrial and services sectors are at the root of M&A transactions, resulting in an interesting trend for the ecosystem of Luxembourg-based service providers that assist with such transactions.
In addition, the prevailing trend of consolidation in the wider financial sector, spanning the asset management, private banking and insurance sectors, has seen its momentum maintained with the entry into the market of a wave of new players that have chosen Luxembourg as their European base. One especially pronounced trend in recent months has been the ongoing consolidation in the field of regulated third-party management companies (ManCos) and alternative investment fund managers (AIFMs), as well as funds and corporate service providers serving the asset management industry, towards a number of diverse goals (rolling out Brexit strategies, improving economies of scale, developing and diversifying their business or, on the opposite tack, implementing large-scale business restructuring in response to the regulatory environment).
Last but not least, M&A business in the 2020s (in Luxembourg, but also more generally) has so far been marked by a revival in acquisitions carried out by special-purpose acquisition companies (SPACs) in the midst of the health emergency. More than 240 SPACs were created worldwide last year; 4 times the number launched in 2019. Several transactions involving SPACs with European targets took place in Luxembourg in 2020. Luxembourg has also established itself as one of the locations in the EU which allows for the SPAC terms to be replicated with a Luxembourg corporate vehicle, be it listed in the EU or outside the EU. These publicly traded vehicles, destined solely for the purpose of effecting mergers with privately held businesses, give the takeover target the opportunity of a listing without having to stage an initial public offering, and are particularly favoured by players wishing to enter the EU market by acquiring established EU-based actors. The SPAC boom reflects the appetite for relatively easy, efficient means of entering new markets in times of political, economic and social uncertainty, and may be yet another sign of the expected surge in M&A activity in 2021 (followed by a predicted reversion to more traditional ways of going public once the health situation has normalised).
Current economic and legal conditions affecting clients and the legal profession
The rather encouraging picture of M&A activity described above must nonetheless be considered in light of the exceptional nature of the events of the past year, and the equally exceptional volume of state aid and financial support packages most countries have found themselves turning to. These measures have provided immediate liquidity support, facilitated access to bank financing and employment maintenance support, delayed tax deadlines for payments and social security contributions, and increased legal protection for businesses and individuals. Luxembourg is no exception to this.
This subsidising of the economy has greatly influenced how businesses have been run over the last year. Unlike for smaller and purely domestic companies, the anticipated wave of insolvency proceedings has yet to hit Luxembourg’s internationally-connected and widely-scattered clientele with as much weight as feared – but its impact could become more keenly felt in 2021 as a consequence of lasting pandemic conditions and the expected decrease in public aid.
What has emerged in 2020, however, is a palpable need for corporate restructuring or refinancing, whether for domestic businesses or indirectly for international players whose organisations contain a Luxembourg component.
Against this backdrop, an extensive reform of Luxembourg insolvency law has been in the works, i.e. the draft bill no.6539 on business preservation and the modernisation of bankruptcy law (the “Draft Bill”) and the parliamentary gears have been turning on this reform since that time, with the final stage expected to be attained in the course of 2021. Among other changes, the Draft Bill will have to implement Directive (EU) 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase efficiency of restructuring, insolvency and discharge of debt (the “Restructuring Directive”), to help ensure that entrepreneurs and companies in financial difficulty can seek support at an early stage. The overall goal is to give debtors access to a preventive and flexible restructuring framework, within which they can restructure their business to prevent insolvency, and thus to promote a culture of second chances for failed entrepreneurs.
And yet the past year has not only been challenging for businesses from an economic point of view. Corporate culture also underwent a set of upheavals, with the sudden switch to fully remote working in the services sector, the need to reinvent the client relationship for the virtual realm, and the fact that key moments in a company’s lifecycle (annual general meetings and other corporate body gatherings) have now had to be achieved without the members’ being able to attend in person.
This has created significant legal, technical, organisational and governance challenges that businesses have had to face, which in turn has benefited the most innovative, comprehensive and integrated legal and business service providers; those that are able to help their clients to adapt to the ‘new normal’. The Luxembourg government had anticipated the broader trend in this direction, having launched its Digital Luxembourg initiative in 2014 aimed at transforming the world of work within a context of accelerated digitalisation of the business lifecycle (underscored by the entry into force of the EU Digitalisation Directive to be implemented in July 2021). But the paramount importance of digitalisation for the resilience of companies, a reality large organisations have more or less nimbly embraced, must not obscure the equally real difficulties encountered by small and medium-sized businesses in transforming their business models – especially those which focus on face-to-face activities such as restaurants, hotels, event management, tour operators, retail stores, etc.
Looking forward: challenges and opportunities for the future
Independently of the health emergency and the accompanying economic backdrop, the international business environment in Luxembourg – as in other European countries – is affected by increased regulatory constraints under measures such as the GDPR, AML or Market Abuse Regulation (MAR), substance requirements, DAC 6, ATAD I and II, and OECD Transfer Pricing Guidelines, all of which impact the management and business lifecycle of companies. This has led clients to initiate strategic planning to strengthen their presence in Luxembourg or reorganise their business to improve margins and distinguish between core and non-core activities. This, in turn, will increase the need for companies either to digitalise their business, or to outsource parts of it. Both options will create new opportunities for local service providers able to go beyond pure legal and advisory services.
Another source of uncertainty to be accommodated is the “deal” struck in the context of Brexit: this may have the potential to disrupt businesses in Luxembourg and elsewhere in Europe, as certain aspects have been excluded from the negotiations, such as financial services. Conflicts and differences of interpretation at Member State level could arise. However, the highly regulated financial sector has gone some way to preparing itself for a worst-case Brexit scenario, and may thus have set the necessary conditions to efficiently face the post-Brexit era.
In view of the above and as a more general observation, the main differences of the current situation to the aftermath of the 2008 financial crisis (the implosion of a system that had reached its limits and left everyone holding the bag) will be the appetite of citizens to consume again and businesses to invest again in the context of a stable financial sector following a period of high economic and market volatility and unpredictability. To understand this is fundamental to economic recovery, even while the health crisis and its consequences are still far from over.
Meanwhile, the challenges for companies remain manifold and of unparalleled scope. On top of having upended the way they do business, the current crisis has been especially disruptive to the core corporate governance methods of companies. They will need to proactively refurbish their internal rules, procedures, strategies, and corporate values if they are to demonstrate adequate resilience for the future, and attractiveness to clients and investors.