LUXEMBOURG: An Introduction to Capital Markets
Capital Markets in the Grand Duchy of Luxembourg
The challenges faced by the markets today, notably higher-for-longer interest rates, call for greater consideration of financing through market-based solutions. More diversified financing in the form of debt and equity is particularly important for young, innovative companies without established revenue streams to scale up and realise their growth potential. Improving firms’ access to market-based sources of financing is a key objective of the Capital Markets Union (CMU) – the European Union’s (EU) plan to create a single market for capital. The new EU Commission has announced that strengthening and completing the CMU is one of its core priorities for the period from 2024 to 2029. The Grand Duchy of Luxembourg (Luxembourg) is the EU’s fourth-leading financial centre and ranks as the most globally integrated EU market. The country has a role to play in enabling companies to access international markets to finance their activities. Its comprehensive capital markets infrastructure, international expertise and robust yet flexible company laws are key draws for firms to structure their capital markets transactions in Luxembourg. Effective capital markets are also a prerequisite for the success of the Luxembourg sustainable finance agenda. In this respect, Luxembourg has been ranked as an emerging global contender and 8th among the world’s financial centres by the Global Green Finance Index 14 published in October 2024, which confirms its role as a hub for sustainable finance. Luxembourg is also home to the leading sustainable finance platform, the Luxembourg Green Exchange (LGX), listing half of the world’s green bonds.
Equity Markets Outlook
Equity markets around the world rebounded in 2024 as investors became more confident that central banks would be able to control inflation and reduce interest rates. The equity primary markets in the EU have seen an increase in initial public offerings (IPOs), with a total of 63 IPO deals completed on European stock exchanges over the first three quarters of 2024 and capital raising, reflecting an 87.2% increase (EUR11.7 billion) compared with the amount raised during the corresponding period in 2023 (EUR6.23 billion). It is worth noting that a Luxembourg company completed in October 2024 the fourth biggest IPO in Europe this year, which confirms the country’s role as a jurisdiction of choice for companies entering European equity markets.
Structure of Voting Rights
Flexibility for issuers to choose how to distribute voting rights in their company may influence their decision on whether to access public markets or not. The Luxembourg company law allows the creation of different classes of shares with or without voting rights. In order to provide issuers with even more flexibility, the EU institutions approved Directive (EU) 2024/2810 on multiple-vote share structures in companies that seek admission to trading of their shares on a multilateral trading facility, which was published on 14 November 2024. Multiple-vote share structures are a form of control-enhancing mechanism that enables controlling shareholders to raise capital from the public while retaining decision-making power in the company by holding shares of a class carrying more votes per share than another class. Currently, most of the EU member states, including Luxembourg, do not allow multiple-vote share structures. The scope of application of the Directive is limited to initial admission to trading of shares on multilateral trading facilities (MTFs) as defined in Directive (EU) 2014/65 (MiFID II), such as the Euro MTF market of the Luxembourg Stock Exchange (LuxSE). The Directive shall be transposed into national laws by 5 December 2026. It is estimated that the implementation of this Directive will further increase the number of IPOs in the EU. Moreover, it will be interesting to see if the Luxembourg legislature will use this opportunity to extend the multiple-vote share structures to certain types of companies that do not seek admission to trading on the MTF.
Access to EU-Regulated Markets
Within the same package of measures as the directive on multiple-vote share structures, Regulation (EU) 2024/2809 amending the Prospectus Regulation and the Market Abuse Regulation (Listing Act) was also published on 14 November 2024. The Listing Act aims at facilitating access to EU-regulated markets by alleviating the costs of drawing up prospectuses and clarifying the ongoing post-issuance obligations. The key changes of the Listing Act are notably the widening of the scope of exemptions from the obligation to publish a prospectus with respect to secondary issuances applicable as from 4 December 2024; the introduction of a new standardised EU Follow-On Prospectus for secondary issuances applicable as from 5 March 2026; and the removal of the obligation for issuers to disclose inside information relating to intermediate steps of a transaction applicable as from 5 June 2026.
Sustainable Investments and Reporting
Investors are increasingly incorporating environmental, social and governance (ESG) factors into their decision-making processes and are expected to continue seeking sustainable offerings going forward. Luxembourg is fully committed to sustainable finance and is structurally prepared to welcome investors seeking sustainable products. For instance, the LuxSE’s Luxembourg Green Exchange (LGX) is the world’s largest platform dedicated exclusively to sustainable bonds, with over EUR1 trillion issued through more than 3,700 listed securities. As sustainable investments become more popular, the risk of greenwashing (misleading sustainability claims) increases, undermining the credibility of sustainable finance. One of the acts aiming at improving transparency on ESG matters is Directive (EU) 2022/2464 as regards corporate sustainability reporting (CSRD), amending Directive (EU) 2013/34, which is currently being transposed in Luxembourg by bill of law 8370. The CSRD focuses on enhancing the rules on sustainability reporting and extending them to a greater number of undertakings. In-scope entities will be required to disclose a range of information on the impacts on sustainability matters (impact materiality), but also on the impacts of the sustainability matters on their development, performance and position (financial materiality) according to the European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG). In particular, entities will be required to disclose their plans for transitioning to a sustainable economy, including alignment with the goal of limiting global warming to 1.5°C, as set by the Paris Agreement, and the EU’s objective of achieving climate neutrality by 2050. Indeed, this type of disclosure could encourage more investments in companies transitioning to sustainability, supported by the issuance of transition finance securities. The CSRD regime will progressively apply as from the financial year 2024 to all entities whose securities are admitted to trading on a regulated market in the EU (except micro undertakings). Luxembourg is currently the home member state for 380 issuers and the Luxembourg financial sector regulator (the CSSF) will gradually be in charge of supervising the application of the CSRD requirements.