LUXEMBOURG: An Introduction to Corporate/M&A

Introduction

Persistent geopolitical tensions across the globe undoubtedly created a challenging environment for M&A in 2024. Businesses faced significant difficulties operating amid heightened uncertainties. Worldwide inflation, which remained persistent, has compelled central banks – including the European Central Bank – to maintain higher interest rates. This has, in particular, widened the gap between the interests of sellers and buyers, as sellers have found it increasingly difficult to dispose of their assets, resulting in a more buyer-friendly market. Private equity funds have also been significantly impacted as leveraged buyouts have become costlier due to increased borrowing costs.

However, the forecast for 2025 looks more promising, with signs of renewed investor confidence. Luxembourg is well positioned to capitalise on the rebound of activity and take comfort in its position as an attractive investment hub. Such privileged status amidst a volatile global economic environment is particularly saliant in light of recent legal and economic trends, as will be further discussed below, in view of drawing certain conclusions on the future of the M&A activity of this unique jurisdiction.

Legal Trends

Luxembourg hosts a large number of private equity players and is a preferred location for setting up holding companies. The stable and supportive environment for investors is unmatched by many other jurisdictions. This business-friendly stance is particularly illustrated by Luxembourg’s liberal and majority shareholder-oriented corporate law framework. Amongst the plethora of legislation expected to impact M&A activity to a varying degree in Luxembourg in 2025, three are of paramount importance as they bear the promise of reshaping the country’s M&A landscape.

The first pertains to the transposition of the Mobility Directive on cross-border conversions, mergers and divisions. On 23 January 2025, the Luxembourg Parliament cast its first vote in favour of a fundamentally atypical approach, founded on two distinct pillars. The first is the strategic confinement of the more complex cross-border mobility regime introduced by the European legislature to its strict and limited scope of application. This ensures that cross-border mergers, divisions and conversions involving non-EU companies will remain governed by Luxembourg’s existing, pragmatic legal framework. From a PE investor’s perspective, this is of particular interest as it entails that the cumbersome and potentially prohibitively expensive exit right for minority shareholders opposed to the operation will not apply to – eg, non-EU cross-border mergers. From a company or an investor’s perspective, this also means that a migration outside of the EU will be possible in a matter of days. The second pillar lies in Luxembourg’s deliberate use of every option provided by the European legislature to foster a mobility-friendly regime even within the Mobility Directive’s scope and illustrated – eg, by the fact that the legality control of the operation has been entrusted to the notoriously competent and versatile Luxembourg notaries. This unique approach should consecrate Luxembourg as the entrance or exit gate to the EU.

The second pertains to the ex ante merger control regime that Luxembourg, following the trend of all other EU member states, is set to introduce. Concentrations falling outside of the scope of EC Regulation 139/2004 on the control of concentrations and meeting two cumulative thresholds (ie, (i) more than EUR60 million total turnover realised in Luxembourg by all involved parties and (ii) more than EUR15 million of total individual turnover, excluding taxes, in Luxembourg of at least two of the involved parties) will have to be notified to the Luxembourg Competition Authority before implementation. Interestingly, and due to the peculiarities of the Luxembourg funds industry, concentration operations carried out by investment funds, securitisation funds, securitisation vehicles or pension funds (except for private equity transactions), are expected to be explicitly excluded as they do not generate any durable alteration of the market structure. Whilst the exact timing for the adoption of this Bill remains uncertain, it is anticipated that the regime could become operational in the course of 2025.

The third pertains to the increasingly sophisticated ESG regime applicable to economic actors. In this respect, Luxembourg is yet to transpose the Corporate Sustainability Reporting Directive (CSRD), despite a transposition deadline set at 6 July 2024, and legislative work to transpose the Corporate Sustainability Due Diligence Directive (CSDDD) entered into force on 25 July 2024, yet to begin. However, all legislative work in this respect was frozen in January 2025, pending the European Union’s decision on a potential EU omnibus regulation consolidating the CSRD, the CSDDD and the EU Taxonomy. Irrespective of the final political outcome, it is beyond any doubt that the complexity of these rules combined with the potentially significant compliance costs for companies will impact M&A activity in 2025.

Economic Trends

Micro-economic trends

This highly favourable legal framework is further enhanced by several micro-economic trends. Most notably, the fintech sector in Luxembourg is poised for continuous growth. The country’s regulatory framework facilitates the development of digital assets, blockchain technologies and payment solutions, attracting global fintech players. Further, there is a significant growth in green bonds and ESG-focused investment funds, strengthening Luxembourg’s reputation as a hub for sustainable finance. In addition, co-investments and similar arrangements governed by Luxembourg law are becoming increasingly popular due to a vast array of investment vehicles that can be customised to suit specific needs as well as a relatively easy access to the financial regulator. Such trend can also be observed in connection with private debt funds gaining popularity as alternative investment vehicles since they offer tailored financing solutions for mid-market companies. Finally, investment funds are diversifying into new asset classes, including infrastructure, renewable energy and digital assets.

Macro-economic trends

The relationship between M&A activity and interest rates is a critical dynamic in corporate finance. Lower interest rates create favourable conditions for M&A by encouraging banks and lenders to extend more credit. As a result, companies can borrow at reduced costs, making leveraged buyouts more viable and private equity firms more capable of executing IPOs or portfolio sales. Thus, optimism surrounding falling interest rates underpins expectations of increased M&A activity in 2025.

Furthermore, there is an increased ESG and CSR awareness, compelling companies to adapt to the rapidly evolving regulatory environment. Such trend entails increased costs since the required standards often demand investments in new systems, audits and certifications, as well as adopting sustainable practices such as transitioning to renewable energy or redesigning products. If the companies’ efforts are perceived as inadequate, they may face significant reputational risks.

Conclusion

Luxembourg’s privileged position as an investment hub, fuelled by its favourable legal framework, as well as the anticipated decline in interest rates and opportunities in high-growth sectors, presents a promising outlook for 2025. However, companies must remain vigilant and adaptive to regulatory challenges, particularly those related to ESG, in order to navigate this dynamic landscape successfully. This is particularly accurate for private equity firms, that are well-positioned to capitalise on this environment, with substantial dry powder and heightened pressure from limited partners to deploy committed capital.