Double Luxco structure and financial collateral arrangements under

Double Luxco structure and financial collateral arrangements under Luxembourg law | Luxembourg | 2015
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Double Luxco structure and
financial collateral arrangements
under Luxembourg law
Luxembourg | 2015
www.allenovery.com
Double Luxco structure and financial collateral arrangements under Luxembourg law | Luxembourg | 2015
Financial collateral in Luxembourg
In the aftermath of the recent economic crisis and the financial
markets turmoil, financial collateral arrangements have attracted
considerable attention from market participants.
The Collateral Act 2005 provides for liberalised rules for creating
and enforcing financial collateral arrangements and the protection
of financial collateral arrangements from insolvency rules.
The Luxembourg act dated 5 August 2005 on financial collateral
arrangements, as amended, (the Collateral Act 2005) is regarded
as one of the most lender-friendly frameworks for security interests
among European jurisdictions.
The purpose of this brochure is to provide an overview of
the contractual and legal framework of financial collateral
arrangements under Luxembourg law.
The Double LuxCo structure
Why Luxembourg?
What is a Double LuxCo structure? The acquisition vehicle (BidCo) is wholly owned by a Luxembourg company (LuxCo 2)
which is itself wholly owned by a second Luxembourg company (LuxCo 1 and together with LuxCo2, the LuxCos). Share pledges
are granted by LuxCo 1 and LuxCo 2 over the shares of each of LuxCo 2 and BidCo, respectively to the lenders providing debt
facilities to BidCo and the target group in connection with the acquisition.
Benefiting from a business-friendly and economically stable environment, Luxembourg has evolved
over the years into a leading business centre. Luxembourg is now a strategic gateway for investments
into Europe and, generally, for structuring investments worldwide.
Shareholder
LuxCo 1 Share Pledge
Safe yet user-friendly
business environment
AAA rating
20% debt-to-GDP ratio
More than 60 double
tax treaties
Political and
economic stability
Tradition of customised
and pragmatic
financial regulation
Founding member of
the European Union
and the Eurozone
Fully developed
infrastructure of
financial services and
support functions
LuxCo 1
Luxembourg favourable legal framework
for financial collateral arrangements
Wide scope
Robust protection against insolvency
– financial instruments, in the widest sense
– claims and receivables, including cash in bank accounts
– bankruptcy remoteness of Luxembourg law financial
collateral arrangements
– pledge, transfer of title by way of security, repurchase agreements,
margin calls, set-off of mutual debts and close-out netting (even for
debts which are not connected)
– safe-harbour provision applies also to non-Luxembourg law financial
collateral or similar financial collateral granted by Luxembourg
collateral giver
– financial collateral may be granted to a security agent or a security
trustee for the benefit of third-party beneficiaries
– no hardening period or claw-back provisions
LuxCo 2 Share Pledge
LuxCo 2
Luxembourg
Bank
Debt
BidCo
Target
– Double Luxco structure benefiting from EU Insolvency Regulation
– recognition of trust created in accordance with The Hague
Convention dated 1 July 1985
France
BidCo Share Pledge
What are the origins of a Double LuxCo structure?
Under French law, a solvent company facing material financial
difficulties may unilaterally file for safeguard proceedings without the
consent of the lenders. The opening of such proceedings immediately
triggers a mandatory stay of the claims (suspension des poursuites),
including the enforcement of security until completion of the
safeguard process. So the lenders will not be able to enforce their
security package.
Flexible creation
Flexible and straightforward enforcement
– various methods of creation and perfection available
– free choice of enforcement trigger by the parties (any breach of
contractual obligations, any financial event, any corporate event, etc)
– right to use, dispose of and re-hypothecate the collateral during the
security period may be granted
– no prior notice required
– allocation of rights to dividends, interests and other distributions or
proceeds may be freely agreed by the parties
– no prior court approval required (except for the judicial
enforcement procedure)
– allocation of voting rights may also be freely agreed by the parties
– enforcement may occur overnight
– pre-enforcement defences allowed, such as the replacement of the
directors by the collateral taker prior to an enforcement
– enforcement through one or more SPVs possible
– various methods of enforcement available, including:
– appropriation pursuant to a valuation method pre-agreed by
the parties. Valuer chosen by the collateral taker, at the cost
of the collateral giver. Enforcement may occur prior to the
valuation being completed. If the financial instruments are traded
on a regulated market, enforcement may take place by an
appropriation at the market value of the financial instruments
– private sale, on normal commercial terms
© Allen & Overy LLP 2015
What are the objectives of a Double LuxCo structure?
Lenders have been wary of sponsors/borrowers in LBOs
and structured finance transactions attempting to use the French
safeguard proceedings regime to gain leverage over their lenders in
restructuring negotiations by neutralizing (or threatening to neutralise)
the enforcement of their security package. The Double LuxCo
structure allows the lenders to enforce the pledge over the shares in
LuxCo 2, notwithstanding the fact that BidCo is subject to a hostile
safeguard and to take indirect control of BidCo with the replacement
of the hostile existing management of BidCo.
Why do we need a double holding companies structure
in Luxembourg?
The establishment of a double structure in Luxembourg is justified
by the combined provisions of the EU Insolvency Regulation and the
Collateral Act 2005 and the high degree of transaction flexibility in the
jurisdiction. It has become market-standard to include contractual
restrictions in finance documents to prevent hostile “COMI” migration
by creating a new type of mandatory prepayment event. Any decision
to change the corporate governance rules of the LuxCos or BidCo
would automatically result in an immediate obligation to repay all the
debt in full. Another example is that the share pledge over the shares
in LuxCo2 would typically be subject to an earlier trigger in order to
become enforceable at a time where acceleration of the debt at
BidCo level is impossible due to a stay of proceedings against BidCo
pursuant to a hostile safeguard.
What is the impact of the new legislation dated 28 July 2014
concerning the immobilisation of bearer shares?
As a matter of Luxembourg law, LuxCo 2 is generally a public limited
company issuing bearer shares. Since the entry into force of the new
legislation, bearer shares must be deposited with a professional
depositary established in Luxembourg, subject to civil and criminal
sanctions. Bearer shares constitute “tangible property” within the
meaning of article 2(g) of the EU Insolvency Regulation and insofar as
the bearer shares are held in Luxembourg, an enforcement of the
pledge over the shares in LuxCo 2 would not be blocked by French
insolvency proceedings. The fact that the bearer shares are now
mandatorily immobilised in Luxembourg provides additional protection
to the pledgee in the context of the Double LuxCo structures.
19
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