Luxembourg is a particularly well-known jurisdiction to set up different types of investment funds, including private equity and venture capital funds.

While such funds can be set-up in different forms, some of these investment funds, will be regulated by specific laws, such as:

• undertakings for collective investment “UCI” or undertakings for collective investment in transferable securities “UCITS” (modified law of 17 December 2010 on undertakings for collective investment),
• specialized investment funds “SIF” (modified law of 13 February 2007 on specialized investment funds),
• investment companies in risk capital “SICAR” (modified law of 15 June 2004 on investment company in risk capital),
• the reserve alternative investment fund “RAIF” (modified law of 23 July 2016 on reserved alternative investment funds).

All of the above mentioned forms of investment funds have in common the possibility to launch sub-funds (the so-called “umbrella fund”). Although the investment fund is treated as a single legal entity, each sub-fund will have, by law, its own assets and liabilities.

Despite being regulated by a specific law, most of these investment funds will also be established in the form of a commercial company (e.g. SA, SCA, or SARL) and, thus, be regulated by the modified law of 10 August 1915 on commercial companies (the “Law of 1915”).

On 10 August 2016, the Law of 1915 was modified to considerably improve the situation of minority shareholders, including therefore shareholders of an investment fund.

Among the new minority shareholder rights, two major changes were introduced: i) a possibility for minority shareholders to bring an action against the management of the company and ii) the right to raise questions with the management or request an independent investigation (if the management refuses to provide the answers on a voluntary basis).

1.Liability claim against the management

Before the changes of 2016 came into force, shareholders could only issue a claim against a director or manager of a company to seek compensation for a damage that is distinct from the company’s collective damage, and that can be defined as an individual and personal damage.

Indeed, if the shareholders have suffered collective damage, it is up to the shareholders’ meeting to seek compensation for the collective damage. In such case, an action had be approved by the shareholders’ meeting on behalf of the company (an action initiated by a single shareholder on behalf of the company would be declared inadmissible).

As, however, the shareholder meetings are often controlled by the majority shareholder (who will also often decide upon the composition of the board of directors or managers), it becomes unlikely that the shareholders meeting would approve to start a liability claim against the management, leaving minority shareholders with little to no possibility to seek compensation.

This has changed in 2016, which allows now minority shareholders holding 10% of the share capital, to issue such a claim.

2.Right to request a report

Beside the liability claim, any shareholder representing at least 10% of the company’s share capital or voting rights is, since 2016, allowed to raise questions with the board of directors or management body of a company about the management and operations of the company or one of its affiliates, without the need for extraordinary circumstances.

If the company’s board or management body fails to answer these questions within 1 month, the shareholder may issue a claim in Court to appoint one or more independent experts to draw up a report on the issues to which the questions relate.

3.Calculating minority shareholder rights at the level of an investment fund

An important question remained however on how to calculate the 10% threshold within an investment fund in the form of an umbrella fund with multiple sub-funds. The question arose therefore whether the 10% threshold for minority shareholder was to be considered at the level of the sub-fund, or the fund itself (including all other sub-funds).

In 2019, the Luxembourg Court of Appeal gave an important indication in relation to the method of calculation of minority shareholder rights (Court of Appeal 23 January 2019).

The case related to questions (13 in total) raised by a group of minority shareholders of one specific sub-fund of a SIF to the management.

The management of the SIF refused to provide the answers by arguing that the group of minority shareholder did not reach the 10% threshold, which was to be calculated at company and not at sub-fund level.

The group of minority shareholders initiated a claim before Court for the appointment of experts to issue a report on the questions raised by them.

The Court first reminded that, even though a SIF may have several sub-funds, it remains a single legal entity. It also reminded however that the law foresees that, for the purpose of its relation between investors, each sub-fund is considered as s separate entity (unless otherwise foresees in the constitutive documents of the fund).

After analyzing the constitutive documents of the umbrella fund, the Court did not find any provisions foreseeing an exception to the legal rule, but rather that the constitutive documents of the investment fund foresaw provisions enhancing the rights of shareholders within each sub-fund (e.g. the articles of association of the fund foresaw the possibility for the shareholders of one sub-fund to request the convening of a general meeting of the shareholders of that specific sub). The Court of Appeal therefore decided that the 10% threshold was to be appreciated at the level of the sub-fund).

While this case relates specifically to the legal right of shareholders to request a report, one could assume that the Court would come to a similar conclusion if the question was raised on a different matter where the law foresees a 10% minimum threshold, e.g. as mentioned earlier, for the group of minority shareholders of a sub-fund intending to issue a liability claim against the management.

The solution could be applied to not only SIFs, but also other type of investment funds (UCIs, UCITS, RAIF, SICAR) and even securitization companies (société de titrisation), as their respective specific laws contain similar provisions in relation to the separation of assets and liabilities within a sub-fund, but also for the relation of investors within each sub-fund.