Double LuxCo means two Luxembourg companies and refers to the structure used in many financing or financial restructuring processes of Spanish companies and companies from other EU civil law countries.
Double Luxembourg structures arise to provide greater protection and ease of execution to financiers. In other words, the aim is that, in the event of a default and insolvency of the borrower, the latter can enforce the shares of companies given as guarantees with greater ease and agility than would be possible under the applicable legislation.
The purpose of these notes is not to provide an exhaustive analysis of this type of structure, a matter which I leave to the experts, but rather to give some basic ideas about them, why they are used and some of their implications.
What are they?
Let us imagine that the group to be financed or refinanced is Spanish and that, in addition to assets such as real estate, machinery, bank accounts, etc., the financial institution or fund requires the shares of the company owning these assets to be provided as collateral. Under this scheme and Spanish law, in the event of default and insolvency of the borrower, the financier would be faced with a tedious procedure, even lasting for several months, and with the possibility that certain exceptions and/or oppositions may be raised to enforce the shares of the Spanish company given as collateral.
What a double LuxCo does is to interpose, between the shareholder(s) and the pledged company, two Luxembourg companies in order to avoid the application of Spanish insolvency law. The diagram would be as follows:
Why is it necessary to have two companies in Luxembourg? Couldn’t it work with just one?
If only one company is established, i.e., if a Luxembourg company is owned by Spanish shareholders and at the same time holds the shares or participations of the Spanish company that is to be delivered as a guarantee in the event of a default and subsequent execution, Spanish law would apply, and this is precisely what we want to avoid due to the times and exceptions that could arise.
With the interposition of a second Luxembourg company, as shown in the diagram, Spanish law would cease to apply and would be subject to Luxembourg law. To this end, Luxco 1 constitutes a pledge on the shares of Luxco 2 of which it is the holder, thus enabling the financing and executing entity to assume control of Luxco 2 and of the companies it owns, such as the Spanish company. In other words, the financial institution would become the holder of the Luxco 2 shares, executing the pledge subject to Luxembourg law, assuming its control and that of the Spanish company contributed.
What other aspects must be taken into account?
As mentioned above, the pledge on the shares of Luxco 2 will be made independently of the other guarantees considered on goods or assets of any other group company (pledge of Luxco 1 shares, mortgages and pledges on assets, etc.), in addition to modulating by Luxembourg law the effects of the existence of the pledge on the voting rights of the Luxcos.
The shares of the Spanish company must be contributed to the two Luxco companies. These contributions, first to Luxco 1 and then to Luxco 2, can be made at the time of incorporation or a later date and both will have implications under Luxembourg and Spanish law:
- For contributions to Luxco 1 as well as to Luxco 2, from a corporate law point of view, the provisions of Luxembourg law on the incorporation of companies and subsequent capital increases will apply.
- The first of the contributions to Luxco 1 will entail a transfer for the partners and as they are in Spain it will be necessary to review the tax implications, whether gains or losses are revealed and whether the contribution can be covered by a tax neutrality regime. The second transfer should in principle not generate any capital gain as it is contributed at the same value as Luxco 1 received it, but the effects will have to be consulted with the Luxembourg advisors.
- Finally, another point to be taken into account is that the ownership of the Spanish company changes, with Luxco 2 being the sole owner, so it will be necessary to proceed with the appropriate declaration of single-member status and its registration in the Spanish Companies House.
Therefore, we can see that these Luxembourg structures can be very useful for financiers of large companies who find certain jurisdictions difficult and slow to enforce collateral such as pledges on shares. With these notes, the process may seem straightforward but obviously requires not only the appropriate legal and tax advice in each applicable jurisdiction but also a sophisticated financial team to analyse the needs and implications of each case to implement such structures.