Until 2006, the corporate governance framework in Luxembourg consisted of the 1915 Law on Commercial Companies (as amended), and securities regulations, including Grand-Ducal Regulations, 1998 Law Creating a Supervision Commission of the Financial Sector, and 1998 Law Concerning the Supervision of the Markets of Financial Assets (as amended). In April 2006, the Luxembourg Stock Exchange (LSEX) established the Ten Principles of Corporate Governance for listed companies, which entered into force on January 1, 2007. These Principles are based on the comply-or-explain principle, and include requirements on the role and composition of the Boards of Directors, and relations with shareholders and investors. The LSEX is supervised by the authority responsible for the prudential supervision of credit institutions, the Commission for the Supervision of the Financial Sector (CSSF). On November 1, 2007, the Law on Markets of Financial Instruments was enacted to incorporate new provisions on transparency for shares and transaction reporting. The European Union Transparency Directive No. 2004/109/EC was also transposed into Luxembourg law on January 11, 2008 through the Law on Transparency Requirements, in which supervision of transparency requirements are transferred from the LSEX to the CSSF. However, there is insufficient information publicly available directly addressing Luxembourg's compliance with the Organization for Economic Cooperation and Development Principles of Corporate Governance.

General Overview

Corporate governance in Luxembourg was mainly based on the 1915 Law on Commercial Companies (as amended) until the LSEX established the Ten Principles of Corporate Governance for listed companies in April 2006. These Principles, which entered into force on January 1, 2007, are based on the concept of comply-or-explain and include requirements on the role and composition of the Boards of Directors, and relations with shareholders and investors, as noted in a 2006 report by the Luxembourg Bankers Association (Association des Banques et Banquiers Luxembourg, or ABBL). On November 1, 2007, the European Union (EU) Directive No. 2004/39/EC on Markets in Financial Instruments (hereafter MiFID) was implemented into Luxembourg law to incorporate new provisions on transparency for shares and transaction reporting. The EU Transparency Directive No. 2004/109/EC was also transposed into Luxembourg legislation on January 11, 2008 through the Law on Transparency Requirements, in which supervision of transparency requirements are transferred from the LSEX to the CSSF, the supervisory authority for credit institutions. Other securities regulations which cover corporate governance in Luxembourg include the Grand-Ducal Regulations, the 1998 Law Creating a Supervision Commission of the Financial Sector, and the 1998 Law Concerning the Supervision of the Markets of Financial Assets (as amended).

The CSSF started its activities on January 1, 1999, under the authority of the Minister of Treasury and Budget. It is an independent agency, integrating the supervisory tasks of the Central Bank of Luxembourg (Banque Centrale du Luxembourg, or BCL) and the Exchanges Commission. The CSSF is responsible for the prudential supervision of credit institutions, including securities markets, banks, undertakings for collective investment, operators of payment or securities settlement systems, and pension funds. Regulatory work is the responsibility of the CSSF's internal committees, which include internal and external representatives. According to a 2002 study by Weil et al., the CSSF also deals with insider trading and declarations related to stock transactions and significant shareholdings in the capital of listed companies. Luxembourg has a small but active Stock Exchange, which specializes primarily in the issuance of international bonds (i.e. Eurobonds). With 13,352 securities listed on the LSEX as of 2007, of which bonds make up 62 percent, Luxembourg has strengthened its leading position in terms of the number of domestic and international bonds listed by a European exchange, as reported in a 2007 press release by the ABBL. On an international level, the LSEX remains the primary listing center for Global Depositary Receipts. Its main role, according to its website, is to organize markets by simultaneously ensuring investor protection. The LSEX entered into a cooperation agreement with Euronext in November 2000, as well as with the Brussels, Paris, and Amsterdam exchanges, which began operations in early 2001, as noted in a 2005 U.S. Department of Commerce Country Commercial Guide.

As stated in the World Bank's 2008 Doing Business report, investor protection in Luxembourg in 2007 was significantly lower than the average achieved by member states of the Organization for Economic Cooperation and Development (OECD). The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Luxembourg scores 6 in the disclosure index against an OECD average of 6.4. It scores 4 in the Director Liability Index against an OECD average of 5.1 and 3 in the Shareholder Suits Index against an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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Corporate governance in Luxembourg was mainly based on the 1915 Law on Commercial Companies (as amended) until the LSEX established the Ten Principles of Corporate Governance for listed companies in 2006. These Principles, which entered into force on January 1, 2007, are based on the concept of comply-or-explain, and include requirements on the role and composition of the boards of directors and relations with shareholders and investors, as noted in the ABBL's 2006 report. The MiFID was enacted on November 1, 2007, to incorporate new provisions on transparency for shares, and transaction reporting. According to the 2002 report by Weil et al., other securities regulations, which govern corporate governance in Luxembourg, include Grand-Ducal Regulations, 1998 Law Creating a Supervision Commission of the Financial Sector, and 1998 Law Concerning the Supervision of the Markets of Financial Assets (as amended). Despite the descriptive information provided above, neither report directly addresses Luxembourg's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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According to the 2002 Weil et al. report, shareholders have the right to convene or adjourn meetings, share in the profits, and appoint internal auditors, and are protected by anti-dilution provisions (i.e. preferential subscription rights). Per the same report, preference shares and cumulative-type shares are allowed under Luxembourg legislation. Under the LSEX's Ten Corporate Governance Principles, companies are required to respect the rights of their shareholders, as well as establish active communication with the shareholders. However, the information provided above does not directly address Luxembourg's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

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As reported in 2002 by Weil et al., Luxembourg's legislation secures "the right to extend the protection of minority shareholders by stipulating provisions in a company's articles of association" (p. 165). Furthermore, issuers of listed securities in Luxembourg are required to ensure the equitable treatment of all shareholders including minority and foreign shareholders. However, per the same report, minority shareholders have no formal rights on the distribution of dividends, or allocation of profits to the reserves. Furthermore, preference shares and cumulative type shares, which are permitted under Luxembourg law, could potentially be used as a way of depriving minority shareholders of their rights. As part of their 2002 study, Weil et al. recommended establishing "satisfactory exit provisions" (p. 182) for minority shareholders in the event that a party obtains majority control of the company. Under the LSEX's Ten Corporate Governance Principles, companies are required to respect the rights and equitable treatment of their shareholders, as well as establish active communication with the shareholders. However, the information provided above does not directly address Luxembourg's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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There is insufficient information publicly available addressing Luxembourg's compliance with this Principle.

Principle V: Disclosure and Transparency

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According to the 2002 Weil et al. report, shareholders have considerable rights on disclosure of information, including the right to access the company's share register at any time. Under the LSEX's Ten Corporate Governance Principles, companies are required to adopt a clear and transparent corporate governance framework and must provide adequate disclosure. Furthermore, it is the responsibility of the Board of Directors to protect the corporation by establishing strict rules in the areas of financial reporting, internal control, and risk management. The MiFID was transposed into Luxembourg law on November 1, 2007, to incorporate new provisions on transparency for shares, and transaction reporting. The EU Transparency Directive No. 2004/109/EC was also implemented into Luxembourg legislation on January 11, 2008 through the Law on Transparency Requirements, in which supervision of transparency requirements are transferred from the LSEX to the CSSF. Nevertheless, the information provided above does not directly address Luxembourg's compliance with this principle.

As of 2005, according to the May 2007 update from the Deloitte & Touche IAS Plus website, companies in Luxembourg listed on an EU / European Economic Area stock exchange are required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU. Deloitte & Touche further note that IFRSs "will be introduced into the local Luxembourg commercial law as an alternative to the current Luxembourg accounting principles."

Principle VI: The Responsibilities of the Board

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Luxembourg has a one-tier board system (i.e. single board). Under the 1915 Law on Commercial Companies (as amended), the Board of Directors "has the power to accomplish all the acts that are necessary or useful to realize the purpose of the company, except the acts that are reserved to the general meeting pursuant to the articles or statutory provisions" (p. 161). Supervisory responsibilities of the Board of Directors include appointing and dismissing senior managers, ensuring the company's compliance with applicable laws and regulations, and protecting the integrity of the corporation's accounting, auditing, and financial reporting systems. The LSEX's Ten Corporate Governance Principles, which entered into force on January 1, 2007, include requirements on the role and composition of the Boards of Directors, and apply to committees emanating from the management boards, such as audit, remuneration and nominating committees, as noted in the ABBL's 2006 report. However, the information provided above does not directly address Luxembourg's compliance with this principle.