Establishing a bitcoin treasury company via convertible bonds in Luxembourg

In the current landscape, crypto assets and particularly bitcoins are gaining significant traction. Both companies and sovereign entities are increasingly considering the creation of crypto asset treasuries to diversify their portfolios. Luxembourg is emerging as a jurisdiction of choice for such initiatives.

Drawing on Ogier’s experience with a recent landmark transaction (read our news story: Ogier advises Blockchain Group on convertible bond issuance), this briefing — jointly prepared by Ogier's legal experts and Ogier Global's corporate and fiduciary experts in Luxembourg — will explore the legal, tax, and accounting aspects of creating a bitcoin (BTC) treasury via a contribution in kind (apport en nature) against the issuance of convertible bonds by a Luxembourg public limited liability company (société anonyme – SA), referred to as the Issuer.

The principles outlined below would apply with the appropriate adjustments to a direct subscription of shares in the Issuer.

Legal considerations

Issuance of convertible bonds by a Luxembourg SA

According to Article 100-14 of the Luxembourg law of 10 August 1915 on commercial companies, as amended (the Luxembourg Companies Law), any company may issue bonds. A Luxembourg SA generally has the capacity to issue bonds, including those convertible into shares, unless restrictions exist under its corporate purpose.

The issuance of convertible bonds entails certain formalities, because they ultimately grant access to the Issuer’s share capital (as part of their potential future conversion into shares of the Issuer). Article 420-27 Section 1 of the Luxembourg Companies Law provides that the rules applicable to share capital increases also apply to convertible bond issuance, although the share capital increase only occurs upon conversion.

The Issuer’s board of directors can decide on issuing convertible bonds under the so-called authorised capital (capital autorisé), provided such authority is granted in the Issuer’s articles of association and approved by the shareholders.

The Issuer’s extraordinary general meeting (the EGM) should resolve the following:

• create an authorised capital and grant the board authority to increase share capital by issuing shares (the Authorised Shares) within authorised capital limits

• reserve authorised capital for CBs issuance convertible into Authorised Shares

• potentially, allow the board to limit or cancel shareholders’ preferential subscription rights. This is relevant only with respect to convertible bonds which are subscribed in cash, which is not the subject of the present case study. Preferential subscription rights do not apply to contributions in kind, such as BTC

• amend the Issuer’s articles of association accordingly. For legal certainty, the authorised capital clause should expressly allow the subscription and payment of Authorised Shares and convertible bonds via contributions in kind

Following the EGM, the board will then be able to approve convertible bonds issuance (within authorised capital limits) and set terms and conditions for their subscription.

Payment of the subscription price for convertible bonds via contributions in kind

According to Article 1833 Section2 of the Luxembourg Civil Code, three categories of contributions are recognised in Luxembourg: contributions in kind (apport en nature), cash contributions (apport en numéraire) and sweat contributions (apport en industrie). Note that sweat contributions are not possible for subscribing to shares or financial instruments convertible into shares of a Luxembourg SA.

The Luxembourg Companies Law expressly allows for the subscription of convertible financial instruments, such as CBs, to be paid up by way of contribution in kind. Contributions in kind require the transfer of non-cash assets, tangible or intangible, provided they are monetarily assessable and legally transferable.

BTC, as a "crypto-asset" and intangible personal property, satisfies these criteria and is therefore eligible to be contributed in kind.

Practical implementation of a contribution in kind consisting of BTC

The contribution in kind involves transferring ownership of the contributed asset. In the case of BTC, this requires transferring the BTC from the subscriber's to the Issuer's wallet. This wallet must be held with a custodian licensed to provide crypto asset services, according to Regulation (EU) 2023/1114 on markets in crypto assets.

It is advisable for the subscription agreement for convertible bonds to include the effective transfer of the BTC to the Issuer's wallet as a conditions precedent to the issuance of the convertible bonds. The receipt of BTC by the Issuer should be evidenced by a certificate issued by the custodian (the Custodian Certificate), indicating:

• the number of BTC credited to the Issuer's wallet

• the time and date of BTC receipt

• the BTC value (in the relevant currency) at the time and date of receipt, based on market value published by a financial data provider

Advance coordination with the custodian will be required to ensure the issue of a Custodian Certificate in the desired format and including all required information.

The auditor’s report on the valuation of the contribution of BTC

According to the Luxembourg Companies Law, the description and valuation of the contributed BTC lies with the board.

The Issuer shall then engage an auditor (réviseur d'entreprises) to prepare a valuation report assessing the description and valuation method of the BTC. The report must confirm that the value of the contributed BTC corresponds at least to the number and subscription price of the convertible bonds issued in exchange.

As part of this process, the board will first prepare a document outlining the description and valuation of the contributed assets, usually in the form of a "representation letter", which will serve as a basis for the auditor's review.

The auditor does not opine on the commercial rationale or fairness of the transaction. Rather, the auditor is to ensure that the valuation methods applied by the parties result in values that do not materially deviate from those which would be agreed upon between unrelated parties under normal market conditions.

Contractual risk mitigation regarding the BTC valuation

Valuation of contribution assets and board responsibility: Following the Luxembourg Companies Law, the board is responsible for ensuring that the assets contributed to a company are accurately valued. Should the contributed assets be overvalued, the board could be held liable for the difference between the correct (lower) asset value and the aggregate value of the shares or convertible instruments issued in exchange.

Shift of value-related risks: Once the relevant assets are transferred to the issuing company, it assumes the risk of any value drops or market changes. This shift in risk arises from the company's acquisition of legal ownership and control of the assets, which are then recorded on its balance sheet. This is a direct legal consequence of asset transfer.

Where there is a contractually agreed delay between the BTC's receipt and the issuance of the convertible bonds (for example, to obtain the Custodian Certificate and issue necessary documentation), the BTC's value will likely fluctuate in the interim due to its notorious volatility.

Potential impact on valuation: In accordance with the professional norms adopted by the general meeting of the Luxembourg Institut des Réviseurs d'Entreprises on 21 June 2022, titled "Professional Diligences of the Auditor in the Context of Contributions in Kind" (Diligences professionnelles du réviseur d'entreprises dans le cadre d'apport en nature), the auditor is required to take into account and reflect in their report any facts that may affect the BTC valuation between the contribution date and the report date.

The auditor must specifically evaluate any developments that could adversely impact the value of the contribution, alter its composition, or affect the effective payment of share capital.

Contractual mitigation

The auditor shall rely on the parties' contractual agreement on the BTC valuation, supported by the Custodian Certificate. To address valuation challenges and ensure the convertible bonds' valid and full payment, the contribution and subscription agreement should clearly set out the following:

• Number of convertible bonds to be issued: the subscriber will transfer BTC to the Issuer and receive a corresponding number of convertible bonds in exchange. This number is determined by dividing the transferred BTC's value by the convertible bonds' nominal value. Using a low nominal value, like one cent, can simplify the calculation

• Effectiveness of the contribution: the BTC contribution is deemed effective upon the Issuer's receipt of the BTC, as shown by the Custodian Certificate. From that moment, the convertible bonds' subscription price is considered as fully paid, even if the convertible bonds are issued later

• Valuation of the BTC: BTC valuation, in the relevant currency, occurs at the time and date of their receipt by the Issuer

• Accounting considerations: the BTC are recorded in the Issuer's accounts as at their date of receipt

• Shift of value-related risk: the Issuer accepts all risks related to BTC value fluctuation from their receipt and waives any rights against the subscriber concerning such fluctuations

The Custodian Certificate is central, evidencing  the number of BTC received by the Issuer, the date of receipt of the BTC, and the BTC's spot price at receipt. This information is essential for calculating the number of convertible bonds to be issued and for ensuring compliance with valuation and accounting requirements.

Treatment of subsequent events

Any events occurring between the BTC contribution's effective date and the convertible bonds issuance affecting the BTC's value will not impact the auditor's conclusion. The contractual agreement on valuation and corresponding transfer of risk provide the auditor with sufficient comfort to issue a valuation report containing a "favourable conclusion without remarks on the individual value and the overall value of the contributions" (conclusion favorable sans observation sur la valeur individuelle et la valeur globale des apports).

To address any auditor's potential concerns, fluctuations in value between the date of contribution and the issuance of the report dates can be disclosed in a separate section of the report such as a "Subsequent Events" section, without affecting the main conclusion.

Even where such value changes are noted, the auditor's report will appropriately confirm that the BTC's value at receipt (such as the time of effective performance of the contribution) is equal to the number and value of the convertible bonds issued in exchange.

The conversion of convertible bonds into shares of the Issuer

The conversion of convertible bonds into shares can occur either at maturity or within a specified conversion period, usually at the Issuer's or bondholder's option, subject to the fulfilment of agreed conditions. The conversion price, determined by the convertible bonds' terms, is determined through negotiations between the Issuer and the bondholder and may be fixed or based on a pre-agreed formula. In certain cases, alternative prices may apply based on the highest or lowest calculated price.

The conversion is generally calculated by dividing the principal amount of convertible bonds to be converted by the applicable conversion price. The convertible bonds' terms should specify that residual values insufficient to subscribe for a full share should be allotted to the share premium, as Luxembourg law does not permit issuing fractional shares.

The board must approve the conversion and corresponding share issuance under authorised capital. The resulting share capital increase and amendment of the articles of association of the Issuer must be formalised under a record deed executed before a Luxembourg notary. Shares can be issued beyond the five-year authorisation if the convertible bonds were issued within this period.

No additional payment for the shares is required upon conversion, as the share subscription is made by way of set-off against the receivable represented by the convertible bonds. A share subscription agreement must be concluded, and the board's valuation report should confirm that the value of the receivable offset equals at least the share subscription price, including nominal value and share premium, if applicable.

Finally, the convertible bonds register and the shareholders register of the Issuer shall be updated to reflect the conversion and share issuance. Any significant change in the capital or control structure of the Issuer following conversion will require filing with the Luxembourg Register of Beneficial Owners (Registre des Bénéficiaires Effectifs, Luxembourg).

Tax considerations

The issuance of convertible bonds should not, in itself, trigger any Luxembourg tax implications. However, the subsequent holding of the BTC by the Issuer, following their contribution in kind (as in the transfer from the subscriber's wallet to the Issuer's one), requires carefully review from a Luxembourg tax perspective.

Depending on the BTC valuation method adopted and the specific terms and conditions of the convertible bonds, the BTC held by the Issuer could give rise to annual net wealth tax implications and potential income tax exposure.

That said, a carefully structured transaction, supported by appropriately drafted CBs terms and conditions can enable a tax-efficient treatment of the BTC treasury strategy on an on-going basis.

This presupposes that the accounting treatment of the operation is duly considered from a tax perspective.

Accounting considerations

One of the main challenges for accountants in Luxembourg is the absence of specific guidance or regulation for the accounting treatment of cryptocurrencies. Nonetheless, the IFRS committee has started to offer direction on this subject. For example, BTC, in the context of the transaction described above, may be treated as a long-term investment, qualifying as an intangible fixed assets under IAS 38.

On this basis, and in line with Luxembourg Generally Accepted Accounting Principles (Lux GAAP), BTC classified as intangible fixed assets would be measured at historical cost. Due to its indefinite nature, BTC would not be amortised but would instead be subject to impairment testing only.

It is important to note that, under Lux GAAP, unrealised gains on assets, including cryptocurrencies, are typically not recognised, reflecting the principle of prudence.

Convertible bonds, when classified as debt, are initially recorded at the fair value of the consideration received, typically their nominal value. However, if there is an indication of an unrealised loss, these bonds must be revalued at their expected repayment value, again in accordance with the prudence principle, to prevent overestimation of asset values in financial statements.

How Ogier can help

Ogier can help clients diversifying their portfolios through the creation of crypto asset treasuries.

We provide comprehensive Luxembourg legal, regulatory and tax advice, and assist with the implementation phase of your project. Ogier Global supports clients by delivering administration services, ensuring effective operation of your structures.

To find out more about how our experienced team can help, please reach out to your usual Ogier contact or one of the contacts listed in this article.

About Ogier

Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.

Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice