The use of beneficiary units in AIFs

Beneficiary units (“parts bénéficiaires”), as provided for by the Luxembourg law of 10 August 1915 on commercial companies (the “Law of 1915”), have their origins in an established corporate practice dating back to the 19th century. Despite their former prominence, they have rarely been used in modern fund structuring and have largely fallen into disuse. Nevertheless, beneficiary units may offer certain advantages in the context of alternative investment funds (“AIFs”) and can accommodate a range of commercial requirements owing to their contractual flexibility.

Beneficiary units under the Law of 1915

Beneficiary units are provided for under Articles 430-1 and 710-5 of the Law of 1915, which allow public limited companies (“sociétés anonymes”) and private limited liability companies (“sociétés à responsabilité limitée”) , respectively, to issue securities that do not represent their corporate capital.

The Law of 1915 provides significant flexibility in determining the rights attached to beneficiary units. Alongside shares (“actions”), the most commonly used securities in public limited companies, beneficiary units may be created to confer specific economic and/or governance rights tailored to the needs of the beneficiaries and the company, provided that such rights are reflected in the company’s constitutional documents.

As a result, beneficiary units can be structured as a sui generis instrument presenting equity-like and/or, depending on their terms, debt-like features. The precise legal and economic characterization will depend on the rights and obligations attached to the beneficiary units under the constitutional documents. In this respect, beneficiary units may combine characteristics commonly associated with both equity and debt instruments and consequently constitute hybrid instruments.

Reasons for the use of beneficiary units

Shareholders are legally entitled to voting rights. By contrast, one of the traditional purposes of beneficiary units was to grant their holders economic rights, such as rights to profits and liquidation proceeds, without, or with limited, political rights.

The Law of 1915 does not prescribe a standard set of political rights for beneficiary units, allowing these rights to be freely organised in the company’s constitutive documents. In practice, holders of beneficiary units may either be granted voting rights similar to those of shareholders and vote in parallel on the same matters, or more limited political rights, such as voting rights on reserved matters, veto or consultation rights, or no voting rights at all .

This intrinsic flexibility makes beneficiary units particularly well suited to AIFs taking the form of a public limited company. Their sui generis nature may allow them to address specific investor requirements, including certain tax considerations, financial assistance concerns, potential regulatory considerations applicable to financial institutions (e.g. CRR banking rules), or an investor’s preference not to hold an interest in the share capital of the AIF.

More generally, beneficiary units may be useful where the parties wish to separate economic exposure from governance rights and tailor the rights of a particular investor.

Beneficiary unitholders and AIFMD

Beneficiary unitholders shall qualify as “investors” for the purposes of the AIFMD where the relevant conditions are met. The European Commission’s Q&A on AIFMD notably states that the terms ‘units’ and ‘shares’ as used in the directive are generic and, therefore, inclusive of any forms of equity and any other security representing an ownership interest in the AIF.

In addition, the ESMA Guidelines on key concepts of the AIFMD define investors by reference to persons from whom the AIF raises capital for the purpose of investment with a view to generating a pooled return. Accordingly, the analysis should focus on the substance of the beneficiary unit and the economic arrangement rather than solely on its legal denomination.

Practical application

Where beneficiary unitholders qualify as investors under the AIFMD framework, the structuring of their rights must be considered in light of the applicable investor-protection requirements. In particular, the flexibility available under the Law of 1915 must be exercised consistently with the AIFMD principles of fair treatment and disclosure.

1) Information rights

AIFMD provides investors with a broad range of information rights, including all information required to be disclosed pursuant to Article 23 as well as information relating to the valuation and calculation of the net asset value per unit or share of the AIF.

Where an AIF issues beneficiary units, the fund documentation should therefore also clearly explain the valuation methodology specifically applicable to those instruments.

2) Preferential rights

The AIFMD framework permits preferential treatments of one or more investors, provided that the relevant treatment is appropriately disclosed and does not result in an overall material disadvantage to other investors.

Accordingly, beneficiary unitholders may, subject to the applicable requirements, benefit from side letters or other arrangements establishing rights that may alter, derogate from or supplement the terms of the fund documentation. Such arrangements may also be subject to the AIF’s most-favoured-nation policy, where applicable.

Where beneficiary units have no voting rights, the AIF may need to adjust its most-favoured-nation arrangements in order to exclude any matters related to voting rights for beneficiary unitholders. In practice, however, where beneficiary units are granted limited voting or reserved-matter rights, it may be appropriate for the same general framework to apply to shareholders and beneficiary unitholders, subject to the specific rights attached to each instrument.

3) Distribution and liquidity rights

Investors in an AIF share the common objective of investing in accordance with a defined investment policy with a view to generating a return. The AIF’s investment strategy and its distribution and liquidity arrangements should therefore generally be coherent across the different “categories” of investors.

Where beneficiary units are intended to provide economic rights similar or identical to those of shareholders, the fund documentation will typically provide the same or substantially similar rules regarding distributions, redemption rights and liquidity management tools.

Any divergence should nevertheless be expressly documented and carefully considered from a legal perspective, including against the principle of fair treatment and the specific economic rights attached to the relevant instruments.

Conclusion

The contractual freedom afforded by the Law of 1915 to structure the rights attached to beneficiary units makes them an interesting instrument for certain AIF structures.

Although beneficiary units and shares may be structured with materially different economic and governance rights, in practice there may be little difference in the information, distribution, liquidity rights and preferential treatment policies applicable to their respective holders. The principal attraction of beneficiary units lies instead in the ability to customise the rights attached to them, including the balance between economic and voting rights.

For AIFs established as public limited companies, this flexibility can provide an additional structuring tool when addressing specific legal, regulatory or tax considerations of investors that is unmatched with more broadly conventional instruments such as share classes or non-voting shares. The instrument therefore  provides a useful alternative, including where the ability to separate economic participation from corporate governance is commercially or legally relevant.
 

This article was first published in Agefi Lxembourg (September 2026). For further information, please visit the Agefi website.