As this thread poses the same question as on the European Board, please forgive me if I post the same response.
Prince Nikolaus of Nassau (rather than of Nassau-Weilburg) was correct in claiming that he was the heir to the future Guillaume IV, as – apart from Guillaume and his father, Gramd Duke Adolphe, he was the only remaining male dynast in the Nassau family. However, Nikolaus predeceased Grand Duke Adolphe.
Nikolaus’ son, Georg, Count von Merenberg, then claimed that he was Guillaume’s heir. But he was the product of a morganatic marriage and therefore ineligible to have succession rights. (Incidentally, there were some doubts whether Nikolaus and his Russian wife were legally married as she had been unable to produce a certificate of divorce from her first husband.)
Guillaume determined to change the house law to allow his daughters succession rights. In this he was supported by the government and Council of State of Luxembourg. The so-called “Merenberg affair” earned the count little to no sympathy in Luxembourg except from a small group that opposed the change in the law for political purposes and not in support of Georg. Socialist Party members of parliament opposed the change not in support of Merenberg but rather in opposition to the institution of monarchy, which, they reasoned, would eventually end if there were no heirs. When the matter came to parliament, only their seven votes counted against.
Meanwhile, Merenberg had brought a law suit in a court at Wiesbaden in Germany to challenge for a share of the Nassau family fortune. Guillaume, though, legally tied these assets to the Luxembourgeois monarchy. Merenberg gave up his law suit in favour of a pension, which is what some observed was the whole reason behind his challenge – money and not the succession rights that he knew he didn’t have a claim to.