Profit Participation Certificates - what are they and what are they used for?

Profit participation certificates confer to their holders equity rights in a corporation. They may be entitled to a share of corporate profits, liquidation proceeds, or new shares issued. However, this right is only available to persons who are “affiliated” with the company. This is stipulated by the law in Art. 657 OR. But what exactly does this mean? You can find the answer here.

Creation of Profit Participation Certificates and Eligible Parties‍

Profit participation certificates can only be issued by a corporation if its statutes provide for it. The statutes must then define the rights associated with these certificates. Additionally, they must record the number of profit participation certificates issued. Unlike participation certificates, profit participation certificates are reserved for persons who are affiliated with the company. These include former equity participants, shareholders, creditors, employees, or similar (Art. 657 para. 1 OR). The condition is that the eligible party has provided the company a comparable benefit. Their issuance does not serve to finance the company but represents an alternative to cash compensation for extraordinary services.

‍Rights Arising through Profit Participation Certificates

‍Profit participation certificates establish property rights. These extend only to a share of the balance sheet profit, the liquidation proceeds, or the subscription of new shares (Art. 657 para. 2 OR). These three options can also be combined with each other. No other rights can be transferred. The holders of profit participation certificates thus have no decision-making power regarding how much is to be allocated to them or whether it is to be done at all. The holders of profit participation certificates form a community, to which the provisions about the creditor community in bond obligations (Art. 1157 ff. OR) apply accordingly (Art. 657 para. 4 OR). Only the holders of a majority of all profit participation certificates in circulation can waive one or all of the rights arising from the profit participation certificates. This regularly requires a high degree of coordination and consultation. For founders of a company, there is a special regulation that this is only possible if it was already provided for in the original statutes (Art. 657 para. 5 OR).