19 July 2019

Conducting a Capital Increase: Share or Participation Certificate?

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When procuring capital, consideration should be given not only to the share but also to the participation certificate.

The investment volume in the form of crowdfunding in Switzerland has multiplied rapidly since 2008 from 0.1m Swiss Francs to a total of 374.5m Swiss Francs. While access to the capital market has so far been easier for listed companies than for non-listed ones, technological progress has also created increasing opportunities for SMEs to gain more efficiency in the course of capital increases.

With the launch of the daura platform, companies are now able to keep their shareholder register online and – thanks to the underlying blockchain technology – entirely automated. Changes in capital can thus be carried out much more easily. In addition to the widespread form of the share, the participation certificate (short “PC”) should not be disregarded when it comes to capital procurement transactions. Although the PC can only be found sporadically in the capital of Swiss companies over the past decades, well-known examples support the view that the statement ""there’s life in the old dog yet"" also seems to apply to this sort of securities. The purpose of this article is therefore to compare the two previously displayed forms of securities which can be issued on daura, while the potential of PCs as a valid alternative to shares shall be accentuated.

A share embodies various functions: Firstly, it represents a ratio in the company's capital, in the form of the nominal value which must, at present, correspond to the minimum amount of one centime (0.10 Swiss Franc). Participation certificates also have a nominal value and embody a monetary participation in the company.

Furthermore, it is important to notice that PCs can likewise be created during ordinary, authorised or contingent capital increases (656b para. 5 CO). The principle of “issuance against contribution” (656a CO) applies likewise. In principle, the provisions on share capital also apply to participation capital (656a para. 2 CO), unless otherwise stipulated by law. This largely identical legal practice reflects the functional proximity of both participation rights, as the aim is (beside others) to enable investors to participate in the success of the company. While participation in profits is a common characteristic, the two effects differ especially in the possibility of participating within the company (voting rights). This responsibility is solely attributed to the shareholder and has lead to the PCs’ sobriquet of ""non-voting share"".

The share thus differs from the participation certificate particularly due to its status as a membership title and all the associated membership and property rights of a shareholder. The latter grants the participant ""only"" property rights. In addition to the aforementioned participation in the balance sheet profit and the dividend, the subscription right in the event of capital increases (656g CO) and the proceeds in the liquidation result (656f para. 1 CO) are additional property rights.

In any case, it must be noted that the participant is granted with rights: Although the exclusion of voting rights is mandatory, the Articles of Association may grant the right of the participant to convene and participate (in) a General Meeting (including the right to information, right of inspection and the right to table motions, 656c para. 2 CO). In addition, the participant is also entitled to the same rights of action as the shareholder (such as rescission, liability or dissolution action). The law also stipulates that the Articles of Association must not place participants in a worse position than shareholders with regards to pecuniary rights (656f CO).

Ultimately, the primary purpose of issuing participation certificates is to procure equity capital (""non-voting stock""). In addition, the participation certificate can also be issued strategically in order not to give up the majority of voting rights within a company in which in terms of capital only a minority shareholding is held - as handled in the prominent example of the Swiss ""Schindler and Bonnard"" families. If one also compares the performance of the Schindler PC stock price with that of the registered share, one can detect a 2% improvement in the performance of the PC over the last five years. The other famously cited example of ""Lindt & Sprüngli"" illustrates that the issue of participation certificates may, under certain circumstances, enable fewer solvent investors to participate; in this case the PC price is approximately one tenth of the registered share price. In summary, PCs can be deemed a noteworthy alternative to shares, if investors

In summary, PCs can be deemed a noteworthy alternative to shares, if investors shall be granted the opportunity of monetary participation, without wanting to perform changes to the majority ratios within the company.