Profit Participation Rights

Profit participation rights are purely contractual participations in a company with which the investor participates as well in profits as in losses of the company. The owner of the profit participation right is not a shareholder of the company and he is usually not entitled to membership rights. This means that he has no voting right in the company’s shareholders’ meeting and no right to attend these meetings.

Profit participation rights are not defined by law and can therefore to a large extent be negotiated and designed as the parties please. They can be designed to resemble borrowed capital by contractually agreeing on minimum interest payments which are independent of the company’s profits. Profit participation rights can also resemble equity capital if they grant the right to participate in the company’s profits and/or liquidation proceeds. Profit participation rights can be issued by all kinds of companies. In stock corporations this will require the assent of the shareholders’ meeting.

If profit participation rights are publicly offered, a sales prospectus is required, which has to be deposited with BaFin. A distribution company needs a permission pursuant to § 34c of the German law regarding the regulation of trade, commerce and industry (Gewerbeordnung).

Profit participation rights, which are certified as securities, are called profit participation certificates. Profit participation certificates may only be publicly offered with a securities prospectus. The distribution of profit participation certificates requires a permission pursuant to the German banking act (KWG), a permission pursuant to § 34c of the German law regarding the regulation of trade, commerce and industry (Gewerbeordnung) is not sufficient.