300 6 Mezzanine
6.3.7 Structural Subordination of Collateral
Like the subordination of debt, even the subordination of collateral can be struc-
tural. For example, a secured creditor can have a security interest at the asset level
or the company level.
The former is a security interest in particular assets of the company. If the as-
sets are sold to repay the secured debt, the main rule is that the holder of the secu-
rity is entitled to the full value of the asset minus costs.
In contrast, the latter is a security interest in the company’s shares. If those
shares are sold to repay the secured debt, the security holder will be entitled to the
value of those shares minus costs but not to the full value of the company’s assets.
The shares can be worth nothing.
A limited-liability company typically cannot give its own shares as collateral
under the European legal capital regime but the shares can be given as collateral
by a shareholder. As the collateral is not given by the company itself, it might not
necessarily violate negative pledge clauses under that company’s other financial
contracts (but would force the shareholder to study its own obligations under its
own financial contracts).
It is easier for a limited-liability company to give a subsidiary’s shares as secu-
rity for its own debts or – within the limits of the purpose of the company and any
applicable particular restrictions (for acquisition finance, see section 20.4) – other
debts.
A share sale under the terms of the security agreement is a relatively easy way
to enforce a security. Unlike the sale of the company’s assets, it would not influ-
ence the position of the company’s unsecured (trade) creditors or its secured credi-
tors who have a security interest in the company’s assets.
6.3.8 Participation in Profits
The terms of the loan can provide that the lender’s remuneration is at least par-
tially profit-related. Although the remuneration depends on profits, the lender is
not a shareholder. In the insolvency of the debtor, the lender is a simple creditor.^75
Equity kicker. Profit-related remuneration can be in the form of an “equity
kicker”. Equity kickers can be real or synthetic.
A real equity kicker means a right to subscribe for shares. For example, the
company may issue convertible bonds or share option rights, or the loan may be a
profit participating loan. The company may issue options that can be traded sepa-
rately (warrants).^76 Company and securities markets laws or the terms of the loan
(^75) Wiehe H, Jordans R, Roser E, Mezzanine Finance Structures under German Law, JIBLR
22(4) (2007) p 219.
(^76) Diem A, Akquisitionsfinanzierungen. C.H. Beck, München (2005) § 38 number 15.