302 6 Mezzanine
Participation certificates (Genussscheine) and ECAPS. In Germany, a limited-
liability company may grant profit-sharing rights. Such rights are largely unregu-
lated.^83 They are normally documented by issuing profit participation certificates
(Genussscheine).^84 If certified, profit-sharing rights are transferable.
Participation certificates are regarded as loan instruments. Some Genussscheine
are like bonds, with a regular coupon that can be delayed in hard times. Others are
closer to equity, with dividend-like payments that can be cancelled under specified
conditions.
According to the terms of the participation certificate, the lender provides capi-
tal to the company for a limited time. The lender is entitled to a stipulated yield.
The lender’s remuneration often consists of a minimum interest rate and a profit-
related component. The lender may be given options or conversion rights to
shares.
In the event of bankruptcy, the lender is normally a simple creditor. The parties
may agree that the lender will participate in the losses of the company. For exam-
ple, the parties may agree on subordination.
Similar techniques can be used in other countries as well. In the US, securities
called ECAPS (Enhanced Capital Advantaged Preferred Security) will, like debt,
carry routine payments and have finite (but long) maturities. At the same time,
like dividends on shares, the interest payments can be deferred in times of finan-
cial stress. They can also be met by issuing extra shares at maturity.^85
Interestingly, Genussscheine under German law are not the same thing as Ge-
nussscheine under Swiss law.^86 Genussscheine under Swiss law are not designed
as an instrument to raise new external financing.^87
Profit participating loans. Sometimes there can be a thin line between profit
participating loans and partnerships or silent partnerships (stille Beteiligung) al-
though the differences between these two forms of investment are large in theory.
A silent partner is an owner rather than a mere investor. In Germany, the distinc-
tion can depend on two things. First, a profit participating loan is a mere exchange
contract, but a silent partner pursues a joint purpose with the company. Second,
claims based on a profit participating loan can be assigned, but a silent partner
cannot assign his rights without the consent of the company.^88
6.4 Share-based Mezzanine Instruments....................................................
Mezzanine instruments can also be based on shares. Share-based mezzanine in-
struments such as redeemable preference shares differ from mezzanine loans.
(^83) See nevertheless § 160(1)(6) and § 221(3) and (4) AktG. See, for example, Kraft ET,
Die Abgrenzung von Eigen- und Fremdkapital nach IFRS, ZGR 2–3/2008 pp 349–351.
(^84) § 793 BGB.
(^85) Chameleon bonds, The Economist, November 2005.
(^86) Art. 657 OR.
(^87) Barthold BM, op cit, pp 235–236.
(^88) Wiehe H, Jordans R, Roser E, op cit, p 219.