6.4 Share-based Mezzanine Instruments 303First, the obvious difference is that a mezzanine lender is regarded as a lender,
but the holder of a share-based mezzanine instrument is regarded as a share-
holder.^89
Second, according to basic company law principles, all shareholders rank be-
hind all creditors on a liquidation, but holders of mezzanine loan instruments rank
in general only behind those to whom they have agreed to be subordinated.
Third, the distribution of funds to shareholders is constrained by mandatory
provisions of company law which do not apply to mezzanine loans. For example,
the main rule is that the company may provide security for the repayment of a
mezzanine loan but not for the repayment of shareholders’ capital.^90
Fourth, whereas dividends on share-based mezzanine instruments will only be
payable out of the distributable profits of the issuer,^91 interest on mezzanine loan
instruments may be payable even in other cases.
Fifth, there are also restrictions on the ability of a company to redeem shares.^92
Typically, they may only be redeemed out of distributable profits or out of the
proceeds of a fresh issue of shares.
Sixth, the holder of a share-based mezzanine instrument has normally no per-
sonal right to trigger the liquidation of the company.
Finally, the tax treatment of dividends on preference shares is also different
from that applicable to interest on mezzanine.^93
Differerent kinds of shares: ordinary, preference, tracking. Ordinary shares
normally carry a right to participate in a company through voting and an entitle-
ment to receive dividends. When a company is wound up, the ordinary sharehold-
ers will be the residual claimants.
It is also possible to issue ordinary shares which carry different rights. In many
countries, a distinction is made between ordinary shares (that confer same rights
or different rights) and particular preference shares.^94 Whether the amount paid to
the company for preference shares is included in equity share capital or debt capi-
tal depends on the governing law.^95
For example, preference shares are not included in equity share capital under English com-
pany law, because their rights differ from the ordinary shareholders’ rights. English prefer-
(^89) See, for example, Barthold BM, op cit, p 234: “Die Vorzugsaktie nach Art. 654 OR ist
in Bezug auf die Vorrechte dem Genussrecht des deutschen Rechts sehr ähnlich. Der
Unterschied besteht jedoch darin, dass der Genussrechtsinhaber nach deutschem Recht
nicht Aktionär der finanzierten Unternehmung sein muss, was der Berechtigte nach Art.
654 OR demgegenüber in jedem Fall ist. Die Vorzugsaktie dürfte dennoch das schwei-
zerrechtliche Instrument für die Finanzierung von Unternehmensübernahmen und Jung-
unternehmen im Wege einer Mezzanine-Beteiligung sein.”
(^90) Ibid, p 237.
(^91) Article 15(1)(a) of Directive 77/91/EEC (Second Company Law Directive).
(^92) Articles 35–40 of Directive 77/91/EEC (Second Company Law Directive).
(^93) Dyer R, Mezzanine Finance: Subordination and Priorities – an Overview, JIBL 5(4)
(1990) p 154.
(^94) See also Barthold BM, Mezzanine-Finanzierung von Unternehmensübernahmen,
SZW/RSDA 5/2000 p 234.
(^95) Ibid, pp 234–235.