A participation certificate (German: Partizipationsschein, French: Bon de participation) is a form of corporate security which is widely issued in both Switzerland.
Holders of participation certificates benefit from the same rights to dividends as shareholders. They also have the same claim to liquid assets as shareholders in the event of the issuing company’s bankruptcy. However, they do not own the company and they do not have the right to vote in the company’s annual general meeting (AGM) like shareholders do.
In Switzerland, a clear legal difference is made between a participation certificate and a dividend rights certificate (German: Genussschein, French: Bon de jouissance).
The most important difference is that participation certificates can only be issued by corporations, while dividend rights certificates can be issued by any category of company.
Another important difference is that dividend rights certificates can only be obtained by investors who already have a vested interest in the issuing company, while participation certificates are offered to the general public.
Dividend rights certificates cannot have a nominal value, while participation certificates can have a nominal value.
Changes to the statutes governing a company’s participation certificates must be approved by both participation certificate holders at an extraordinary general meeting (EGM) and by shareholders at the company’s annual general meeting.
However, companies may include clauses in their statutes which require participation certificate holders to waive this right. In any case, changes to corporate statutes and other key decisions voted on by shareholders at a company’s AGM cannot put shareholders at an advantage over participation certificate holders.
If a company issues more than one category of shares (such as preferred shares, voting shares or ordinary shares), the rights of participation certificate holders must at least be equal to those of shareholders who hold the most basic category of shares.
Many small and mid-sized Swiss companies which are not publicly owned and are not listed on either the SIX Swiss Exchange (SIX) or the Berne Exchange (BX) issue participation shares as a means of raising capital. Participation certificates are also offered by a number of Swiss cantonal banks and regional banks. Some large Swiss public companies issue participation certificates in addition to shares in their stocks.
Participation certificates are typically cheaper than shares because they do not represent ownership in the issuing company. When a company offers both shares and participation certificates to the public, participation certificates can be a more affordable vehicle for participating in a company’s growth than shares.
In addition to giving holders a right to cash dividends based on business performance, the participation certificates issued by many Swiss companies also entitle their holders to benefits akin to shareholder perks. These dividends in kind may include limited complimentary access to the goods or services offered by issuing companies.
Ownership of participation certificates is transferrable, so they can be bought and sold in much the same way as shares. The participation certificates of some companies are listed on securities exchanges, while others can only be purchased directly from issuing companies or from their holders on the secondary market. The secondary market for participation certificates is typically less liquid than that for shares. As with shares, corporations may attempt to take participation certificates out of circulation by means of buyback programs.
Compared to corporate bonds and medium-term notes which pay out interest on loan principal at predetermined rates regardless of whether or not the issuing company makes a profit, participation certificates provide more room for capital gains because they allow investors to participate in the growth and profits of issuing companies. They also bear more risk because dividends are not guaranteed.
Important: Although the term participation certificate is also widely used in Austria, the Austrian definition of the term is closer to that of a dividend rights certificate.