A participation certificate (PC) is usually a bearer instrument securitizing its holders the right to share in the distributable profits of the issuing company and in liquidation proceeds, it carrying no voting rights and commonly not entitling its holders to preemptive rights.  The participation right is in the form of an annual cash dividend based on the net profit of the issuer and the PC may be convertible and redeemable.  PCs may be issued as a form of participating preferred stock, having a guaranteed minimum dividend, or as a form of common stock having little or no advantage over the issuer’s common stock in terms of dividends.

PCs are common in several European countries, including Austria, France, Germany, the Netherlands and Switzerland.  They were first developed in Switzerland, chiefly as a means of enabling companies to split their equity into smaller units and to help limit foreign control of domestic companies.  Since they are nonvoting and do not entitled their holder to participate in the shareholders’ meetings of the issuer, PCs allows companies to increase their equity capital without changing current shareholder control.

Participation Certificates vs. Common and Preferred
Participating Certificate Common Stock Preferred Stock
Dividends Fixed or variable Variable Fixed or minimum
Voting Rights Never Typically Occasionally
Preemptive Rights Occasionally Frequently Frequently
Liquidation Rights Varies Residual Prior

Participation certificates are generally recognized and treated as compound financial instruments, having both debt and equity components, requiring split accounting under IFRS.  Depending on the terms and conditions of each individual issue, they may be cumulative, where passed dividend accrue and to which their holders have priority claim to payment in future years, or noncumulative, where passed dividends do not accumulate and are not paid to their holders at a later date.  As with bonds that include any accrued interest in the price at which it trades (dirty price), any accrued dividends on a PC is included in its market price and not paid separately, whereby the market price drops accordingly upon payment.

The participation certificate common in Europe as a form of equity is not to be confused with the US “participation certificate” or “certificate of participation” (COP) that gives its holder a share of the revenue from a facility leased to a municipality or other government entity or the mortgage backed security sold by Freddie Mac to fund its purchases of mortgages.

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