Meet the Law - Profit Participation Loan

On 13 January, entered into force the legal regime of the Profit Participation Loans (RJEP), approved by Decree-Law No. 11/2022, of 12 January.

The Profit Participation Loan (PPL) is presented as an instrument to promote the reduction of companies' dependence on bank financing and to capitalize them through a "quasi-equity investment" whose level of risk is higher than that of senior debt although lower than ordinary capital.

The following aspects of RJEP are highlighted:

1.    PPL is an onerous credit agreement, in the form of a loan or in the form of securities representing debt, whose remuneration and repayment or amortization depends, even if partially, on the result of the borrower's activity and whose outstanding amount may be converted into equity of the borrower.

2.    PPL is considered equity for purposes of commercial legislation whenever its remuneration depends on the borrower's results and its repayment or redemption is subject to the satisfaction of the requirements laid down in articles 32 and 33 of the Portuguese Companies Code.

3.    The following entities (lenders) may grant PPL:

1. Credit Institutions and Financial Companies;
2. Specialized Alternative Credit, Venture Capital and Social Entrepreneurship Investment Undertakings;
3. Securities Investment Companies for the Development of the Economy;
4. The Capitalization and Resilience Fund;
5. Other entities that are qualified to grant credit on a professional basis.

4.    Commercial companies outside the financial sector can be borrowers.

5.    The PPL in the form of loan is concluded in writing and the PPL in the form of debt securities follows the framework applicable to the issue of securities. Both the loan contract and the conditions of issue of the debt securities (generically referred to as "instrument" of PPL) must expressly mention its applicability to the RJEP. As a rule, the PPL under any of the referred modalities also requires prior, express and favorable resolution of the borrower's General Meeting.

6.    The purpose of PPL must be set out in the respective instrument, and may consist, namely, in the following:

1. Financing investments;
2. Working capital reinforcement;
3. Repayment of previous debt; or
4. Any other purpose agreed by the parties, compatible with the corporate object or policy.

7.    PPL is onerous and its remuneration (exclusively or partially indexed to a share in the borrower's profits) is provided for in the PPL instrument.

8.    The participation in the results may consist of a fixed or increasing percentage of those results, or be proportional to the weight of the nominal value of the PPL in the borrower's equity and such participation may also be earned through any financial indicator provided for in the company's profit and loss account, reflecting the evolution of its financial situation agreed by the parties. In addition to the variable component, the remuneration may also have an interest rate component, due under the terms defined in the contract, which is independent from the borrower's results.

9.    The borrower pays the remuneration in the event of existing distributable profits; if the borrower fails to pay the remuneration due, the lender has the right to call the guarantees provided to secure the PPL or, alternatively, to convert it into share capital.

10.    The borrower may repay PPL at any time, at its nominal value, plus the unpaid remuneration provided for in the respective instrument and the remuneration that would be due until the beginning of the quarter in which the reimbursement occurs. The repayment can only be made with funds that, according to the corporate law, can be distributed to the shareholders.

11.    There is no payment of PPL’s remuneration or its repayment:

1. When the borrower's equity is or would, by virtue of the payment, become less than the sum of the share capital and reserves;
2. When the profits of the financial year are necessary to cover retained losses or to form or reconstruct reserves imposed by law or by the memorandum of association, applying the limits on the distribution of assets to members set out in the Portuguese Companies Code.

12.    The lender has the right to convert the PPL into borrower’s share capital in the following cases:

1. If repayment has not taken place in full, after the established repayment period has elapsed;
2. If the borrower has not paid the remuneration due for more than 12 months, consecutive or interpolated;
3. If the borrower's management body does not provide the lender with proof of the approval of the accounts and deposit at the Commercial Registry Office within 12 months after the legal deadline for such purpose;
4. Other situations established in the contract.

13.    If there is a right to convert PPL into share capital, the lender must submit a proposal for conversion into share capital of the PPL accompanied by a statutory auditor's report (the costs of which are the lender's responsibility in the case of borrowers that are micro or medium sized companies) and with the content provided for in the RJEP, for the purposes of approval by the General Meeting. The shareholders of the borrower always have a pre-emptive right in the capital increase that would result from the conversion, in which case it is obligatorily applied to redeem the credits.

14.    As an alternative to the proposal of conversion into share capital and if the requirements of the RJEP are met, lender and borrower can agree to grant the lender a direct right (direito potestativo) to convert the PPL into share capital of the borrower, in which case several rules of the RJEP that would apply in the case of a conversion proposal do not apply, namely the pre-emptive right of shareholders or members mentioned above.

15.    While the PPL is in force, it is forbidden for the borrower, except with the express authorization of the lender, to alter the profit sharing conditions established in the articles of association, to attribute privileges to existing shareholdings, to reimburse loans, additional or supplementary payments, to redeem shareholdings or, except in the cases foreseen in the RJEP, to deliberate on the reduction of its share capital.

16.    The credits arising from PPL contracts may be assigned to third parties, including credit securitization companies.

17.    In the event of insolvency of the borrower company, the credits arising from PPL are considered subordinated credits, ranked above the credits of the shareholders and other persons especially related to the debtor.