Here’s Everything You Need To Know About Pari Passu

What Is Pari Passu?

Pari passu means the equal treatment of creditors or shareholders. It ensures that all parties involved are treated on an equal footing and share the same rights and privileges. It is particularly relevant in insolvency and bankruptcy proceedings. The clause helps creditors to be treated fairly and equitably.

Pari passu is often referred to as “equal footing” or “on an equal basis” in legal and financial contexts. These terms emphasise the principle of treating all parties involved without discrimination.

A common example of this clause can be found in a bond indenture agreement. It might state that in the event of a default, all bondholders are entitled to the same treatment, and there will be no discrimination in payments or collateral rights. This clause ensures equal treatment of bondholders, regardless of when they purchased their bonds.

What Is Pari Passu In Startup Terms?

In the context of startups, the term pertains to the priorities of favoured shareholders within a company. When investors possess this preference, also known as blended preference, it signifies that they share equal entitlements to any accessible funds during a liquidity event, such as a company sale.

How Does Pari Passu Clause Differ From Pro Rata Rights?

Pari passu and pro rata are related concepts, but they have distinct meanings. The former means equal treatment, as discussed earlier, while pro rata means in proportion to one’s stake or share. In the financial context, if shareholders have pro rata rights, they have the right to buy additional shares in proportion to their existing ownership.

Example: If a company offers additional shares to existing shareholders on a pro-rata basis, and you own 10% of the company, you have the right to purchase 10% of the new shares issued.

What Is A Pari Passu Issue Of Shares?

A pari passu issue of shares refers to the issuance of new shares in a manner that treats all existing shareholders equally. In this scenario, each shareholder is allowed to purchase additional shares in proportion to their current ownership, maintaining their relative ownership percentage in the company.