Pari Passu

Pari passu is a Latin term meaning "on equal footing" or "equal step" — in M&A and finance, it describes a situation where two or more parties have equal rights, claims, or priority to the same assets or income stream, with neither having priority over the other. Pari passu provisions ensure that all holders in a class of debt or equity receive proportional treatment — no single holder within the class can be paid before or at a higher rate than the others.

In debt structures, pari passu clauses in bond or loan indentures are fundamental protective provisions. They prevent a borrower from creating new debt obligations that rank ahead of (i.e., have superior priority to) existing debt without the consent of existing debt holders. If a company's bond indenture contains a pari passu clause, the company cannot issue senior secured debt that would push existing bondholders down the priority waterfall without their consent. This protection preserves the relative claims of existing creditors.

In M&A capital structures, pari passu concepts appear in several contexts. First, in acquisition financing: when multiple lenders participate in a senior loan (a "club deal"), their claims are typically pari passu — each has equal priority to loan repayment and equal recovery rights in a default or liquidation. Second, in preferred equity structures: multiple series of preferred equity issued at different times may be either pari passu (same priority) or have seniority ordering among series (Series B senior to Series A). Third, in earnout and contingent payment structures: if multiple sellers are entitled to an earnout, specifying that each receives their proportional share pari passu prevents any single seller from claiming priority.

For SMB M&A, pari passu language appears most commonly in: seller note documentation (multiple seller notes from different transaction parties receiving equal priority); parallel debt structures (equipment financing pari passu with other secured obligations); and operating agreements where multiple members have equal distribution rights in their respective classes.

Pari passu clauses have been the subject of significant litigation, particularly in sovereign debt markets (the Argentina bond disputes) where the interpretation of pari passu language — specifically whether it required equal payments or merely equal legal status — was contested with billions of dollars at stake.