Pari passu is a common term found in transaction documents. The clause on pari passu, when applied, makes it mandatory that all holders of a specific security be treated on the same footing as equity shareholders.

This clause is important because it ensures that no class of investor loses out when it comes to distribution of dividend or return of capital.

For example, if pari passu is applicable in an event of liquidation, the holders of a particular class of security will be entitled to return of their capital, pari passu with the equity holders, or be entitled to pro rata return based on their ownership stake in the company.