Tuesday, October 27, 2015

What is Par Value? or No Par Value? when issuing stock for a corporation...

Historically, par value[1] (as opposed to non-par value[2]) was the initial sale price of the stock. In the early days of contracting, this was the only way to show someone how much the investment was worth. If someone did not pay the par value, the stock was called “watered”. You can pay more then par value, but you can’t pay less (paying less is called watering down the stock).

There are certain legal ramifications of not paying for the stock. A shareholder is liable to corporate creditors to the extent his stock has not been paid for. Hanewald v. Bryan’s Inc. 429 N.W.2d 414,1988 N.D. In the latter case the defendants took out a $55k loan from the bank and signed a $5k promise note for the purchase of a business which went out of business 5 months later. The court held that because they initially received stock in the corporation they formed for this business, and they did not pay any cash or value for the shares, they could not enjoy the benefit of corporate limited liability since they had not purchased the protection. The only monies the owners placed in the business was $10k in the form of a loan. The “watered stock liability” doctrine will hold a shareholder liable for not paying the par value of the stock. The model corporations act allows for a promise to perform services in consideration for common stock. Some states explicitly state that you must pay a cash amount for stock or services must be performed before stock can be exchanged for their value. For example in IL you can not issue a promissory not or services to be performed in exchange for stock. The Model Corporations Act allows for both.

When relating to stocks;
Par value stock has no relation to market value and, as a concept, is somewhat archaic. The par value of a stock was the share price upon initial offering; the issuing company promised not to issue further shares below par value, so investors could be confident that no one else was receiving a more favorable issue price. Thus, par value is a nominal value of a security which is determined by an issuing company as a minimum price. This was far more important in unregulated equity markets than in the regulated markets that exist today.

Par value also has bookkeeping purposes. It allows the company to put a de minimis value for the stock on the company’s financial statement.

Many common stocks issued today do not have par values; those that do (usually only in jurisdictions where par values are required by law) have extremely low par values (often the smallest unit of currency in circulation), for example a penny par value on a stock issued at USD$25/share. Most states do not allow a company to issue stock below par value.
Even in jurisdictions that permit the issue of stock with no par value, the par value of a stock may affect its tax treatment. For example, Delaware permits the issue of stock either with or without a par value, but by choosing to assign a par value, a corporation may significantly reduce its franchise tax liability.

No-par stocks have “no par value” printed on their certificates. Instead of par value, some U.S. states allow no-par stocks to have a stated value, set by the board of directors of the corporation, which serves the same purpose as par value in setting the minimum legal capital that the corporation must have after paying any dividends or buying back its stock. Preferred stock par value remains relevant, and tends to reflect issue price. Dividends on preferred stocks are calculated as a percentage of par value.

Also, par value still matters for a callable common stock: the call price is usually either par value or a small fixed percentage over par value.

In the United States, it is legal for a corporation to issue “watered” shares below par value.
However, the purchasers of “watered” shares incur an accounting liability to the corporation for the difference between the par value and the price they paid. Today, in many jurisdictions, par values are no longer required for common stocks.

Hope this was helpful,

-The MicroCapCompany Team
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About the Author: Nicholas Coriano is a Business Consultant and Planning Guru.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and as an Investor Relations Agent & Consultant to Micro Cap Companies and Penny Stocks.  He is the founder and author of The MicroCapCompany.com a blog focused on providing information and advice to Micro Cap Company Executives and Investors.  You can also find him blogging about Social Media, SEO, Web Development and Tech on PushYourRank.com

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[1] Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par (at the par value), over par (over par value) and under par (under par value).
[2] Stock that is issued without the specification of a par value indicated in the company's articles of incorporation or on the stock certificate itself.

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