The adoption of no par value shres is because of the following limitations of par value shares

1 This section provides a brief overview of the requirement for par value, as

seen in its historical perspective, and as it applies today. It also describes the more

significant issues that requiring par value and retiring the concept give rise to.

2 It is important to emphasise from the outset that there is no essential difference

between a share of no par value and one having a par value. Both represent a share,

being a fraction or an aliquot part of the equity, but the par value share has attached to

it a label of value, and the share without par value does not. In a par value system, it

is usual to state the share capital this way:

"The share capital is $x divided into y shares of $z each"

The share therefore has a label proclaiming that its par value is $z. On the other hand

a no-par system would simply represent the capital as:

"$x divided into y shares".

3 Par value (or nominal value, as it is also called) is the minimum price at which shares can generally be issued. Where shares are issued above the par value, the amount in excess of the par value is called the share premium, and is separately

accounted for. All shares of a class have the same par value, and this generally

remains unchanged in the life of the company.

4 The par value is shown on the financial statements as the share capital of the

company. These were the statements that were said to be relied on by customers and

financial institutions that extended credit to the company and potential subscribers to

shares in the company. The theory is that par value and the statutory framework in

which it operates is necessary in order to protect creditors and shareholders.

5 The way in which the concept of "par" is said to protect creditors' interests is

principally as follows:

(a) The par value of a company's shares provides a base of subscribed share

capital that cannot be repaid to shareholders except with the sanction of the

court - or, in the case of a liability to pay the unpaid part of the par value,

cannot be released by the company without the sanction of the court. It was

therefore regarded as a cushion of solvency for the trading activities of the

company.

(b) Par value assists creditors to assess whether a company has adequate capital

by showing the minimum amount that an applicant for a share has to

contribute to the company.

6 It is said to protect shareholders in these ways:

(a) It protects existing shareholders by ensuring that companies do not issue new

shares below the floor price (par value) of existing ones, thereby reducing the possibility of dilution of the fractions of ownership held by earlier allottees

(called "share watering").4

(b) It fixes the maximum amount that a shareholder in a company limited by

shares is statutorily obliged to pay for new shares. The actual share price, and

the amount of any premium over par, would be a matter for agreement

between the parties.

7 The weight of legal opinion is that the theory of par value is not borne out in

practice. On the contrary, the par label is said to stand in the way of recognising the

ordinary share in a company for what it really is: a fraction of the equity of the

company. Conceivably it is potentially deceptive, and can be used to mislead the less

sophisticated investor. The object of a change to no-par is not to add any suggestion

of a value that is more true or real, but to remove a label that has little to do with the

intrinsic value of the share.

8 The concept of par value is also said to add unnecessary complexity to

company accounting and the financial statements of companies. The increasing use in

loan agreements and other creditors' agreements of financial covenants on the

company, including limitation on the circumstances under which the company could

use its funds to pay dividends or other distributions to shareholders or to repurchase

its own shares, means that the division of the company's equity between "capital" and

"surplus" has become for such creditors a matter of academic interest only.

9 The expression of a dividend as a percentage of the par value is also said to

illustrate the unreality of the par value system. For example, if a 5% dividend is

declared in respect of a share of $1.00 par value, the dividend that an investor who has

paid $10 for the share is 5 cents (ie 0.5% of his investment), not 50 cents. A dividend

declared as a percentage of par value (in the example 5%) can be deceptive, while a

declaration in terms of money (5 cents) makes obvious the real position.

10 There is a clear growing recognition and acceptance of the validity of no-par

value shares, and a move towards its adoption in place of par value shares.

Resources

Top Categories

Product

Company