Is Your Corporation Up to Par?

Is Your Corporation Up to Par?

By Kristin Naidysh

For the average first-time entrepreneur, setting par value for the stock of a newly created corporation can be an intimidating task. At first blush, a plethora of resources mention par value, but the assistance typically stops there. The budding entrepreneur may find hundreds of journals, periodicals, or web-based articles that reference par value, but few go so far as to explain its significance in the modern business world. This is when calls to Strahan Cain, PLLC pour in. The reality is that par value is something of a corporate fiction in today’s society and, while boasting earnest historical significance, is relatively arbitrary and inconsequential in the present world of corporate transparency and credit checks. To save diligent businesspeople from the headache of researching par value for their upcoming Texas corporation, this article will explore the fundamentals of par value from its bygone financial importance to its minimal relevance today.

Par value was initially created in the 19th century, an era virtually devoid of securities and exchange regulation and prior to the worldwide availability of corporate information. During this establishment period, the par value of a company’s common stock was equivalent to the market value at issue; thus, creditors and government agencies were able to place a dollar value on a company. Likewise, investors enjoyed knowing they were purchasing stock at a reasonable price because the par value of common stock was the lowest possible price a share could be sold for. If an investor bought stock in a company for $3.00 per share and the par value was $3.00, he knew he was getting the best deal. Therefore, 1800s par value facilitated the purchase and sale of otherwise unencumbered securities. State business codes such as the Texas Business Organizations Code codified the creation of corporations in their respective jurisdictions and required par values to be printed on each stock certificate, thereby delineating the minimum contributions to and the maximum distributions from the corporation.

Par value did not gain any legal significance until the latter part of the 19th century when disgruntled investors, creditors, and shareholders began turning to courts of law to remedy wrongs resulting from fraudulent activities and speculation schemes. Philip McGough, a California business professor and author, describes that “[w]ith failed speculation schemes involving discount, watered, or bonus stock, judges tended to look at par value as a benchmark for adequacy of consideration.” From these judicial opinions developed theories of corporate liability to purchasers of stock. “The leading case in this area is in Handley v. Stutz [139 U.S. 417 (1891)],” McGough states, “In this case, the U.S. Supreme Court held that, in certain limited situations, a corporation could issue stock at less than par. The significance of the case rests, however, not on the holding on in the implication of the holding: under ordinary circumstances, corporations had an obligation not to issue stock below par.” Legal action was also taken when corporations would violate statutory regulations under the applicable state business code by making distributions from contributed capital beyond their established par values, rendering a corporation insolvent.

Today, however, the country is trending toward the elimination of par value stock and many states, including Texas, allow for “no par stock.” Creditors, investors and government agencies have widespread access to corporate records and a corporation’s par value is no longer the market value of a company’s stock. “[T]he securities laws in the United States are designed to prevent the kind of speculation schemes where the value of stock might be an issue [and] [t]he more recent state corporation codes define adequate consideration as that determined by the board of directors and strictly limit shareholders’ liability to that consideration.” Specifically, securities are regulated heavily by bodies such as the U.S. Securities and Exchange Commission through legislative Acts such as the Securities Act of 1933 and the Securities Exchange Act of 1934. Further, the Texas Business Organizations Code provides, “There is no minimum or maximum par value that must be assigned […] Shares may have ‘no par value,’ which means that the board of directors will assign a value to the stock below which the shares cannot be sold.” From a legal perspective, corporate transgressions and securities schemes are further addressed under suits of fraud and the like.

The only real procedural, rather than substantive, difference par value makes in today’s global business world is in a corporation’s accounting department—on its balance sheets. Finance and business author Cam Merritt explains, “The stockholders' equity section of the balance sheet identifies how much money the company has raised by selling shares. If the stock has a par value, the common stock equity account will show only the money from the par-value part of the stock sales. Anything above par value will appear in an equity account called something like additional paid-in capital.”

Corporations today, if incorporated in a state without no par stock, frequently set their par values at $1.00, $0.01, or even a fraction of a cent. Even the once-customary paper stock certificates adorned with the corporation’s seal have now become obsolete. Most new or small corporations simply keep records of stock ownership in a stock ledger on-site. The bottom line for aspiring entrepreneurs embarking down the road towards incorporation is that assigning a par value should not be what keeps you up at night. The importance of par value is mostly historical and is overshadowed by modern free information and a heavily regulated market. Whether you assign no par value, or a par value of $0.01 per share, the number you write on your Texas Form 201 will not be what determines whether your company is up to par with the competition.

Questions? Call Strahan Cain, PLLC today to get legal help starting your business. 

Tags

Contact us to learn how we can help your business