Par Value

This is an interesting, albeit trivial, topic.

I entered into a discussion on Wikipedia about Par Value on Preferred Stock. Somebody had queried a statement in the article:

Preferred stock has a par value or liquidation value associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued.

and complained:

What is this? Par value is an amount set by the articles of organization or bylaws (need research as to which one) as to the value of the preferred stock. The proceeds actually contributed to the corporation is almost always higher than the par value, especially since we’re talking about preferred stock here (and not common stock). The proceeds actually collected for the issuance of the stock is actually: Par value + Additional-paid-in-capital. APIC has not even been discussed in the article

I asked for some examples and was referred to Northrop Grumman preferred B and Realty Income Corp., 7 3/8% Preferred D, both US stocks where, in fact, liquidation value or subscription price is very different from par value.

A little worried, I checked to see what was on line. CIBC Investors Edge states:

Par Value

The stated face value of a bond or, in the case of stock, an amount assigned by the company’s charter and expressed as a dollar amount per share. Par value of common stock usually has no relationship to the current market value and so no par value stock is issued. Par value of preferred stock is significant, however, as it indicates the dollar amount of assets each preferred share would be entitled to in the event of liquidation of the company.

National Bank states:

Par Value

The stated face value of a bond or, in the case of stock, an amount assigned by the company’s charter and expressed as a dollar amount per share. Par value of common stock usually has no relationship to the current market value and so no par value stock is issued. Par value of preferred stock is significant, however, as it indicates the dollar amount of assets each preferred share would be entitled to in the event of liquidation of the company.

According to GlobeInvestor:

Par Value:

The stated face value of a bond or, in the case of stock, an amount assigned by the company’s charter and expressed as a dollar amount per share. Par value of common stock usually has no relationship to the current market value and so no par value stock is issued. Par value of preferred stock is significant, however, as it indicates the dollar amount of assets each preferred share would be entitled to in the event of liquidation of the company.

It does my heart good to see such unanimity!

IFIC states:

Par value: The principal amount, or value at maturity, of a debt obligation. It is also known as the denomination or face value. Preferred shares may also have par value, which indicates the value of assets each share would be entitled to if a company were liquidated.

which is echoed by AIM Trimark

Par value – The principal amount, or value at maturity, of a debt obligation. It is also known as the denomination or face value. Preferred shares may also have par value, which indicates the value of assets each share would be entitled to if a company were liquidated.

The Journal of Accountancy states:

Preferred shares pay a fixed quarterly dividend based on a stated par value. If XYZ Corp. issues a preferred stock with a par value of $50 and paying a quarterly 2% dividend, that’s a $1 dividend each quarter.

citing riskGlossary.com, which further states

However, preferred shares are superior to common shares. No dividends may be paid to holders of common stock unless dividends to preferred shareholders are also paid in full. In liquidation, preferred shareholders are entitled to at least their par value before common shareholders can receive anything.

RiskGlossary, in its discussion of par value, further states:

For common stocks, par value became a stated minimum issue price. In the United States, a corporation could issue stock at a price in excess of par value. If it issued the stock below par value, the stock was called watered. Purchasers of watered stock were liable 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. In jurisdictions that still require them, corporations typically state nominal par values, perhaps listing a USD .01 par value for a stock that will be issued at USD 25.00. 

For preferred stocks, par value remains relevant. Preferred stock is typically issued at a price close to the par value. Preferred stock dividends are calculated as a percentage of par value. Also, if common stock is callable, it is usually at par value or at a small premium over par value.

It would appear, then, that if I was mistaken, I am in good company!

But on the other hand, par value isn’t really formally spoken about much, at least in Canada. For instance, the Bank of Montreal states:

We are authorized by our shareholders to issue an unlimited number of Class A Preferred Shares and Class B Preferred Shares without par value, in series, for unlimited consideration. Class B Preferred Shares may be issued in non-Canadian currency.

In the prospectus for the recent Sun Life Financial issue, the phrase “par value” is not found anywhere.

I do, however, see a recent ruling regarding Canfor that states:

At the end of the series of steps comprising the Arrangement, the authorized share capital of Canfor will consist of 1,010,000,000 shares divided into 1,000,000,000 common shares without par value and 10,000,000 preferred shares with a par value of $25 each. At June 5, 2006 there were 142,540,059 common shares issued and outstanding and no preferred shares is sued and outstanding.

so the words “par value” are not completely unknown in formal description, anyway!

If you’ve read all the way down to here expecting an earthshaking revelation, then I’m very sorry to disappoint you: there ain’t none. However, any insights anybody would like to share with me about “Par Value” and any legal weight the phrase might have or, perhaps, the insistence of certain jurisdictions (which ones?) that insist on all issues being assigned a par value of some kind will be very gratefully ripped off and presented as the fruits of my own research.

Unless requested otherwise!

Update : The State of Delaware has some interesting tax rules based on their Franchise Tax:

To use this method, you must give figures for all issued shares (including treasury shares) and total gross assets in the spaces provided in your Annual Franchise Tax Report.  Total Gross Assets shall be those “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report.  The tax rate under this method is $250.00 per million or portion of a million of the assumed par value capital, which is calculated as described below, if the assumed par value capital is greater than $1,000,000.  If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $250.00.  

The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00 , gross assets of $1,000,000.00 and issued shares totaling 485,000.

  1. Divide your total gross assets by your total issued shares carrying to 6 decimal places.  The result is your “assumed par”.Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
  2. Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par.Example: $2.061856 assumed par s 1,000,000 shares = $2,061,856.
  3. Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.Example: 250,000 shares s $5.00 par value = $1,250,000
  4. Add the results of #2 and #3 above.  The result is your assumed par value capital.Example:  $2,061,856 plus 1,250,000 = $3,311 956 assumed par value capital.
  5. Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $250.00.Example: 4 x $250.00 = $1,000.00

NOTE: If an amendment changing your stock or par value was filed with the Division of Corporations during the year, issued shares and total gross assets within 30 days of the amendment must be given for each portion of the year during which each distinct authorized amount of capital stock or par value was in effect.  The tax is then prorated for each portion of the year dividing the number of days the stock/par value was in effect by 365 days (366 leap year), then multiplying this result by the tax calculated for that portion of the year.  The total tax for the year is the sum of all the prorated taxes for each portion of the year.

Harvard Business Services also states:

Since your annual Delaware franchise taxes are based on your number of shares and their par-value, it is best to keep both of these as low as you can.

If you need more than 1,500 shares of stock initially, it becomes expensive to issue “no-par” stock. By placing a small par-value on your stock you can save a significant tax bite.

Par-value has no relation to “market value” or “stock price”, except that you cannot sell stock for less than par. Therefore, if you plan on issuing yourself stock for starting the company, you may want to consider keeping your par-value low. This does not limit you with respect to stock price when you sell shares of stock to investors.

Hat-tip to Art LaPella on Wikipedia for showing me this.

Update Oklahoma also charges fees based on declared par-value:

CERTIFICATE OF INCORPORATION (Domestic Business or Professional): One-tenth of one percent (1/10th of 1%) of the authorized capital stock. No par value is based on $50.00 per share, for computing filing fees only. 18 O.S., §1142 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MINIMUM: $50.00

Although, as far as I can make out, they don’t charge continuing taxes based on par-value. The incorporation fees are also charged when articles of incorporation are amended:

If the authorized capital is increased in excess of fifty thousand dollars ($50,000), the filing fee shall be an amount equal to one-tenth of one percent (1/10 of 1%) of such increase.

which leads to amusing situations … or, at least, situations I consider amusing, such as American Natural Energy Corp.’s amendment in which the number of authorized common shares was increased from 100-million with a par value of $0.01 to 250-million with a par value of $0.001.

Update, 2011-11-24: See the second section of Security Transaction Taxes and Market Quality for an entertaining account of Par Value as it relates to common stock and trading in New York when it had a securities transaction tax.

One Response to “Par Value”

  1. [...] Similar fun and games have been observed elsewhere, particularly with respect to preferred shares, as discussed on the blog in the post Par Value. [...]

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