Par value stock is stock whose certificate of incorporation assigns each share a nominal dollar amount, and that amount does two things: it sets the minimum consideration the share may be issued for, and it fixes the figure the stock caption carries on the balance sheet. It is not a statement about what a share is worth, which is why a share trading in the tens of dollars can sit in the caption at a fraction of a cent.
Shares with par value may be issued for consideration having a value not less than their par value (8 Del. C. 153(a)). How the caption and additional paid-in capital then split the cash, and how the legal capital and surplus rules sit behind that split, are worked through in common stock.
The Floor Has Teeth, and They Are Held by Creditors
A minimum issue price would be a formality if nothing followed from breaching it. Something does, and it reaches the shareholder rather than the company.
Where the whole of the consideration payable for shares has not been paid in, and the assets are insufficient to satisfy the claims of the corporation’s creditors, each holder of or subscriber for those shares is bound to pay on each share the sum necessary to complete the unpaid balance of the consideration for which the shares were issued (8 Del. C. 162(a)). That liability is enforced only after a writ of execution against the corporation has been returned unsatisfied (8 Del. C. 162(b)), so it surfaces in insolvency rather than in ordinary operations.
The liability travels with the shares imperfectly, which is the part worth flagging on a client file. A person becoming an assignee or transferee of shares in good faith and without knowledge or notice that the full consideration has not been paid is not personally liable for the unpaid portion, but the transferor remains liable (8 Del. C. 162(c)). Selling the shares does not sell the exposure.
Why Charters Pick a Fraction of a Cent
The commercial reason par values are set so low is a tax computation, and it is one where the par figure is an input rather than a label.
A Delaware corporation pays as its annual franchise tax whichever of two prescribed amounts is the lesser (8 Del. C. 503(a)).
The first counts authorized shares and ignores par entirely. Where the authorized capital stock does not exceed 5,000 shares the tax is $175; where it exceeds 5,000 but is not more than 10,000 shares it is $250; and there is a further sum of $85 on each 10,000 shares or part thereof (8 Del. C. 503(a)(1)). A charter that authorizes shares in the millions reaches a large number on this method quickly.
The second is where par value earns its keep. The assumed par value capital is found by multiplying the number of authorized par value shares by the quotient of the corporation’s total assets divided by the total number of issued shares of all denominations and classes, and the tax attributable to it is $400 for each $1,000,000 or fraction thereof in excess of $1,000,000, scaled proportionately where the assumed par value capital is below $1,000,000 (8 Del. C. 503(a)(2)).
Read the quotient carefully, because it is the whole mechanism. It is assets per issued share, not par per share, so a company with modest assets and a large issued share count produces a small quotient and a small assumed par value capital. The statute then blocks the obvious exploit: if the quotient is less than the par value of any class of authorized par shares, the shares of that class are multiplied by their par value instead, and the number of shares multiplied by the quotient is reduced accordingly (8 Del. C. 503(a)(2)).
That last sentence is the reason a low par value matters. A high par value sets a floor under the assumed par value capital that the asset-based quotient cannot get below, so the second method stops being cheaper and the corporation pays the lesser of two large numbers.
No Par Value Stock Is Not the Free Option
Shares without par value carry no consideration floor, and what the caption holds for them is whatever the board determines to be capital, which is their stated capital (8 Del. C. 153(b)). The balance sheet treatment is covered in common stock.
The franchise tax does not treat them as free, and this is the trap in choosing no par to avoid the par question. For the second computation, a corporation’s assumed no-par capital is found by multiplying the number of authorized shares of capital stock without par value by $100, and the brackets run from $175 where that assumed no-par capital does not exceed $500,000, to $250 where it exceeds $500,000 but is not more than $1,000,000, plus a further $85 for each $1,000,000 or part thereof beyond that (8 Del. C. 503(a)(2)).
That deemed figure per authorized share has no relationship to anything the shares cost or are worth. Multiplying an authorized share count in the millions by it produces an assumed no-par capital far larger than anything the balance sheet reports.
Common Questions
Whether the charter names a minimum issue price. Par value stock has one and may not be issued below it (8 Del. C. 153(a)); no par value stock has none and is issued for whatever consideration the board determines (8 Del. C. 153(b)). The consequences run further than the issue price, into what the stock caption carries, into the shareholder’s exposure for unpaid consideration, and into the franchise tax computation, and the three do not point the same way.
Only at the bottom. Par is a floor rather than a price, so it constrains the lowest lawful issue price and says nothing about the highest. In practice the floor is set so far below any realistic price that it never binds, which is exactly the point of setting it there.
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