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Corporations • Stock Issuance
CORP#019
Legal Definition
If a corporation sets a par value for its stock, it must sell it for at least par value. The corporation may accept any valid consideration so long as the board of directors values the consideration in good faith to be at least par value.
Plain English Explanation
"Par value" is a largely meaningless concept left over from olden times. But, like many things that are modernly irrelevant, you'll still need to know it for your law school exams. To understand it, travel in your mental time machine back 200 years ago when corporations served a much different purpose than they do today (and the laws haven't been updated much since). Back then, corporations were massive entities that required special government approval in order to exist and generally only poofed into existence to deal with large, expensive projects (like building railroads). Back then, "par value" was important. Why? Primarily to protect investors from a corporation deciding to aggressively raise money by dumping too many shares into the market in a time when information traveled a lot slower. This is probably still a bit too high-level, so let's dive in deeper.
Imagine you were an investor in the 1800's and you just bought shares of a company for $2 (which would be worth about $40 in 2021). You'd be pretty upset if, the day after you bought your shares, you found out your friend was sold shares for $1. To try to provide some stability and assurance in how shares were priced, state governments required them to set a "par value," which was a legally binding, minimum value that a corporation could sell their shares for. Now when an investor purchased shares for par value from a corporation, they wouldn't need to stay awake all night wondering and worrying whether the corporation would screw them over by selling them for cheaper later, thereby devaluing the shares.
Another old-timey factor about par value is that it represented a redeemable value of assets against the corporation. In other words, if you had a $2 par value share of a corporation, you were basically entitled to turn that stock back in for $2 worth of assets owned by the corporation, including their cash reserves.
It didn't take long for corporations to realize there was no benefit to setting a high par value to their shares so it became common to set it extremely low (like a penny per share). After corporations began doing this, the whole point of the par value was lost, and yet it remains with us still as a reminder of old times, and to haunt you on the bar exam.
With that said, what you need to know is that in many states today, corporations are still required to set a par value, and they are still required to sell their shares for at least the par value, or at least something that the board of directors believes to be equal to par value (like a fancy baseball card).
Imagine you were an investor in the 1800's and you just bought shares of a company for $2 (which would be worth about $40 in 2021). You'd be pretty upset if, the day after you bought your shares, you found out your friend was sold shares for $1. To try to provide some stability and assurance in how shares were priced, state governments required them to set a "par value," which was a legally binding, minimum value that a corporation could sell their shares for. Now when an investor purchased shares for par value from a corporation, they wouldn't need to stay awake all night wondering and worrying whether the corporation would screw them over by selling them for cheaper later, thereby devaluing the shares.
Another old-timey factor about par value is that it represented a redeemable value of assets against the corporation. In other words, if you had a $2 par value share of a corporation, you were basically entitled to turn that stock back in for $2 worth of assets owned by the corporation, including their cash reserves.
It didn't take long for corporations to realize there was no benefit to setting a high par value to their shares so it became common to set it extremely low (like a penny per share). After corporations began doing this, the whole point of the par value was lost, and yet it remains with us still as a reminder of old times, and to haunt you on the bar exam.
With that said, what you need to know is that in many states today, corporations are still required to set a par value, and they are still required to sell their shares for at least the par value, or at least something that the board of directors believes to be equal to par value (like a fancy baseball card).
