Par Value

Par value – also known as nominal or face value – refers to the value of a single share. More specifically, this value sets the lowest price at which a company can sell its shares. So, if a company sets a par value of €1, that means any purchaser of shares must pay at least €1 per share. In practice, at incorporation companies will usually opt for a low par value, perhaps as little as €0.1 or even less. This is because theoretically, it is the minimum amount of capital the company must hold to repay its creditors. In addition, on incorporation, founders will often issue large quantities of stock to themselves. So, if a founder has been issued one million shares at a par value of €1, that means they need to cough up €1,000,000 for their shares, whereas if the par value is €0.001, the same number of shares would cost €1,000.  Thus, we can see that the difference in having a par value of €1 and a par value of €0.001 can be massive in monetary terms.

The par value does not impact the actual value of the shares, it merely sets a mandatory minimum price below which those shares cannot be traded. The ‘real’ or ‘actual’ value of the shares will usually be much higher than the par value. On a similar point, when shares are issued to shareholders, the price-per-share will almost always be far higher than the formal par value.

In many jurisdictions, it is also possible to have so-called no-par value shares. These shares have no minimum value. In practical terms, this can be advantageous to the company, in that if they need to buy back shares for whatever reason, they will not be locked into paying a pre-determined minimum price-per-share. 

One possible pitfall surrounding par value may be seen when a company sets the price too high. If a company initially sets the par value at, for example, €10, then that creates a situation in which no individual share can be sold for less than that price. This could bring about difficulties. In this scenario, if, for whatever reason, the company finds itself eager to sell shares at some point, its hands will be tied somewhat in that it will only be able to do so if would-be buyers are willing to pay at least €10 per share. If the real value of the shares is not perceived to be at that level, then the company will be unable to sell.

A company can overcome this issue by completing a stock split, which basically involves increasing the number of authorised shares. For example, let’s say Company A has an authorised share capital of €1,000,000, made up of one million shares at a par value of €1. If they were to perform a 100:1 stock split, this would effectively mean multiplying the existing number of shares by 100, so one million shares would become one hundred million shares, and the par value would be reduced by €1/100= 0.01. Following the stock split, you can see that the total authorised share capital has remained the same, as 100,000,000 x €0.01= €1,000,000, but Company A now has a significantly larger number of shares to issue and at a lower par value.  This can also work in the opposite way – if a company wants to increase the par value, then it will perform a reverse share split. With this approach, the number of authorised shares is reduced, which, in turn, leads to an increase in the par value per share.