In this video I will explain everything you need to know about Par Value Shares with regards to company shares; also referred to as Face Value or Nominal Value shares. For purposes of this video we will just call them Par Value shares and should not be confused with bond par values as bonds and shares are unrelated.
Par Value Shares is a concept dating back hundreds of years when markets were unregulated and investors had limited information. The concept was introduced to protect investors by setting a fixed minimum value for which a share can be traded at. This fixed minimum share price was called the Par Value. However, is has little relevance in today’s environment as we have so much access to information so that concept is very outdated.
We all know that the value of a share does not remain fixed; they go up and down depending on what a willing buyer and a willing seller agree upon. The difference between the actual trading value of a share and the par value is called the share premium. The share premium is used to balance the companies books.
Lets look at an example. Company A has set the par value share price for a single share low at R1 while Company B has set it high at R40 for a single share. Let’s assume that the actual value of a single share of the company is trading at R20 per share. To balance the books the par value plus the share premium must equal the actual value. Therefore, in the case of company A the share premium is a positive value of R19. The opposite is true for company B which has a negative share premium of R20.
So what does this actually mean? If company B goes bankrupt, the shareholders are liable for the share premium of R20 per share. This is not the case for company A where the shareholders have no risk. To limit the liability of the shareholders most companies which still have Par Value shares set the value as low as possible.
In South Africa the Co-op Act which uses Par Value shares is contradictory when applying this philosophy. On the one hand it will be in the members interest to set the par value price low for example R1 to limit the shareholders liability towards the Co-op. On the other hand the standard constitutions as drafted by CIPC values shares on termination and death according to Par Value and not the actual value. In this case it would be beneficial for the receiving party; for the par value to be set as high as possible.
Having considered both sides of the argument I would recommend that the Par Value shares for Co-op be set as low as possible and the standard constitution be amended to value all shares on termination and death on the actual value and not Par Value.