Nominal value of shares

The nominal value, also known as par value is the face value of a share, debt
security or other type of financial instrument, it includes currency and
is opposed to market value, which may be more or less than par value 1. The
share is one of the equal parts into which a company's capital is divided,
entitling the holder to a proportion of the profits 2. The nominal/par value for a
share refers to the value stated in the corporate charter. Shares usually have no
par value or very low par value, such as one cent per share.
The concept of nominal value of shares has been regulated by the DIRECTIVE
2012/30/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
of 25 October 2012 which was ratified by the UK, it invoked the requirement of
providing “the nominal value of the shares subscribed and, at least once a year,
the number thereof3” in the status of the company among other elements. The
domestic law of UK also refers to the nominal value in the Companies Act of
2006, section 5424 that had established several rules regarding the fixing, the
importance and the sanctions if this requirement is not met.
The par value of shares is the lowest legal price for which a corporation may sell
its shares. It has nothing to do with how much a corporation's shares are actually
worth or are sold for. Rather, it is an antiquated legal and accounting concept
mandated by the corporation laws of some states, such as the UK. When
a corporation is formed, the articles of incorporation must set a "par value" for
its stock. Everyone who buys shares in the corporation, including the
corporation's founders, must pay at least this amount, the concept of par value
was created to protect the public against fraud in the sale of stocks. If they pay
less, they'll owe the corporation the difference. Par value is given to each share
to represent the amount of capital contributed by each shareholder, which cannot
be redistributed during the existence of a corporation, and new shares cannot be
sold below par value5.
Par value was traditionally known to serve two main functions, first it provided
that “the statutory liability of each shareholder is the difference between the
amount fixed by the memorandum and the sum which has actually been paid
1
At https://www.investopedia.com/terms/p/parvalue.asp
2
At https://www.lexico.com/definition/share
3
Article 3 of the DIRECTIVE 2012/30/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 October 2012, Official
Journal of the European Union, L 315/74.
4
Companies Act 2006, c. 46. at https://www.law.du.edu/images/uploads/corporate-governance/legislation-companies-
act.pdf
5
DUDYCZ (T) and BRYCZ (B), “Why the Par Value of Share Matters to Investors”, International Journal of Financial Studies, 9,
16, 2021, p 1.

Synda SOMAI – M1 in Common Law

upon his shares." And second, it ensured that “the capital is fixed and certain,
and every creditor of the company is entitled to look to that capital as his
security6.” Basically, it has been the foundation for the capital maintenance
principle created to protect corporate creditors against the “extra” risks
associated with limited shareholder liability7.

Practically, the applied formula is par value multiplied by the number of shares
equals the share capital of the company. In its original design, share capital
should be the financial basis of the company and guarantee the satisfaction of
creditors’ claims.
Despite its importance, this concept is highly debated because of its several
downfalls, and though some states have abandoned its use, it still seems to be
present in the European Economic Area, which provokes thoughts about its
controversy.
Therefore, the main issue to be tackled will concern the purpose of the
nominal value of shares.
The plan will tackle the nominal value as a unit of measurement in the first
part (I), before dealing with how the nominal value provides for a minimum
protection, as the second part (II).

Part One: The nominal value as a unit of measurement

First, the basic concept of the nominal value (Chapter One) must be thoroughly
explained before tackling its ineffectiveness (Chapter Two).

Chapter One: The basic concept of nominal value

The nominal value of shares is a fundamental element in the establishment of a

company because it provides for a means of measurement for the issued shares
at the moment of capital subscription.
In measurement, a nominal value is often a value existing in name. It is assigned
as a convenient designation rather than calculated by data analysis or following
6
Australian Companies and Securities Law Review Committee, “Shares of No Par Value and Partly-Paid Shares”, Discussion
Paper No 10, 1990, at 3.
7
DUDYCZ (T) and BRYCZ (B), supra note 5.

Synda SOMAI – M1 in Common Law

usual rounding8 methods. The use of nominal values can however be based on
de facto standards or technical ones9. All real measurements have some variation
depending on the accuracy and precision of the test method and the
measurement uncertainty. The use of reported values often involves engineering
tolerances.
The nominal value according to the legislator is crucial since the UK companies
Act requires that shares have a fixed nominal value and the attribution of shares
not meeting this requirement is void as section 542 provides: “a shares that
does not have a fixed nominal value is void.”
From another perspective, nominal value represents an accepted condition, a
goal or an approximation as opposed to the real value which is always present.
The Real value is the nominal value as adjusted for inflation enabling
comparison of quantities as if the prices of goods had not changed on average.
Changes in value in real terms therefore exclude the effect of inflation. In
contrast with a real value, a nominal value has not been adjusted for inflation,
and so changes in nominal value reflect at least in part the effect of inflation 10.
In order to adjust this value, there is a requirement of another concept: a
premium. A share premium is the amount paid for an equity in excess of its
nominal value11, i.e. the amount of the premium is the difference between par
value and the selling price; the selling price is usually defined by market value,
it is how much cost any properly or highest price a buyer would pay for a share
and the lowest price that a seller would accept.
A company issues its shares at a premium when the price is higher than their par
value. This is very common since par value is typically set at a minimal value
such as one cent per share: it is the security states by the issuer. This comes to
show why par value is important because if shares lack a par value, then there
is no premium. In this case, the entire amount paid is recorded in the
common stock account 12.
Chapter Two: The ineffectiveness of the nominal value
concept

Many scholars agree that the nominal value concept is relatively useful since it
does not indicate at any given time the price of shares to investors: the issue
8
“Rounding means replacing a number with an approximate value that has a shorter, simpler, or more explicit
representation”. At https://en.wikipedia.org/wiki/Rounding
9
At https://en.wikipedia.org/wiki/Real_versus_nominal_value
10
At https://en.wikipedia.org/wiki/Real_versus_nominal_value_(economics)
11
At https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/share-premium-account/
12
At https://www.accountingtools.com/articles/why-are-shares-issued-at-a-premium.html

Synda SOMAI – M1 in Common Law

price (at premium) will generally be higher than the nominal value.
Additionally, the par value does not necessarily reflect the actual amount
invested by the shareholders especially when the shares are exchanged for
property and not cash, making par value seem arbitrary13.
In 1954, the report of the Gedge Committee recommended a reform to abolish
Par value in private companies in UK but it retracted from the proposal with the
second directive of the EU. On the other hand, several states give companies’
shareholders the choice of assigning a par value or not to shares, such the case of
the United States.
Concretely, some scholars argue that there is no real benefit in allocating a
higher or lower par value to a share. The nominal value of a share is an arbitrary
value allotted to that unit. When considering shares, it is usually the market
value and not the nominal or book amount that investors and shareholders are
truly interested in.
The book value per share (BVPS) metric can be used by investors to gauge
whether a stock price is undervalued by comparing it to the firm's market value
per share14. If a company’s BVPS is higher than its market value per share—its
current stock price—then the stock is considered undervalued. If the firm's
BVPS increases, the stock should be perceived as more valuable, and the stock
price should increase. For example most new limited companies in the United
Kingdom are registered with a book value of 1 pound each, but it is possible for
it to be set as low as 1 pence or above that amount.
In the first period of birth of a company, a creditor is interested in net asset value
but once the company begins trading, the net asset won’t be as necessary
because it won’t be as real as its share capital. Other elements would be
considered more valuable such as the balance draft, the share premium, the
market value, capital maintenance…etc. to determine the company’s position
rather than the nominal capital.
In sum, the notion of nominal value has been historically praised but is
insufficient on its own to reflect a company’s true status. On the other hand, and
in the light of all other concurrent elements suggesting better understanding of
the company’s activity, it is necessary to look for potential advantages that
enable the nominal value concept to survive.

13
RICE (R.F) and HAMO (A.J), "Shares With No Par Value", Minnesota Law Review, Vol. 5, 1921, p 494.
14
BVP is “is the ratio of equity available to common shareholders divided by the number of outstanding shares. This figure
represents the minimum value of a company's equity and measures the book value of a firm on a per-share basis”. At
https://www.investopedia.com/terms/b/bvps.asp

Synda SOMAI – M1 in Common Law

 Part Two: The nominal value provides for a minimum
protection

Despite this observed limited role of nominal value, several scholars support the
usefulness of this notion arguing that it provides for a minimum protection
threshold for the company’s shareholders (Chapter One) on one hand, and for
its creditors (Chapter Two), on another.

Chapter One: Protection of the shareholders and the company

The nominal value of shares is usually used as a reference price for minimum
cost. The rule of nominal value could be regarded as a protector for shareholders
from directors who seek to devalue their interest in the company by issuing
shares at a lower cost to new shareholders, providing for an unfair prejudice.
Although only 25% of the nominal value of shares has to be issued at the time of
establishing the company, provisions of article 8 of the EU’s directive 2012/30
of the European parliament and of the council asserts that “shares must be
issued at a price lower than their nominal value or, where there is no nominal
value, their accountable par”.
Shares must be issued above their nominal value or accountable par i.e. at a
premium, but unfortunately, the premium in itself does not constitute a part of
the subscribed statutory capital, it cannot be used for distributing dividends or
any other payouts and can only be used for whatever has been expressly laid out
in the company's bylaws15, unlike the nominal value. Nominal or authorized
capital16 represents the securities provided for shareholders. Since shares can
also decrease in value due to the exigencies of the company over time and the
effect of inflation17, accordingly, nominal capital can protect a company’s assets
by being its minimum price and therefore minimum value of securities.
The cost of capital is the cost of a company’s funds and is therefore used to
evaluate a company’s new projects. The par value’s importance can be observed
when certain state laws require that shares of a stock have a par value to ensure
15
At https://www.investopedia.com/ask/answers/050815/how-does-share-premium-account-appear-balance-sheet.asp
16
The amount of capital in shares that a company is legally authorized to make available to shareholders and is also the
aggregate par value of those shares that have been issued by a corporation. At
https://www.investopedia.com/terms/a/authorized-share-capital.asp
17
HO (Y.K) and LAN (L.L) “The Par Value of Shares: An Irrelevant Concept in Modern Company Law”, Singapore Journal of
Legal Studies, 1999, p 557.

Synda SOMAI – M1 in Common Law

the continuity of a company’s financial reserves and their maintenance. Nominal
value can also serve as the alarming signal for insolvency and risk of bankruptcy
of the company, when the capital goes below these reserves and the company’s
profits are menacingly deteriorating.

Chapter Two: Protection of creditors

The nominal value of shares fixes the maximum liability of a shareholder to

protect the creditors of a company. It assures them that a company has received
assets whose value is non less than the nominal value, at least. In Ooregum gold
mining Co. of India V Roper (1892), the court (House of Lords previously)
established that shares must not be issued at a discount to their nominal value.
The nominal value therefore establishes a minimum proportion to assure
creditors that the company is in good health, accordingly, shares without par
value paid-in capital informs creditors that the company may become insolvent
later and fail to pay its debt. As Lord Halsbury stated, in laying down the rule
that a company may not allot shares for less than par, “The capital is fixed and
certain, and every creditor of the company is entitled to look to that capital as
his security”. In economic terms, these rules might be understood as a response
to problems of
information asymmetry in corporate credit markets. They publicize to investors
the value of the assets that shareholders put into the company, and seek to
ensure that this information is truthful18.

Conclusion
To sum things up, nominal value is a fixed amount and factor that reflects the
economic reality of a company and can help foresee its insolvency, despite
several practitioners and scholars opinions arguing the lack of nominal value’s
efficiency among other more revealing elements of the financial status of the
company.

18
ARMOUR (J), “Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law”, the Modern Law
Review, Vol. 63, 2000, p 364.

Synda SOMAI – M1 in Common Law

 Bibliography

BOOKS
1. General
DAVIS (P.L) and WORTHINGTON (S), Principles of Modern Company Law, Sweet and
Maxwell, 2014.
WRIGHT (M), SIEGEL (D), KEASEY (K) and FILATOTCHEV (I), the Oxford
Handbook of Corporate Governance, OUP Oxford, 2014.

2. Specific
Great Britain Company Law Review Steering Group, Company Formation and Capital
Maintenance, Final Report, Volume 2, Department of Trade and Industry, 2001.

ARTICLES
ARMOUR (J), “Share Capital and Creditor Protection: Efficient Rules for a Modern
Company Law”, the Modern Law Review, Vol. 63, 2000, p 364.
Australian Companies and Securities Law Review Committee, “Shares of No Par Value
and Partly-Paid Shares”, Discussion Paper No 10, 1990, at 3.
DUDYCZ (T) and BRYCZ (B), “Why the Par Value of Share Matters to Investors”,
International Journal of Financial Studies, 9, 16, 2021, p 1.
HO (Y.K) and LAN (L.L), “The Par Value of Shares: An Irrelevant Concept in Modern
Company Law”, Singapore Journal of Legal Studies, 1999, p 557
RICE (R.F) and HAMO (A.J), "Shares With No Par Value", Minnesota Law Review, Vol. 5,
1921, p 494.

ELECTRONIC RESOURCES
www.accountingtools.com
www.corporatefinanceinstitute.com
www.en.wikipedia.org
www.investopedia.com
www.law.du.edu

Synda SOMAI – M1 in Common Law

www.lexico.com

CASES
Ooregum gold mining Co. of India V Roper (1892) AC 125.

STATUTES
Companies Act 2006.

EUROPEAN UNION LEGISLATION

The DIRECTIVE 2012/30/EU OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL of 25 October 2012, Official Journal of the European Union, L 315/74.

Synda SOMAI – M1 in Common Law