The concept of par value of stock is universally regarded as a relic. Most law professors reluctantly and apologetically teach about par value in Business Associations classes and students wonder why they need to learn the concept. As for practicing lawyers, they generally set par values as low as possible as to avoid the largely historical pitfalls of watered stock and legal capital restrictions on dividends. Hence, readers of balance sheets encounter the puzzling $0.000005 par value per share of Twitter, for example.
Yet, somewhat peculiarly lawyers rarely create stock with a par value of zero. Although lawyers try to set the par value arbitrarily low, and although it often goes lower through stock splits, par value is very persistent, at least among publicly traded companies. So how many public companies are there with no-par stock? A review of 10-K filings from the first three quarters of 2018 revealed the following distribution of par values among reporting companies.
|
Par value per share |
Number of Companies |
Percentage of Companies |
|
$0.01 |
1396 |
31.9% |
|
$0.001 |
1228 |
28.0% |
|
$0.0001 |
600 |
13.7% |
|
$0 (no par) |
357 |
8.1% |
|
$1 |
222 |
5.0% |
|
$0.10 |
126 |
2.9% |
|
$0.00001 |
94 |
2.1% |
|
OTHER |
359 |
8.2% |
The reporting company with the lowest par value was MEI Pharma, Inc. with a par value of $0.00000002 per share (they should use scientific notation!) and the reporting company with the highest par value was Brighthouse Life Insurance Company with a par value of $25,000 per share (high par values are more common in regulated industries such as insurance, banking, and utilities).
Notably, of the 4,382 companies reviewed, only 357 (or 8.1%) had zero par value. Although it's possible the script missed a few (see Note on Methodology below), this estimate is likely close to the percentage of public companies with no par stock.
This is peculiar because the idea of stock without par value is not a recent innovation. States had begun reforms allowing no par value stock in the early 20th Century. There was even a law review article in 1924 lamenting the "dangers" of the growing reform movement toward shares without par value. Yet those "dangers" are no longer feared by any contemporary commentator or practitioner, so far as I'm aware. So what's the explanation for the peculiar persistence of par value?
Like so many other things in lawyering, the answer is likely one of default decision-making and inertia among transactional lawyers. One can imagine the response, "We always use $0.01 par value per share, and it's never caused any problems." The (not at all irrational) culture of transactional law is not to change what's working. There's no compelling reason to move from vanishingly small par values to zero par values, and lawyers perceive there might be some risk of doing so (for example, inadvertently allocating the entire purchase price of shares to legal capital). Thus, no change takes place.
Another example of a similar dynamic at work is the Delaware incorporation choice. Although the most recent evidence (including my own work with Jeff Manns) suggests Delaware incorporation has either no value or negligible value, Delaware continues to dominate the incorporation market. The decision of where to incorporate is largely driven by lawyers, and a company's choice of lawyer largely determines its choice of state of incorporation, as I've argued in my article, The Delaware Trap. The story of transactional legal inertia and default thinking is one that dominates many areas of corporate law and practice, and understanding these factors is vital to understanding transactional law and its evolution.
In fact, these two "cultural" traditions (Delaware incorporation and the persistence of par value) show a relationship in the data. Among Delaware incorporated companies, only 29 of 2124 companies (1.4%) had zero par value. Of the non-Delaware incorporated companies, 305 of the 1995 non-Delaware companies (15.3%) had zero par value. Thus, Delaware companies tend to retain par value stock at higher rates than non-Delaware companies. This is true despite the fact that companies with very high par values (greater than or equal to $1.00) incorporated in states other than Delaware at a higher rate (67.5% for those with a par value > $1 versus 46.2% for those with par value < $1). So companies incorporated in states other than Delaware are more likely to have high or zero par values, whereas Delaware companies are more likely to have nominal (but not zero) par value.
* Note on methodology. The computer script used the 10-K XBRL elements for par value of common stock and preferred stock, rather than reviewing the charter documents. It is possible that the XBRL par value figure was entered differently from the relevant charter documents. Stock was classified as no par when the 10-K contained XBRL with a CommonStockNoParValue element or a CommonStockParOrStatedValuePerShare element with a value of 0. 10-K filings with the words "no par value" or "without par value" in the first few pages were reviewed for accuracy.