The "No Par Value Share" issue is one of the many issues being discussed as part of the current review of English company law.
It is likely that the DTI will form its views and make recommendations to the Government on the issue in the first half of next year. If the Government decides to introduce No Par Value Shares, a bill would possibly be introduced to Parliament in 2004/5.
Removal of the par value concept from shares should simplify things for business, investors and professional advisers alike. Indeed, most of the responses to the DTI's consultation document of October 1999 confirm this view.
The main drivers for the change to No Par Value Shares are that having a par value
is arbitrary and misleading (people may think a share's value is its par value); inhibits flexibility in the arrangement of a company's capital structure; and creates unnecessary complication and confusion in the presentation of a company's accounts.
Also, the protection against the dilution of shareholder interests, which the par value rule is designed to ensure, is undermined in practice by the fact that shares on issue are often worth more than their par value so that a dilution of an economic interest occurs when any shares are issued below market value (even if the issue is at or above par value).
The concern is what is to happen to par value shares and how the change to No Par Value Shares is to be effected. Are par value and No Par Value Shares to co-exist or are par value shares to be replaced by No Par Value Shares? If par value shares are to be replaced, what transitional provisions (if any) will apply? At present all companies limited by shares have an authorised share capital divided into shares of fixed amounts and the authorised share capital can only be changed by shareholder resolution. Shares can be issued at par or at a premium but not at a discount. The nominal or par value of shares allotted is credited to a share capital account and any premium over and above that value, to the share premium account.
If No Par Value Shares are created there will be no such thing as authorised share capital, a company will be able to increase its share capital by issuing new shares for consideration or by the board of directors transferring the company's profits or reserves to a share capital account.
The concept of stock is likely to disappear and companies with stock will probably be required to convert that stock into shares. Shares could be issued at a discount.
From a commercial perspective, the introduction of No Par Value Shares should create more flexibility in the structuring of investments. However, depending on the provisions governing the change, the rights and protections of investors may well be materially affected, possibly adversely.
That said, No Par Value Shares have been introduced in New Zealand and Australia, replacing par value shares, and no material "downsides" were experienced.
The information and opinions contained in this publication are provided by national law firm Hammond Suddards Edge. They should not be applied to any particular set of facts without seeking appropriate legal or other professional advice.