What is the Difference between Par Value and Fair Market Value?

The Par Value of stock is the value per share set forth in the certificate or articles of incorporation on file for the corporation.  Also called nominal or face value, the Par Value is the minimum price per share that must be paid in order for the shares to be considered fully paid.  For Delaware corporations, the Par Value is typically set at $0.0001.  The Par Value has no bearing on the Fair Market Value of the stock.

The Fair Market Value is the current price at which the stock is valued by the “market.” In the case of publicly-traded stock, the Fair Market Value is generally determined by averaging the day’s highest and lowest selling prices from the public exchange on which it is registered, such as the New York Stock Exchange or NASDAQ.

Because non-publicly traded stock has no public market to determine its value, determining the Fair Market Value of private stock is more complicated.  The board of directors, often with the assistance of third party valuation firms, determines the Fair Market Value by incorporating many valuation techniques.  Below is a list of factors that are often considered by a private corporation’s board of directors in determining Fair Market Value:

  • the value of tangible and intangible assets of the corporation;
  • the present value of anticipated future cash-flows of the corporation;
  • the market value of stock or equity interests in similar companies and other entities engaged in trades or businesses substantially similar to those engaged in by the company, the value of which can be readily determined through non-discretionary, objective means (such as through trading prices on an established securities market or an amount paid in an arm’s length private transaction);
  • recent arm’s length transactions involving the sale or transfer of such stock or equity interests; and
  • other relevant factors such as control premiums or discounts for lack of marketability and whether the valuation method is used for other purposes that have a material economic effect on the service recipient, its stockholders or its creditors.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Helen E. Quinn expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s