Legal Definitions - stated value

Stated value refers to an arbitrary value assigned by a company's board of directors to shares of its stock, particularly common stock, when those shares do not have a "par value." Unlike par value, which is a nominal minimum value often set in the company's charter, stated value is determined by the board and serves a similar accounting and legal purpose.

It represents the portion of the proceeds from the sale of stock that is considered the company's legal capital. This legal capital generally cannot be distributed to shareholders as dividends or used to repurchase shares, thereby protecting creditors. Any amount received from selling shares above their stated value is typically recorded as "additional paid-in capital" on the company's balance sheet.

• Example 1: A New Tech Startup's Initial Public Offering (IPO)

  A newly formed software company, InnovateTech Inc., decides to issue 10 million shares of common stock to the public. To simplify its capital structure and avoid the complexities sometimes associated with par value, its board of directors declares that the shares will have no par value but assigns a "stated value" of $0.01 per share. When InnovateTech sells these shares to investors for $10 each, $0.01 per share is allocated to the common stock account (based on the stated value), and the remaining $9.99 per share is recorded as "additional paid-in capital."

  Explanation: Here, the $0.01 is the stated value. It's an arbitrary figure set by the board for accounting purposes, establishing the minimum capital contribution per share that forms part of the company's legal capital.

• Example 2: An Established Manufacturing Company's Stock Reclassification

  Global Manufacturing Corp. has historically issued common stock with a par value of $1.00. Over time, the market price of its stock has grown significantly. The board decides to reclassify its common stock to "no par value" shares to provide more flexibility in future stock issuances and simplify its balance sheet presentation. Concurrently, they assign a "stated value" of $0.50 per share to the existing and future common stock. This adjustment impacts how the company accounts for its equity, ensuring that at least $0.50 per share remains as legal capital.

  Explanation: In this scenario, Global Manufacturing Corp. uses stated value to replace a traditional par value. The $0.50 per share is the new accounting baseline for its common stock, determined by the board, which helps define the company's legal capital and how subsequent share transactions are recorded.

• Example 3: Protecting Creditors During a Dividend Declaration

  Retail Giant Inc. has common stock with a stated value of $5.00 per share. The company has accumulated significant retained earnings and wishes to declare a large cash dividend. State corporate law often dictates that a company cannot pay dividends out of its "legal capital" (which includes the stated value of its shares) to protect creditors. Therefore, Retail Giant Inc. must ensure that the total amount of dividends declared does not reduce its equity below the aggregate stated value of its outstanding shares, plus any other legally mandated capital reserves.

  Explanation: The stated value of $5.00 per share acts as a protective floor for the company's capital. It helps define the portion of equity that is legally restricted from being distributed to shareholders, thereby safeguarding the company's financial stability and ensuring there are assets available to satisfy creditor claims.