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Simple English definitions for legal terms
true-value rule
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A quick definition of true-value rule:
The true-value rule is a rule that says when someone buys stock in a company, they have to pay the full price for it. This means they have to pay the amount the company says the stock is worth, either in money or something else of equal value. If the stock ends up being worth less than what was paid for it, the person who bought it is still responsible for paying the full price. This is important because it makes sure the company's books match up with its actual assets. If the true value is less than the price paid, the shareholder may be liable to creditors for the difference.A more thorough explanation:
The true-value rule is a requirement that anyone who subscribes for and receives corporate stock must pay the par value for it, either in money or its equivalent. This ensures that a corporation's real assets match its books. If the true value is less than the par value, the stock is considered unpaid for to the full extent of the difference, and the shareholder is liable to creditors for the difference, regardless of the directors' good faith.
For example, if a person subscribes for 100 shares of stock with a par value of $10 per share, they must pay $1,000 for the stock. If the true value of the stock is only $8 per share, the shareholder is still liable for the full $1,000, and the difference of $200 is considered unpaid.
The true-value rule is important for maintaining the integrity of a corporation's financial records and protecting the interests of shareholders and creditors.