What happens if I don't pay the par value for my shares?

You may be liable to the corporation's creditors for the difference between the par value and what you paid.

The True-Value Rule: A Crucial Principle in Corporate Law

Q: What happens if I don&#039;t pay the par value for my shares?

You may be liable to the corporation&#039;s creditors for the difference between the par value and what you paid.

Q: Can property be accepted as payment for stock?

Yes, but it must be valued at fair market value, and only under specific conditions.

Q: Does the true-value rule apply in all states?

While the rule is widely recognized, specific applications can vary by state.

Definition & Meaning

The true-value rule is a principle in corporate law that requires individuals who purchase corporate stock to pay the par value of that stock, either in cash or its equivalent. This rule ensures that the actual assets of a corporation match the financial records. If the actual value of the stock is less than its par value, the shareholder is considered to have unpaid stock and may be liable to the corporation's creditors for the difference, regardless of the directors' intentions or actions.

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Legal Use & context

The true-value rule is primarily used in corporate law, particularly in matters related to stock issuance and shareholder liabilities. It is relevant in various legal contexts, including:

Corporate governance
Shareholder rights
Bankruptcy proceedings

Individuals or businesses involved in corporate stock transactions should be aware of this rule, as it can affect their financial obligations. Users can find legal templates on US Legal Forms to assist with stock transactions and related documents.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A company issues shares with a par value of $100. A shareholder pays only $80 in cash for their shares. Under the true-value rule, the shareholder is liable for the remaining $20 to the corporation's creditors.

Example 2: A corporation accepts property valued at $50 for shares with a par value of $100. If the property has no ascertainable market value, the directors must ensure the property is sold for cash to determine its worth (hypothetical example).

State-by-state differences

Examples of state differences (not exhaustive):

State	Variation
California	Allows for certain non-cash payments to be accepted under specific conditions.
Delaware	Strictly enforces the true-value rule with limited exceptions for non-cash payments.
New York	Similar to Delaware, but includes additional regulations on valuation methods.

This is not a complete list. State laws vary, and users should consult local rules for specific guidance.

Comparison with related terms

Term	Definition	Difference
Par Value	The nominal value of a stock as stated in the corporate charter.	True-value rule focuses on actual payment made, while par value is a fixed amount.
Paid-In Capital	Money that shareholders invest in the company above par value.	True-value rule addresses the minimum payment required, while paid-in capital refers to excess contributions.

Common misunderstandings

What to do if this term applies to you

If you are involved in a stock transaction and the true-value rule applies, consider the following steps:

Ensure that you understand the par value of the shares you are purchasing.
Verify that your payment meets the requirements of cash or its equivalent.
If you are uncertain about your obligations, consult a legal professional for guidance.
Explore US Legal Forms for templates that may assist in drafting necessary documents for stock transactions.

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Quick facts

Typical Fees: Varies by state and transaction type.
Jurisdiction: Corporate law, varies by state.
Possible Penalties: Liability for unpaid stock can lead to financial obligations to creditors.