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The long-standing tradition of quoting the worth of a company’s shares by using an artificial measure referred to as the par or nominal value, will be a thing of the past under the new Companies Act of 2004.
Scheduled for implementation on January 1, 2005, the new Act will effectively repeal the 1965 Company Law, which states that companies with share capital are required to state in their Memoranda of Association the share capital of the company and the subdivision of that capital into shares of fixed denomination known as par value.
Therefore, if the share capital of a company is $10,000, this is divided into 10,000 shares at $1 each. The $1 would effectively be the par or nominal value. The rationale for companies using par value was that it allowed investors and creditors to have a convenient measure to assess the worth of their investment or security.
However, Tax Principal at Deloitte and Touche, Ethlyn Norton-Coke has pointed out that “par value has been an unreliable measure of the true worth of a company”.
Speaking recently at a seminar to educate accountants about the new legislation, Mrs. Norton-Coke explained that par value was an unreliable measure as shares might be sold at a premium or at a discount and as a result, the par value was not an accurate index of the investment for the purpose of disposal. She added that the par value method of measuring shares might be misleading to investors who might believe that the par value equated to the true value of the company.
The seminar, which was organised by the Institute of Chartered Accountants of Jamaica (ICAJ), in association with the Office of the Registrar of Companies (ORC), was held at the Jamaica Conference Centre under the theme: ‘Improving Corporate Governance and Transparency’.
Mrs. Norton-Coke pointed out that the law has given companies six months as from January 1, 2005, to decide whether or not they would continue to operate under a par regime. “If the company fails to elect during that period, it will be deemed to have converted to no par,” the Tax Principal said.
Deputy Chief Executive Officer at the ORC, Shellie Leon in her presentation, indicated that this election could be made in the form of an ordinary resolution, that is, a simple majority of the voting rights. She said that the ORC, which is responsible for implementing the new Act, would be undertaking a public education campaign to ensure that companies are adequately sensitised about the new operating regime.
After this initial six-month period, companies would be given an additional 18-month transitional period to convert to no par. Therefore, at the end of a maximum of two years, all companies, whether they have converted or not, will be deemed to be operating on a “no par” basis.
According to Mrs. Norton-Coke, the advantage of operating under a “no par” regime was that “it enabled companies to issue and sell shares at varying prices, according to their current market value at the respective times of issue, without regard to any nominal value for the shares previously fixed”.
The Companies Act was passed in Parliament in March this year and unlike the 1965 Act, the new law is designed to meet the realities of a changed business environment.
Commerce, Science and Technology Minister, Phillip Paulwell noted in his Sectoral presentation earlier this year that “twelve years in the making, the landmark legislation establishes the framework for the modernization of corporate governance”.