MBE Rules · Business Associations
Watered Stock
Watered stock liability
The rule
Shareholders receiving par shares for less than par owe the corporation (and creditors relying on stated capital) the difference; the board's good-faith valuation of property or services is conclusive.
In plain English
Watered stock refers to shares issued by a corporation at a value less than their par value, which can harm the corporation and its creditors. If shareholders receive shares for less than par, they are responsible for paying the difference to the corporation, but the board's good-faith valuation of any property or services provided in exchange is final.
Worked example
A corporation issues shares with a par value of $10 each to a shareholder in exchange for a piece of equipment valued at $5. The board of directors believes the equipment is worth $10 and issues the shares anyway. Since the shares were issued for less than par, the shareholder owes the corporation $5 to cover the difference.
Memory hook
Watered stock means you owe the difference when shares are worth less than their par value.
The trap
Exams may present scenarios where the board's valuation is challenged, leading students to overlook that the board's good-faith valuation is conclusive unless proven otherwise.
How examiners test it
Questions often involve fact patterns where shares are issued below par value, requiring candidates to identify the obligations of shareholders and the role of the board's valuation.
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