Panama: Share Capital: Shares With or Without Nominal Value?

Published on Mar 19, 2024

Our lawyers in Panama, experts in corporate and financial law, share with us this article about stock options within the capital stock of a Panamanian corporation and the reflection behind the choice of each one.

Panamanian corporations are a highly useful and advantageous instrument for international investors, as Panama is recognized as a key jurisdiction for global corporate law. This is thanks to the attractive services it offers and the tax and legal benefits, both for local and international investors looking to structure their business activities under the Panamanian jurisdiction.

Law No. 32 of 1927 regulates Panamanian corporations and seeks to control all general aspects that concern a corporation, regardless of whether its activities are extraterritorial or local, its powers, or its purpose. This law establishes a list of minimum formalities that the articles of incorporation must contain, including the provision that "the articles of incorporation must contain the amount of the social capital, the number and nominal value of the shares into which it is divided; and if the society is to issue shares without nominal value, the declarations mentioned in Article 22 of this law."1

Based on the above, this article seeks to clarify some important concepts regarding social capital and the types of shares that a Panamanian corporation can have, in order to differentiate and ultimately determine which option might be best for your business.

Social capital, also known as authorized capital, is not defined under Panamanian law. However, it can be defined as the monetary amount or the value of assets that its shareholders must contribute to the corporation. This amount represents the sum of shares that can be issued and/or sold according to the value set in the articles of incorporation or the price assigned at the time of issuance by the corresponding corporate body.

The social capital does not need to be physically consigned to a specific location, nor does it need to be released or paid, thus its only formality is that it needs to be duly detailed in the articles of incorporation. Likewise, when establishing the corporation, it is at the discretion of the subscribers to the articles of incorporation to determine whether the shares will be bearer or nominative.

Bearer shares do not contain the shareholder's name; instead, their name is kept confidential and only the natural or legal person who holds the corresponding certificate is recognized. On the other hand, nominal shares contain the shareholder's name and are registered in the share registry books, but it can be chosen whether these shares are with or without nominal value. However, the decision on the type of nominal share to be used entails different purposes, characteristics, advantages, and challenges for the shareholders of the corporation. Below, we will explain each of them in detail:

Nominal value shares are those where shareholders pay a specific monetary value for each share, which must be described in the articles of incorporation. The law establishes that these shares can be issued as (i) fully paid and cleared, (ii) partially paid, or even (iii) without any payment having been made for them. Additionally, their payment does not have to be only money, but also services or goods that, in the opinion of the Board of Directors, have a value lower than the nominal value of the shares2.

There are no parameters or requirements under the law to determine the authorized social capital if the corporation will not engage in a regulated activity. However, setting a nominal value for the shares is used as an initial reference to establish the issuance price of the shares, based on which the capital contributed by the shareholders is calculated, becoming the base amount for calculating the company's capitalization, especially if it is an operating company.

Choosing to have shares with nominal value maintains the following advantages:

  1. Clarity in Capital Structure: It allows future investors to understand the financial dynamics of the corporation due to the transparency within this figure.
  2. Fixed Minimum Issuance Price: It establishes a minimum price for the issuance of shares, ensuring a fair market value for the company's shares and avoiding undervaluation of the shares against third parties.
  3. Regulatory Compliance: Establishing a nominal value allows Panamanian societies operating or trading in other jurisdictions to comply with regulations requiring their shares to have a nominal value.

However, in the long run, shares with nominal value may be perceived as limiting, as they could be considered disadvantageous during the changing course of a corporation. Below are some of them

  1. Rigidity in Valuation: Maintaining a specific value may be perceived as restrictive because, over time, it would not accurately suggest the market value of the company and would limit its flexibility in fundraising.
  2. Limited Flexibility in Prices: Corporations may face challenges in adjusting share prices to market conditions since the nominal value imposes a base.

Shares without nominal value are those that are sold at the price determined by the Board of Directors privately, but for this, the articles of incorporation must state the following: "i) the total number of shares that the company can issue; ii) the number of shares with nominal value, if any, and the value of each; iii) the number of shares without nominal value and one of the following declarations: a) That the social capital will be at least equal to the total sum represented by the shares with nominal value, plus a certain sum with respect to each share without nominal value issued, and the sums that from time to time are incorporated into the social capital in accordance with a resolution or resolutions of the Board of Directors; or b) That the social capital will be at least equal to the total sum represented by the shares with nominal value, plus the value that the company receives for the issuance of shares without nominal value, and the sums that from time to time are incorporated into the social capital in accordance with a resolution or resolutions of the Board of Directors.”3

Shares without nominal value are often used for the following advantages:

  1. Flexibility in Prices: They allow setting share prices based on market demand, so new investors could participate as shareholders of the corporation and even set higher prices for the public offering.
  2. Adaptability to Market Changes: Corporations can adjust their social capital structure according to market fluctuations to make it more dynamic.
  3. Appeal to Investors: Shares tend to be more attractive to investors seeking growth opportunities, as the market can dictate the true value of the corporation and hence an additional financing strategy.

However, these shares can be considered ambiguous or enigmatic in other jurisdictions, as there is some suspicion of the corporations created with shares under this figure, which present the following challenges for the societies that use them:

  1. Overvaluation: Companies without shares of nominal value may face challenges in establishing a minimum reference point for share prices, which could lead to overvaluation.
  2. Perceived Complexity: Not having a fixed nominal value can make it difficult for some shareholders to assess the true value of the company since it depends on market dynamics.
  3. Exemption from Liability: Holders of shares without nominal value are not considered responsible for such shares, neither for the society nor for its creditors4.

The choice between one or another type of shares will depend on the specific requirements of the company business behind the corporation.

By choosing a corporation that maintains shares with nominal value, its shareholders can be assured that it will have clarity and transparency for them and for future investors by establishing a minimum amount for its issuance. Additionally, if the company wishes to operate outside the Panamanian jurisdiction, it would be in compliance with international regulations, thus providing a trustworthy and secure environment for those wishing to participate in or trade with the corporation.

On the other hand, if shareholders decide that the company’s share capital should be under shares without nominal value, they will enjoy flexibility in setting issuance prices that allows them to maintain a beneficial strategic position for the business, depending on its position in the market.

Similarly, the corporation, by having shares without nominal value, would enjoy adaptability to the specific circumstances of its company; however, it may be viewed negatively by third parties such as investors or international regulatory entities, as this type of share tends to be prohibited or unregulated in other jurisdictions.

Therefore, to decide on the authorized social capital under shares with or without nominal value, this choice must be based on the following considerations: (i) shareholders' preference, (ii) financial implications, (iii) company valuation, (iv) regulatory compliance, and (v) legal requirements.

It is important to make this decision in an informed manner through legal and financial advice that aligns with the defined needs of the business or company for which the corporation is formed, as well as the evaluation and considerations of the shareholders.

1. Article 2, numeral 4, Law 32 from February 26, 1927, about Panamanian Corporations.
2. Article 21, Law 32 from February 26, 1927, about Panamanian Corporations.
3. Article 22, Law 32 from February 26, 1927, about Panamanian Corporations.
4. Article 25, Law 32 from February 26, 1927, about Panamanian Corporations.

Alexandra Lasso
Associate, Panama

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.