What is premium, discount and parity?

What Are Premium, Discount, and Par Price?

In company law, the terms premium, discount, and par price are used. The concepts are particularly relevant in connection with the subscription of company capital and also in relation to capital increases and capital reductions. The main rule is that the subscription price can be freely determined, with several exceptions. This article explains in general terms what premium, discount, and par price are, provides examples of how to calculate the subscription price, and discusses why determining the price is important.

Premium and Par Price

For subscription of share capital and capital increases, it is possible to subscribe for shares at either a premium (a price greater than 100) or at par (a price of 100). One may wonder why a shareholder would contribute more than the statutory minimum requirement, such as DKK 400,000 when establishing an A/S. However, amounts paid at a premium are tax-free for the company, as per section 13 of the Danish Corporation Tax Act. Since the share capital of DKK 400,000 is tied up, it is advantageous to subscribe at a premium, as the premium can be used to pay dividends.

The share premium is recorded for accounting purposes on the liabilities side under the special item “share premium fund,” and the company is free to make use of this amount. Premiums are therefore a form of free equity. Subscription at a premium means that the subscription price is set so shareholders must pay assets to the company whose value exceeds the nominal value of the share capital.

When raising capital, knowing the market price of the shares is crucial to ensure the increase is decided correctly. Special rules apply if the company offers subscription at a preferential price, which is lower than the market price but above par. For example, if the equity is DKK 400,000 and the share capital is DKK 100,000, the market price is calculated as:

Market Price = Equity / Share Capital × 100

In this case, the market price would be 400,000 / 100,000 × 100 = 400. If the subscription price is set at 300, it is a preferential price, and it must be decided whether there is a deviation from the pre-emptive right. If there is, the group of people offered the preferential subscription must be identified. For instance, if employees are offered subscription, the majority requirement for approval is less strict compared to offering shares to existing shareholders.

Deferred Payment

In connection with a premium, full payment must be made in limited liability companies. However, only 25% of the share capital must be paid in. For example, if a share capital of DKK 400,000 is subscribed at a price of DKK 400, the total capital contribution is DKK 1.6 million. Of this, DKK 1.2 million constitutes the share premium fund and must be fully deposited. Meanwhile, only 25% of the statutory minimum requirement, DKK 125,000, is required for the share capital. Thus, shareholders must be prepared to pay a total of DKK 1,325,000.

The situation is different for private limited companies, where only 25% of the premium must be paid. However, a minimum share capital of DKK 40,000 must still be paid, corresponding to the statutory minimum for incorporation.

When deferred payment is allowed, rules stipulate when the remaining amount must be paid. These rules, outlined in the Danish Companies Act, state that payment must be made on demand from the central management body, with a deadline of 2-4 weeks.

Discount

It is prohibited to subscribe for share capital at a discount, as stated in sections 31 and 153 of the Danish Companies Act. Therefore, it is crucial to calculate the nominal value of the share capital, which must at least equal the par price.

A discount is only permissible in cases of capital reduction. For instance, if a company reduces its capital by DKK 1 million but only distributes DKK 500,000 to shareholders, the remaining DKK 500,000 is transferred to a free reserve.

Debt conversion can also be conducted at a discount. This involves converting a creditor’s debt into equity at a “penny-for-penny” rate, reflecting the market value of the debt, which is typically less than the face value of the claim.

In conclusion, understanding the market price is essential, particularly for capital increases. The formula for calculating the market rate is straightforward:

Market Rate = Equity / Share Capital × 100