Authorized Shares, also known as Authorized Stock, refer to the maximum number of shares a corporation is legally permitted to issue, as specified in the company’s corporate charter (or articles of incorporation). The corporate charter is a foundational document that outlines crucial aspects of the corporation, including its objectives, structure, and the total number of shares it can issue.
Legal Framework
The concept of Authorized Shares is rooted in corporate law. When a company is formed, its founders draft and file a corporate charter. This document, among other things, stipulates the total number of shares the corporation is authorized to issue. It is essential to understand that this number can be amended through shareholder approval and regulatory filings, but it sets a cap on the potential equity distribution of the firm.
Types of Shares Issued
Within the framework of Authorized Shares, companies can issue different types of shares, each conferring distinct rights and privileges:
Common Shares
Common shares represent ownership in a corporation and entitle shareholders to vote on corporate matters and receive dividends. They are typically issued to raise capital.
Preferred Shares
Preferred shares offer certain advantages over common shares, such as fixed dividends and priority in asset liquidation scenarios. They, however, usually do not confer voting rights.
Issued and Outstanding Shares
It’s important to differentiate between Authorized Shares and Issued and Outstanding Shares. Issued shares are those that have been sold to investors, while Outstanding Shares are currently held by them, not including treasury stock (repurchased shares).
Special Considerations
Initial Public Offering (IPO) and Equity Financing
When a company goes public, it must decide how many shares to issue as part of its IPO. The number of authorized shares provides flexibility in equity financing.
Authorized vs. Issued Shares
While a corporation may have a large number of Authorized Shares, it isn’t obliged to issue all of them immediately. This flexibility allows for future fundraising activities without requiring immediate amendment to the charter.
Examples
Consider Company XYZ, which has authorized 10 million shares. Initially, it issues 5 million shares to raise capital. Later, if the company needs additional funds or wants to offer stock options to employees, it can issue more shares within the authorized limit without seeking additional shareholder approval.
Historical Context
The concept of Authorized Shares has evolved alongside corporate laws to ensure clarity and governance in equity distribution. Historically, strict regulations were imposed to protect investors from over-dilution and to maintain market stability.
Applicability
Authorized Shares are crucial for corporate governance as they:
- Define the scope of equity distribution.
- Provide flexibility for future capital raising.
- Prevent unauthorized dilution of shares.
Comparisons
Authorized vs. Outstanding Shares
- Authorized Shares: Maximum shares that a corporation can issue.
- Outstanding Shares: Shares currently held by shareholders, excluding treasury stock.
Related Terms
- Corporate Charter: A legal document that establishes a corporation and outlines fundamental elements like the number of authorized shares.
- Treasury Stock: Shares that were issued and later reacquired by the issuing corporation.
FAQs
What is the significance of Authorized Shares?
Can a corporation change the number of Authorized Shares?
Why doesn't a company issue all Authorized Shares at once?
References
- “Principles of Corporate Governance” by American Law Institute
- “Corporate Finance: Theory and Practice” by Aswath Damodaran
- U.S. Securities and Exchange Commission (SEC) guidelines on corporate stock issuance.
Summary
Authorized Shares constitute a fundamental aspect of corporate finance and governance, delineating the upper limit of shares a corporation may issue. This provision within the corporate charter offers flexibility in fundraising while ensuring shareholder protection and market stability. Understanding the intricacies of Authorized Shares is crucial for stakeholders, including investors, corporate managers, and regulators.
