Authorized stock refers to the maximum number of shares that a corporation is legally allowed to issue as specified in its articles of incorporation. This figure is determined when the company is formed and can be increased or decreased through shareholder approval and amendments to the articles.
Examples of Authorized Stock
Example of Authorized Stock Calculation
Imagine a corporation’s articles of incorporation state that it is authorized to issue 10 million shares. This means the company can legally offer up to this number of shares to investors, which includes issued shares, treasury stock, and unissued shares.
Real-World Example
A tech company incorporated in California stated in its articles of incorporation that it would have 50 million shares of authorized stock. Upon its initial public offering (IPO), it issued 20 million shares to the public.
Comparison with Issued Stock
Definition of Issued Stock
Issued stock is the subset of authorized stock that has been allocated to shareholders. These shares can be held by investors, company insiders, or the company itself as treasury stock.
Key Differences
- Scope: Authorized stock represents the upper limit of shares a company can issue, while issued stock is the actual count of shares distributed to shareholders.
- Flexibility: Issued stock can vary frequently as new shares are issued or bought back, but changing the number of authorized shares requires shareholder approval and amendment of the articles of incorporation.
- Control: Authorized stock acts as a control mechanism, limiting how many shares can be issued and potentially diluting the ownership of existing shareholders.
Example Comparison
Consider a company with 10 million authorized shares:
- It issues 7 million shares (issued stock).
- It has the flexibility to issue an additional 3 million shares without needing to increase the number of authorized shares.
Historical Context
The concept of authorized stock dates back to the early formation of corporate law. It serves as a regulatory measure to protect investors by ensuring companies do not issue an excessive number of shares, which could devalue them significantly.
Applicability
Corporate Structure
Understanding authorized stock is crucial for corporate governance, particularly when planning equity financing, mergers, or acquisitions.
Regulatory Compliance
Companies must comply with their jurisdiction’s legal requirements concerning authorized shares. This compliance is essential for maintaining good corporate standing and avoiding legal issues.
Related Terms
- Treasury Stock: Treasury stock refers to shares that were issued and later repurchased by the company. These shares do not confer voting rights or dividends.
- Outstanding Shares: Outstanding shares are those currently held by shareholders and are part of the issued stock but exclude treasury stock.
- Par Value: Par value is the nominal value of a share stated in the articles of incorporation, often used for accounting purposes.
FAQs
How Can a Company Increase Its Authorized Stock?
What Happens if a Company Issues More Shares Than Authorized?
Are Authorized Shares the Same as Outstanding Shares?
References
- Black, H. C. (1999). Black’s Law Dictionary. West Group.
- Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance. McGraw-Hill Education.
Summary
Authorized stock is a fundamental concept in corporate finance that limits the number of shares a corporation can issue, as defined in its articles of incorporation. Understanding the nuances of authorized stock, its implications for corporate structure and governance, and how it contrasts with issued stock is crucial for investors, corporate officers, and regulators.
